Japan's recent success in extracting natural gas from offshore methane hydrate deposits for the first time has sparked enthusiasm over a significant and so far untapped resource base. The US has been undertaking its own project to extract gas from methane hydrates on Alaska's North Slope. The US Department of Energy (DOE) even went as far as comparing methane hydrates to the current onshore unconventionals boom in North America. But are we really witnessing another breakthrough in hydrocarbon exploration or is commercial-scale methane hydrate extraction a mere mirage? An IHS perspective…

Japan and Alaska: opportunities Japan's Ministry of Economy, Trade and Industry (METI) announced in March that a consortium including the Japan Oil, Gas and Metals Corporation (JOGMEC), METI, and the Japan Petroleum Exploration Company (JAPEX) have successfully extracted underwater methane hydrate gas from the Nankai Trough in the Pacific seabed of the Aichi prefecture coast, as part of a flow test there. Deposits of methane gas trapped in lattice-like structures of ice, known as 'flammable ice', could provide Japan with "next generation sources of clean energy" according to JOGMEC.

Estimates from JOGMEC state that the Nankai Trough contains 1.1 trillion cm (39tcf) of methane reserves, enough to provide Japan with 11 years of total gas supply. A separate study from the National Institute of Advanced Science and Technology has estimated that there are roughly 7 tcm of methane hydrate in the waters surrounding Japan, equal to about 100 years of Japan's gas supply needs.

However, Japan is not the only place where methane hydrates are being explored for future commercial production potential. In Alaska's Prudhoe Bay, US supermajor ConocoPhillips and partners JOGMEC and the US Energy Department (DOE) have seen the first encouraging results from testing a promising extraction method, called molecular replacement, to harvest methane from the ice-like lattices underneath Alaska's permafrost. Molecular replacement works by injecting CO2 into identified deposits and substituting it for the methane, leaving the structure intact.

ConocoPhillips and partners have tested the process in 2011 and 2012, extracting nearly 1 mmcf of methane. If commercially scalable, the research could allow companies to tap into resources that the USGS deems to be among the largest hydrocarbon resources in the world, pegging an estimate at about 85.4 tcf.

A game changer? The DOE speculates that methane hydrates could be even bigger than the US unconventional oil and gas plays: a new gas game-changer. The agency has been pursuing a methane hydrates research programme since the 1990s. The government-driven research into developing methane hydrate resources underlines the potential these deposits hold for energy security. The DOE estimates that the commercialization process could "take years" but noted in a press release last year that "the same could be said of the early shale gas research... that the Department backed in the 1970s and 1980s". DOE estimates that even if just a small fraction of the assumed resources becomes recoverable, it could double US gas resources.

Outlook and implications Methane hydrates could potentially add significantly to the world's gas supplies and transform the global gas market and its trade flows, if and when production becomes commercially viable. As Japan and, to a lesser extent, the US are keen to harvest potentially substantial onshore and offshore methane hydrate resources, could the world be witnessing the early stages of another potential new natural gas boom?

The first sustained flow tests in Japan and the US can certainly be considered a milestone judging by historical experience in the hydrocarbon industry, and they advance a previously expected timeline of methane hydrate commercialisation from decades to possibly 15 years as estimated by JOGMEC. But several challenging factors remain:

- Capturing methane hydrates is a difficult and expensive undertaking that will likely remain unviable in the US as long as inexpensive shale gas is available. As IHS forecasts steadily rising US dry gas production from conventional and unconventional sources through 2035, methane hydrate development might be put on the backburner in the US, even if it is technologically feasible. New shale gas reserves are also likely to come onstream elsewhere, in Europe and China, adding to these competitive pressures in gas markets. Therefore, a lot will depend on cost reduction through technological fine-tuning and safely conducted commercial scaling of methane hydrate production for any momentum increase.

- Infrastructure development around methane hydrate resources will be a significant challenge as most of the methane hydrate deposits are found in harsh Arctic environments or offshore, where conventional hydrocarbon development already faces challenges. The need for scalable infrastructure development further adds to the costs of methane hydrate extraction.

- The global LNG market is expected to become more competitive in the second half of the decade as new export projects in Australia, North America and Africa will add significant volumes to the market. In a glutted global LNG market, methane hydrates are unlikely to become a priority for gas producers. That would mean though that methane hydrates would remain in the ice or slowly be released as Arctic permafrost melts due to climate change, adding to the problem without taking advantage of methane hydrate's commercial potential.

Geographically limited upside While a global roll-out of methane hydrate extraction is unlikely to materialize in the foreseeable future, the implications of the new energy source for countries lacking access to conventional resources are profound. For resource-poor Japan, domestically produced methane hydrate gas has the potential to reduce the fossil fuel import dependence that has defined its energy system throughout the modern era. The high cost of Japanese LNG imports has given Japan greater motivation to press ahead with its methane hydrate research programme.

The Japanese government has already invested significantly in its methane hydrate project since the early 2000s and there are hopes that operational refinement can make methane hydrate extraction cost competitive with LNG imports. After a week-long flow test in the Nankai Trough, Japan was able to extract gas at volumes that pushed the upper limits of original JOGMEC estimates. At the conclusion of the test METI officials stated that the results may be sufficient to lead to commercialisation, although it remains doubtful as to whether Japan will be able to reach its ambitious target to scale commercial gas production from methane hydrates by 2028 - an objective deemed realistic by a recent IHS CERA report Methane Hydrates Breakthrough: The next game changer or a major step on a longer road?.

In addition, because Japan remains the single largest importer of LNG, potentially decreasing Japanese import dependency could have a transformative effect on the global LNG market, which is why methane hydrate developments are being watched closely and uneasily by major LNG exporting countries and those that are planning to enter the global LNG market.

Thanks also to Olivia Boyd for her contributions to this article.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.