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IEA sees North America unconventionals as global bridge

Shale gas has transformed the North American market, and is now poised to lead the world into a lower carbon future

But widespread adoption of the cleaner-burning fuel depends on greater assurances that technologies such as hydraulic fracturing (facking) are safe, says International Energy Agency (IEA) chief Maria van der Hoven.

In its latest technology perspectives report, the IEA identifies “technological transformation” as the key driver to a cleaner energy future, where natural gas displaces coal as the main fuel for power generation.

But opposition to shale-gas development and other carbon reducing technologies such as Carbon Capture and Storage (CCS) remains a threat. “The risks are real that public sentiment could derail these technologies”, van der Hoven said in an interview with Petroleum Economist, in Calgary.

Van der Hoven says the key to reducing global emissions is to displace coal for power generation – not just in North America but around the globe.

“Against that background, the current increase in the use of coal for electricity generation is the single-most problematic trend in the relationship between energy and climate change”, says the IEA.

Renewables and nuclear will play an important role in the future energy mix, but gas is the main driver of the IEA’s road map to 2050 because it emits 40% less carbon and is more efficient than coal for base load power.

Oil wasn’t considered in the study, though it is assumed to remain the world’s primary transportation fuel for decades to come.

“If you want to accommodate this demand for energy and at the same time grow into a cleaner energy supply, then gas – although it is a fossil fuel, it is the cleanest fossil fuel we have – is the answer. It has to replace coal”, says van der Hoven.

Under the IEA’s most optimistic scenario, a wholesale change from coal to gas ensures an 80% chance of limiting global temperature increases to 2° C, provided that non-energy carbon dioxide emissions as well as other greenhouse gases are also reduced.

Natural gas provides the clearest path forward because much of the existing transportation and production infrastructure is already in place.

The North American experience has shown that natural gas is abundant and can be produced at low cost. With proved resources to cover a century of production, North America is ideally positioned to begin exporting its surplus as LNG to growing economies in Asia.

It’s also likely to provide the proving ground for the next generation of drilling and fracking technology that will be used in other parts of the world – the transformational change the IEA is seeking.

There are unintended consequences, however.

Fuel switching is one reason why US emissions are at the lowest in a decade. But substitution has freed up a surplus of coal for export to countries where gas prices are significantly higher than they are in North America.

Coal from the US and Canada is cheap enough to compete with LNG in markets like Japan, which pay some of the highest landed natural gas prices in the world – as much as $16 per million British thermal units (Btu) compared to $2.50/million Btu in the southern US.

If the trend continues, North America will switch to cheap gas while the world switches to North America’s cheaper coal, raising fears that North America is simply exporting its carbon emission, not providing net global carbon reductions.

It’s a problem unique to North America’s isolated markets, which are effectively cut off from the outside world until large-scale LNG exports begin post-2015. North American exports will help moderate global prices and add market balance, but it will take time.

Van der Hoven cautions against expectations that Henry Hub will be the price setter for other gas markets, but agrees cheaper North American gas will be the lowest cost of supply.

“The North American price is dominated by the shale gas revolution. I think it will be an illusion to hope that for $3 or $4 you can buy the gas in Asia. No.”

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