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EIU urges cautious optimism on shale

Economist Intelligence Unit offers a more bearish view than the EIA on the world’s potential shale-gas resources and the chances for their development

A new report on global shale-gas development urges “cautious optimism” for investors and operators. The Economist Intelligence Unit’s (EIU) Breaking New Ground: A special report on global shale gas developments highlights some of the key difficulties that must be overcome to develop shale gas resources outside North America.

One of the initial problems to be tackled is uncertainty surrounding the estimates of potential resources. The EIU’s lead energy analyst Peter Kiernan said bullishness on global shale development was premature. “It’s still too early to define the resources. A lot of it is speculation,” he said. “Outside of the US, we don’t really know.”

Bearish view

The EIU offers a much more bearish view than the US Energy Information Administration’s (EIA) April report that claims there could be 6,622 trillion cubic feet (cf) of recoverable shale gas across 32 countries worldwide.

The report also highlights an array of environmental, financial and political obstacles to commercial shale-gas development beyond North America. The US shale-gas revolution was the result of “bold but foolish bets” made by small independent companies, the EIU said, without much consideration for the economic or environmental consequences.

US shale-gas production has risen from virtually nothing in 2000 to 4.8 trillion cf last year, according to the EIA – nearly 18% of total output. The surge in production has caused domestic natural-gas prices to plummet below $4 per million British thermal units (Btu), too low to justify the large investments needed in new projects the EIU said.

But the gas-price depression won’t last forever, as greater availability of shale-gas supplies stimulates new demand. The EIU predicts that North American gas prices will rise by over 20% in 2012 and by 8% the following year, pushing them up to around $6/million Btu by the beginning of 2013.

Beyond North America

Beyond North America, however, environmental, economic and logistical concerns will make development more difficult. Pockets of opposition to shale gas have cropped out around the globe, following concerns in the US that hydraulic fracturing (fracking) could be environmentally damaging.

Kiernan said the rest of the world will be looking to avoid environmental backlash. “The horse bolted with shale gas in the US and now other countries are assessing it [the environmental issues],” he explained. “It will have a filter-down effect on the rest of the world.”

In South Africa this is a particular problem, said Kiernan, because fracking is a water-intensive activity and most of that country’s estimated 485 trillion cf of resources lie in the semi-arid, drought-prone Karoo basin. In August, the South African government imposed a second six-month moratorium on licence awards as a result of environmental concerns.

This has left hopeful developers, such as Shell, waiting until next year to learn whether they can begin exploration, without which, said Kiernan, it’s impossible to determine how extensive South Africa’s shale-gas reserves are. Consequently, it’s impossible to predict demand for local water supplies.

However, Shell, alongside a handful of other companies, holds a technical co-operation permit that allows it to carry out seismic studies in the Karoo. “But even if the ban is lifted and exploration is allowed, local opposition to fracking will continue to smoulder, making life difficult for operators,” Kiernan said.

There is also the issue of the Square Kilometre Array (SKA) telescope project, which South Africa hopes to host. It is competing with Australia to become the home of equipment that could make the country an international hub for astronomy.

But South Africa’s Department for Science and Technology has raised concerns that communications systems used by shale-gas fracking equipment in the Karoo basin could affect SKA, a high-powered telescope that will use radio waves instead of light waves to see into space.

A lack of expertise

The report added there are many other countries with huge potential for shale-gas production, but politics, pricing mechanisms and a lack of technical knowledge are slowing development. China could eventually produce “more shale gas than any other country”, the EIU said, and the government is pushing for commercial extraction to begin as soon as possible to meet growing domestic energy demand.

The EIA reckons China could have the largest recoverable shale-gas resources in the world, estimated at 1,275 trillion cf. In June, the country held its first shale-gas licensing round, under which several exploration blocks were awarded to domestic companies. A second auction is planned by the end of the year.

But international operators will find it almost impossible to break into the Chinese market without teaming up with the few select domestic companies approved by the government. And China will need foreign technical expertise to get production up and running. Even with international help, it will take until 2015 for China to master the technology, the EIU said, claiming “significant production” is unlikely until at least the second half of the decade.

There are also issues with China’s gas-pricing system, which the EIU described as “a mess”, with different mechanisms for setting prices for domestic onshore and offshore production, and imports in the form of liquefied natural gas and by pipeline.

Here, China is not alone. India and Argentina, both with potentially large-shale gas resources, also have problems with gas-pricing structures. Government subsidies have kept domestic gas prices artificially low, discouraging much-needed energy-sector investment.

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