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Shale gas firms take the long view

North America is still the world’s only significant producer. But explorers are stepping up activity elsewhere and a global business is emerging

From majors to minnows, energy companies are busily investing in promising shale gas reserves around the world in the hope of replicating North America’s success. As happened in the early days of drilling in the US and Canada, smaller independents have been among the pioneers in western countries with shale gas potential, such as Australia, the UK and Poland. But it is Shell, Chevron, Total and the other majors that are showing they have the clout and market access to operate in multiple arenas and gain access to the more complex prized markets, notably China.

The long game

As Petroleum Economist’s survey this month shows, shale gas production outside North America remains an investment for the long term. Few deposits offer either the benign geology of the most prolific US plays, or the ready access to drilling expertise, equipment, financing and a vast market on the doorstep that the US offers. These deficiencies push up costs, and add to the risks of investment in a sector that already struggles to compete with conventional gas reserves and, in some places, even with relatively cheap energy imports.

However shale drilling costs are falling, as companies gain more experience of new plays and infrastructure improves, while the cost of rival energy sources are likely to rise in future – so shale gas is a sector the industry’s heavy hitters cannot afford to ignore.   

China is the biggest magnet for the international oil companies (IOCs) lured by a combination of the world’s largest estimated shale gas reserves – 1.1 trillion cubic feet (cf) of technically recoverable reserves (TRR), according to the US Energy Information Administration (EIA) – and the Chinese government’s eagerness to boost domestic energy production and peg back exports. Shell, Chevron, Total, ConocoPhillips, ExxonMobil, Eni and BP have all made forays of varying degrees into Chinese shale gas exploration through joint ventures with state energy firms China National Petroleum Corporation, China National Offshore Oil Corporation and Sinopec (see table). 

Despite the interest, the uncertainties and pitfalls are many. Drilling wells in China’s most promising prospects can still cost an estimated $10 million-15 million, four or five times more than sinking the cheapest shale gas wells in the US, due to the greater depth and geological complexity of some of China’s deposits.

Meanwhile, with Chinese mineral rights lying squarely with the state-owned companies, it is more difficult for IOCs to invest and plan as confidently as they would in the liberalised, less opaque and more familiar North American market. And, with fewer than 100 wells drilled in the country so far, the extent to which China can turn its vast reserves into meaningful production is anyone’s guess.

But few would want to miss out if the gas does start to flow and the Chinese government throws its weight behind an expanded search for shale gas. So all eyes will be on what happens when the first major gas production from shale reserves starts to flow. 

That could happen soon if Sinopec’s forecasts are right. The company is trying to ramp up production from its Fuling development in Chingqing – the country’s most advanced shale gas project – which, the company predicted earlier this year, will be producing 5 billion cubic metres a year (cm/y) by 2015 and 10 billion cm/y by 2017.  If those expectations are met, this just could mark the start of the shale gas revolution the IOCs are hoping for. 

Europe opens up

Europe offers more comfortable investment conditions than China for most IOCs, but it also offers smaller reserves, a patchwork of differing regulatory regimes, despite EU efforts to harmonise them, and more potential for opposition to shale gas on environmental grounds. Several European countries have halted or banned shale gas exploration, including France, the Netherlands and Bulgaria. Others, such as Poland, the UK and Denmark, are keen to push ahead with it. 

Poland has been a leader in the European shale gas drive, with mixed results. Isle of Man-based 3Legs Resources – now partnered by ConocoPhillips – drilled Poland’s first fractured well in 2011, and was soon joined by big guns, such as Chevron, ExxonMobil, Eni, Marathon, Total and Talisman Energy, as well as smaller players such as Canadian-registered BNK Petroleum and UK-based San Leon Energy, all lured by big reserve estimates. The EIA pegged Poland’s technically recoverable reserves at up to 187 trillion cf.

<>However, by the time Eni pulled out of Poland earlier this year, all the IOCs bar Chevron and ConocoPhillips had departed, frustrated by some poor exploration results and by the Polish government’s failure to revamp energy laws fast enough to provide clarity on the framework for future investments. Recoverable reserve estimates put out by the government these days are also far lower than those early figures, at less than 30 trillion cf.  

But the Polish government’s enthusiasm for shale gas has not cooled, as it seeks to cut heavy dependence on Russian energy imports, so this may still be a market that can reap rewards for energy firms. In June, environment minister Maciej Grabowski said he was hopeful shale reserves would be producing commercial quantities of gas later in 2014 and that he expected 100 wells to be drilled this year, before revising the figure down to 80 wells a month later. In January, San Leon raised optimism when it announced results from its Lewino well in the Baltic basin that suggested commercial production could be possible. 

Ukraine faces a similar challenge to Poland, as it too seeks to cut dependence on Russian gas supply, though the operating environment has become considerably more challenging thanks to violence and political unrest close to the Russian border – precisely where one of the country’s two largest shale gas deposits lies, in the Dniepr Donets basin. 

The unrest will hold back Shell’s efforts to develop acreage it was awarded there in 2013, though the company recently said it is ready to proceed with the project when it can. Chevron, the other major shale investor in Ukraine, is operating in acreage on the other side of the country close to EU borders and so is likely to be in a better position to push on with development, which remains at the data-acquisition stage. Russia also has large shale gas reserves, but is unlikely to prioritise their development, given it still has the world’s largest conventional gas reserves. Instead unconventionals activity is focused on developing more lucrative shale oil reserves, where several IOCs have signed exploration agreements.   

Low key

In July, the UK became the latest European market to boost efforts to attract entrants into its unconventionals sector, launching an onshore licensing round designed to encourage investment to a sector that has yet to get beyond the initial test stage in less than a handful of locations. 

So far, independents have made the running in efforts to tap reserves now estimated by the British Geological Survey to contain between 49.4 trillion cf and 134.6 trillion cf of gas in place. The EIA estimated UK TRRs at 26 trillion cf in 2013.

Cuadrilla Resources has drilled a test well in northwest England and postponed drilling at another site in southern England last year in the face of environmental protests. In May, the company submitted plans to fracture four wells in northwest England. Merger and acquisition activity is also on the rise. IGas, the UK’s largest shale gas firm in terms of acreage, said in May it was buying UK shale gas competitor Dart Energy, while Egdon Resources is in talks to buy Alkane Energy’s UK shale assets in a deal which would make it the second largest acreage holder.   

Perhaps more significant than these deals was the low-key entry of Total into the UK market when it bought a 40% interest in two of IGas’s licences in central England. The French company is the first major to make a foray into UK shale gas – the government, which is strongly supportive of shale gas development, will be hoping it won’t be the last. Total has also announced it will be drilling the first shale gas test wells to be sunk in Denmark later in 2014 or early in 2015. If the tests, in the north of the country, are encouraging, fracturing is set to take place next year.  

Australia, like the UK, is already familiar territory for oil and gas firms, but until recently exploration of more readily available conventional and coal-bed methane reserves have been favoured over shale deposits. So far shale exploration has been low key and come from a clutch of homegrown and small firms such as Santos, Beach Energy, New Standard Energy, Drillsearch Energy, Senex Energy and Real Energy. But this situation is changing. In 2012, Santos was able to claim commercial production, albeit at a fairly low level, from one of its shale wells, which lay conveniently close to an existing pipeline and gas processing station. Then Chevron said in February 2013 it would invest up to $350 million in Beach Energy’s acreage in the Cooper basin, which straddles the South Australia/Queensland border. BG, ConocoPhillips, Statoil and Hess now have interests in shale gas acreage across the country. In May 2014, South Africa’s Sasol took a stake in Falcon Oil & Gas’s acreage in the Beetaloo basin in northern Australia, where Origin is also a partner. 

IOCs are also keeping an eye on developments in a number of other potentially attractive destinations. Argentina’s shale reserves have already drawn in the likes of Chevron, which started drilling in the Vaca Muerta play in Neuquén province in 2013. Shale oil is as much of an attraction as gas, but Argentina’s need to reduce gas imports should encourage state oil firm YPF to invest in gas production and infrastructure – and it will require IOC assistance to do it. 

North Africa is another shale gas hot spot, though political instability in Libya and elsewhere has blighted exploration. Algeria looks like the country in the region most likely to push ahead with shale exploration. Shell and Eni are among firms that have signed partnership agreements with the government in recent years, putting them in pole position to benefit if exploration advances.    

Another promising prospect is South Africa, where, before a 2011 moratorium on exploration, Shell, Falcon Oil & Gas and a consortium of Statoil, Chesapeake Energy and Sasol were among those seeking licences in the prospective Karoo basin. The moratorium, imposed due to environmental concerns, has since been lifted. The government seems to be edging closer towards permitting exploration drilling in the fragile wilderness area, once a new regulatory framework is in place. And if some of these more prospective global plays start to realise their potential, then we can expect IOC interest in other countries with shale gas potential from Pakistan and Indonesia to Brazil to rise. No one will want to lose out. It is taking time, but a genuinely global shale gas business is on its way. 

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