02/10/14 – Global Shale Exploration Needs Pragmatism Not Bravado
Of late, there has been a change in the mood of global shale oil and gas enthusiasts. While the enthusiasm has not dimmed, exaggerated claims about potential reserves are fading and there is a new found sense of pragmatism from Poland to China.
Country after country, thought to be holding shale gas reserves, is coming to the realization that even a partial replication of the US shale bonanza in their own backyard will require time and patience above anything else. However, the realization has come about the hard way for some.
Established techniques that made US shale exploration one of the biggest oil and gas story in recent years were found wanting elsewhere. For instance, a differing geology ensured what had worked for American shale rock formations did not quite cut it in Poland. Just ask Eni Eni, ExxonMobil, Marathon Oil MRO -1.22% and Talisman Energy Talisman Energy, all of whom have exited the Polish shale market.
That leaves Chevron CVX -1.4% as the only international oil and gas major persisting with Poland. Ukraine, another ‘hot’ shale destination is troubled by internal strife where Shell, Eni and Chevron are toughing it out. German legislative framework is stalled; France has a shale gas exploration moratorium while the Brits are grappling with environmental protests.
Tapping Argentine shale is complicated by the country’s macroeconomic environment, while China has downgraded its 2020 forecasts for domestic shale gas production to 30 billion cubic meters (bcm) per year from a previous target of 60 to 100 bcm. Charles Dewhurst, Global Head of Natural Resources at BDO, feels a reality check is doing the industry a whole lot of good.
“It took the US better parts of three decades to get a meaningful return on investment. As we enter the next phase of shale development, bulk of this would be outside North America. The wider industry is learning from the US experience, as is evident in commercial activity and policymaking efforts,” says the Houston-based industry veteran.
“There are several countries that could do a lot more but have chosen not to, for instance Germany and France. Yet Poland, Russia, Ukraine and the UK look to be playing the long-term game. Initial excitement has given way to the realization that geology is as different as the operational climate. Not all jurisdictions will monetize shale gas assets as quickly as the industry hopes for.”
Dewhurst also feels transportation and logistics need to be addressed in tandem with attempts to bring potential shale gas projects on-stream.
“Historically, the industry has always been gung-ho on the exploration and production side while not paying adequate attention to infrastructure. European gas pipeline infrastructure is nothing on the scale of the US. Australia has similar infrastructural challenges. Even in the US, pipeline capacity is a big issue with a developmental lag of 10 to 15 years being par for the course.”
China, UK, Poland, South Africa and Argentina hold the best hope of bringing shale gas to market outside North America, says the BDO partner.
“Despite recent doubts, China is still on the top of my list. Primary reason for that is political will and of course, next comes Beijing’s policy of central planning on matters of strategic importance. Given the internal dynamic, China is best placed for moving its shale drive forward and dealing with various issues and challenges from environmental to procedural much faster than others. Ultimately, it is about improving security of supply.”
Supply concerns also have much to do with European shale gas prospection with the continent’s importers wanting to rid themselves of Russian gas in wake of the Ukrainian standoff. However, Fitch Ratings analyst Stephane Buemi feels there’s little medium-term prospect of that happening.
“European shale gas remains in its infancy and we believe it will take at least a decade for production to reach meaningful volumes. By that point it would probably only offset the decline in production from Europe’s conventional gas wells,” he says.
Like Dewhurst, Buemi flags up infrastructural concerns as well. “Piped gas imports from markets other than Russia are likely to remain limited. We believe the Trans Anatolian Gas Pipeline is the only viable non-Russian pipeline under consideration in Europe. This could provide 31 bcm of gas per year by 2026, but that is not enough to cover the incremental increase in gas demand we expect over the period, let alone replace any supplies from Russia.”
Nonetheless, even if at best European shale gas production helps stem a significant increase Russian imports, then that’s persuasive enough for some.Poland is a case in point. It currently requires 16 bcm of gas per year, nearly 70% of which is imported from Russia. Recent Polish Government estimates suggest the country’s shale reserves are in the region of 346 to 768 bcm. Cost of each prospection well ranges from $15 to $20 million and around 250 of these will have to be dug before the Government knows what’s commercially viable. Yet, the recent departures of major companies and costs involved have done little to dampen things given the political imperative.
The UK is said to have 1,300 trillion cubic feet (36,812 bcm), over 10% of which is thought to be commercially viable at the time of writing this article. The estimate prompted UK Chancellor George Osborne to issue planning guidelines last year aimed at making the process of approving new drilling sites more streamlined, and a consultation on tax incentives to encourage exploration.
Local districts affected by shale gas drilling are also expected to receive £100,000 ($162,200) in “community benefits” and 1% of production revenues, should the production sites yield gas.
Germany, with potential reserves of 481 bcm, is studying what the UK government is up to. While having to contend with a moratorium at home, France’s Total has bought a stake in a UK project.
Ultimately, need and ensuring security of supply are and have always been great drivers of investment, says Dewhurst. However, there is wider acceptance that it is going to be a slow drive for most with a few kinks along the road.
Source – Forbes.com