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Mena slowly comes around to shale

The region is rich in unconventional gas, but it will not be developed quickly

Algeria and Saudi Arabia are leading the race to exploit shale gas in the Middle East and North Africa. Both countries need more energy to meet rising domestic power generation needs. In Saudi Arabia, gasifying its electricity will leave more crude oil for export. In Algeria, Sonatrach must find fresh resources to keep feeding its lucrative gas-export business.

Algeria’s shale sector has attracted most of the region’s foreign interest. The government claims up to 700 trillion cubic feet (cf) of recoverable shale gas in a resource of 3,400 trillion cf. Wood Mackenzie, a consultancy, calculates a recoverable figure at 70 trillion cf.

Algeria’s conventional reserves are now about 160 trillion cf. But production is declining rapidly and consumption is forecast to continue rising steeply. Output fell again last year to less than 82 billion cubic metres (cm), down from 88 billion cm in 2005. In the past 10 years, demand has risen by almost 53%, to 30.9 billion cm. By 2030, consumption could hit 70 billion cm, says Apicorp, with power generation needs more than doubling.

This is already biting into Algeria’s export capacity. In 2005, liquefied natural gas (LNG) and piped exports totalled 65 billion cm a year (cm/y). In 2011, exports barely crept over 50 million t/y. Problems at LNG plants have been partly to blame, but the trend is downwards. Despite extra supplies in recent years from fields like Ohanet and In Salah, reserves at Hassi R’Mel and others are depleting faster than thought, say analysts. Other new fields are acting as back-fill, replacing lost wellhead output elsewhere, but not increasing overall production. It leaves government export targets of 85 billion cm/y some way off.

Those fundamentals are behind the government’s plan to bring foreign shale experts into its upstream. Last year, it signed preliminary deals with Eni, Shell and Talisman Energy, although the contracts are for studies only. An already postponed licensing round for shale acreage has been scheduled for the end of 2013, though analysts think it may be delayed again.

Foreign firms are also wary of Algeria’s investment terms. The government passed amendments to the 2005 Hydrocarbon Law earlier this year, offering limited tax relief, but Sonatrach retained its right to a controlling stake in each project. Some of the terms are hazy, too. It remains unclear, for example, how tax will be paid on fields that involve both hydraulic fracturing and more conventional drilling methods.

In any case, no serious work has yet been carried out, and the obstacles preventing rapid uptake of shale drilling remain large. The shale plays are primarily in the far south of the country, close to borders with several unstable neighbours. The deadly terrorist attack at the In Amenas gas plant in January 2013 has dented Algeria’s reputation. Although water supply is not an issue – two aquifers in the main basin should suffice – infrastructure is sparse. Shale resources in the Ahmet-Gourara basin, for example, are a fair distance from trunk lines.

And Algeria’s sense of urgency seems to have faded in the past year. New recent conventional discoveries, as yet undisclosed, have taken priority at Sonatrach, says one analyst. That could work in favour of foreign companies, but Algeria’s shale-gas development is likely to come slowly. In the meantime, conventional gas will come first; then some promising tight gas developments; only later will shale gas enter the mix.

Saudi Arabia, meanwhile, is increasingly keen to exploit its shale-gas reserves to meet fast-expanding domestic power demand, as it seeks to free up more of its conventional oil reserves to shore up crude export capacity. Sparse details are emerging. Khalid al-Falih, Saudi Aramco’s chief executive, said that initial supplies of unconventional gas would feed a 1 gigawatt power station intended to fuel a phosphate and manufacturing complex in the north of the country.

In March, oil minister Ali al-Naimi suggested Saudi Arabia may have 600 trillion cf of technically recoverable shale-gas reserves, a figure which would put it at number five in the Energy Information Administration’s (EIA) list of global reserve holders. The EIA has not released an estimate of Saudi shale-gas resources, but Baker Hughes’ estimates are in line with the oil ministry’s, at 645 trillion cf.

Al-Naimi’s figure is double Saudi Arabia’s estimated conventional gas reserves of around 288 trillion cf, from which production remains limited – 3.6 trillion cf in 2012, according to the EIA.

Despite the bold objectives, there is little detail. This reflects the problems that lie ahead in producing sufficient quantities of a resource that has yet to be commercialised outside North America – and all in an area where the huge quantities of water required for hydraulic fracturing and the infrastructure to move it to the country’s main markets are lacking.

Limited returns

Developers would also face the economic burdens of extracting a resource that will cost perhaps twice as much to exploit as US shale gas and for which returns will be limited by huge subsidies on domestic gas sales. However, the figures start to make more sense, when income from exports of oil that would have been burned at home were it not for the increased use of gas, is factored in. The government knows shale gas will not offer a quick fix to its problems. Al-Naimi stressed in March that, while Saudi Arabia planned to drill seven shale-gas test wells in 2013, the programme is long term, with an eye on the nation’s gas needs in 15 years’ time. However, if exploration proves successful, Aramco can be expected to speed up investment in the sector.

Early exploration has focused on areas where energy infrastructure already exists. In 2010 and 2011, Saudi Aramco invited Halliburton, Schlumberger and Baker Hughes to share their experiences on shale gas and look at the country’s potential. All three have research centres in the kingdom, where work is being carried out on technology tailored to Saudi conditions.

In 2011, Aramco and Halliburton carried out analysis and further exploration work at the Shale-1 well in the Silurian Qusaiba, originally drilled in 2007. In a paper published in September 2013, the companies said the work had provided valuable information on how to develop operational plans for future drilling. Aramco will soon invite bids from firms to build shale-gas processing infrastructure in three locations around the country. No news on progress had emerged by late November.

Much work will still need to be done on the basics if the shale programme is to gather momentum, not least on careful handling of water resources. However, if some of the techniques to reduce water usage being pioneered in the US shale industry can be adapted, then shale drilling in the country could have a bright future.

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