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International shale fades in low price era

The oil market downturn along with regulatory obstacles have scuppered investor plans for international shale

For international oil companies riding high on $100/barrel oil and looking to new frontiers for growth, shale outside the US and Canada was a promising bet. But the oil market downturn, investor-enforced austerity and regulatory obstacles have scuppered most of those plans and most are beating a fast retreat, delaying for years the prospect of shale production outside North America. 

Even before the oil price decline there had been few successes elsewhere in the world. The international majors were slow to react to the rise of shale in the US and seemed determined not to repeat the mistake elsewhere, so they bought into shale projects from Poland to China to Argentina and beyond. But test wells produced mixed results and at several times the cost of the US equivalent. 

And nowhere could replicate the sort of favorable operating environment - access to land and water, acceptable fiscal terms, a strong oilfield services sector and frenetic competition - that fostered the nascent US shale industry.

Poland was a case in point: it was a test-bed for European shale and five years ago it was seen as the best early prospect for shale production outside North America, thanks in part to its determination to import less gas from Russia.

But in early June, ConocoPhillips, which has slashed its 2015 capital expenditure by a third, pulled out of the country's shale patch citing poor drilling results and a need to cut costs.

It was the last of the major international companies to do so, following ExxonMobil, Chevron, Total and Marathon Oil. The exploration is now left to state-owned companies and a small handful of independents that will struggle to raise the financing needed to keep the drill bit spinning. Smaller companies such as 3Legs have also stopped activities.

Elsewhere in Europe, the news hasn't been any better for shale proponents. Chevron's rapid withdrawal from the continent has dealt a severe blow. The US supermajor snapped up acreage across eastern Europe hoping a desire from the region's governments to wean themselves off Russian gas would provide support for shale development. But Chevron struggled to win backing and over the past nine months it has pulled out of all of its projects on the continent including blocks in Poland, Romania, Lithuania and Ukraine. With the lower oil price there is little appetite to continue exploring, particularly in the face of widespread public hostility. 

Russia's oilmen were dismissive of shale gas in the early days, but quickly came around to the promise of shale production when explorers started to turn their attention to the potentially huge Bazhenov shale oil play in West Siberia. Producers and policy-makers saw shale production as crucial to offsetting declines from the country's mature West Siberia conventional oilfields. Rosneft, Gazprom and Lukoil along with Western majors ExxonMobil, Statoil, Shell and Total pledged hundreds of millions of dollars in investment in the Bazhenov. 

But Russia's shale hopes have suffered from the one-two punch of sanctions and lower oil prices. Sanctions have not only cut off financing to the oil sector: they have also specifically targeted shale drilling technology, preventing western firms such as Total from bringing much needed equipment into the country.

In China the story has been more mixed. The national oil company Sinopec has seen some shale success. Its Fuling shale gasfield is the first commercial project in the country. Moreover, the company has touted big reductions in costs, improved efficiency and some technological breakthroughs though it still remains well behind its western competitors.

But otherwise success has been elusive, especially for the western majors that have invested in China's shale patch. In 2010 and 2011 many of them formed joint ventures with a Chinese national oil company, but little has come of the deals. Shell made the most progress, signing a production sharing agreement with China National Petroleum Corporation (CNPC), but the company said last year that it was scaling back its shale investment in China because of disappointing results. Others have also quietly pulled back from their Chinese projects, and the country's shale hopes now rest largely on Sinopec and CNPC.

In Mexico, shale acreage was supposed to be one of the largest prizes on offer as the country opened its upstream to foreign investors for the first time in decades. The prolific Eagle Ford formation spans the US-Mexico border, and the southern section of the play is thought to hold billions more barrels of oil. 

US shale producers already have a deep understanding of the Eagle Ford, making it one of the least risky shale plays outside the US. Still, costs in the early stages of exploration are expected to be at least a third higher in Mexico and the country's oil policy makers now say they will put off auctioning shale blocks because of the lower oil price. 

Colombia is another Latin America frontier for shale exploration that has turned sour. ExxonMobil, Shell and ConocoPhillips all bought stakes in the country's La Luna shale formation, the source rock for Venezuela's massive Maracaibo oilfields, with high hopes.

And early test results garnered comparisons with the US' top shale plays. But early well costs were high, local communities were uneasy at the prospect of nearby fracking and government regulations were spotty. Together that made Colombian shale a challenge to begin with. Now with the oil price downturn, all three of the majors have put their shale exploration plans on hold. Moreover, state oil company Ecopetrol has cut its unconventional exploration budget from $240 million last year to just $40m this year and says it doesn't expect to be producing any shale oil or gas before the end of the decade.

Argentina is the outlier. The country's Vaca Muerta is one of very few shale plays outside the US to maintain momentum through the oil downturn. Government policy, long the bane of Argentina's oil industry, has helped. Buenos Aires, keen to keep investment flowing in the shale patch and to move the country closer to energy independence, has used its price controls to keep domestic crude prices at around $77/b, sparing producers from the worst of the downturn. 

At the same time, the national oil company YPF's commitment to sustaining shale development has also helped. The higher domestic crude price has allowed YPF to buck the industry's austerity trend and continue to pump more money into shale development. And despite the state's expropriation of Spain's Repsol, other companies such as Chevron and Malaysia's Petronas has come in. As a result, output from the Vaca Muerta has slowly but steadily risen, from very little in 2013 to 42,000 barrels of oil equivalent/day now. 

For the time being, this combination of strong government support and a committed national oil company with a mandate to invest through the downturn appears to be the formula for shale success outside the US. 

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