If some headlines are to be believed, shale gas is the saviour of the world’s impending energy crisis. With new discoveries come ever-increasing reports of its ubiquity. Proponents argue that shale gas is cheap to extract, easy to store and offers great opportunities for investors. But the shale story is not without twists.
Shale gas is one of a number of what geologists call ‘unconventional’ sources of gas. A natural gas formed within shale formations, shale gas is extracted through a process known as ‘hydraulic fracturing’ or ‘fracking’, which involves drilling down into shale beds and detonating small charges, which shatter the rock, and injecting water to force the gas into wellheads. Fracking can either be carried out vertically or, more typically, horizontally, which greatly expands the horizon of any single prospect.
The estimated reserves of shale gas are thought to be truly staggering. It is estimated that domestic reserves in the US and Canada will guarantee the two countries’ energy security for at least a century. China, Argentina and Australia are developing their own prospects, while European countries including Poland, Ukraine and the UK are among those with potential prospects.
But shale, which was first commercially extracted with any success in 1998, must confront significant technological, legislative and market-driven issues before delivering the promise of cheap fuel for users and profits for investors.
Currently, there is no single world market for gas, but rather there are separate markets in the US, Europe and Asia, and the pricing of each is affected by quite different variables. For example, in the US prices are low, depressed by a greater appetite for oil. Meanwhile gas prices are higher in Asia, where the price is linked to oil prices.
Niall Rowantree, an analyst in the unconventional play team at Wood MacKenzie, a global energy and mining research and consultancy group, says that he and his colleagues are currently looking at about 100 shale gas ‘plays’ around the world – of which at least one half are in the US. “Currently, the only commercial plays are in North America and to a lesser extent in Australia," he says. "For now, the prospects presented by the rest of the world are pretty academic.”
One of the big questions is how quickly a lifting of gas exports from the US – which have been imposed to safeguard energy security – will take effect. Currently, oversupply has pushed prices in the US to a fraction of those paid in Europe and producers are keen to tap higher paying markets.
In April 2012, US-based Cheniere Energy Partners got the go-ahead from the Federal Energy Regulatory Commission to build a gas export terminal at Sabine Pass in Louisiana, and was awarded a licence to export to non-free trade agreement members. The company expects to be exporting by 2015, and has sale agreements to customers including Gail, a natural gas processing and distribution company based in India, the Korea Gas Corporation in South Korea and Gas Natural Fenosa, a Spanish integrated gas and electricity company.
Other projects poised to export include Southern Union Company and BG Group’s Lake Charles project, also in Louisiana, and Freeport and Macquarie Capital’s Freeport liquefied natural gas (LNG) project in Texas. The Freeport LNG project has signed 20-year contracts with two Japan-based companies – Osaka Gas Company and Chubu Electric Power Company – for gas liquefaction and export.
For Cheniere, the 2015 start date for exports coincides with the estimated completion of the Panama Canal Authority's expansion programme, which will enable LNG tankers from the Gulf of Mexico to travel through the Panama Canal to Asian markets. “Major US exports would lead to the creation of a global market for LNG, which hitherto has not existed,” says Ann Hawkins, a Houston-based energy lawyer at Skadden, Arps, Slate, Meagher & Flom.
Replicating US success
While North America represents a good percentage of the shale gas story, there are other countries of interest for their potential. In October 2012, Australian oil and gas exploration and production company Santos announced that it would commence commercial gas production from shale wells in South Australia’s Cooper Basin – a development which the South Australian premier Jay Weatherill described as “a game changer” for the state’s economy and a source of energy security.
In Western Australia, another Australian oil and gas exploration and production company, Awe, is reported to have achieved near-commercial production from a well at Dongara, near Perth, while others are close behind. Multinationals partnering with indigenous players include ConocoPhillips, Alcoa, Mitsubishi and BG Group.
China, mooted as having some of the world’s largest reserves, has signalled its interest in replicating US success in the shale gas sector. In March 2012, Shell signed the first shale gas production sharing contract in the country – with the China National Petroleum Corporation (CNPC) – for shale gas exploration, development and production in the Fushun-Yongchuan block in the Sichuan Basin, an area covering 3500 square kilometres.
The Chinese government, eager to reduce its reliance on imports, has recently announced that it will subsidise the production of shale gas, offering 0.40 yuan ($0.06) for each cubic metre of shale gas produced. This is double what it offers for the production of coalbed methane. Wood MacKenzie’s Mr Rowantree believes that the expense required to realise Chinese prospects will be enormous. “If CNPC is prepared to put a lot of money behind shale, things could happen very quickly. But if not – then not,” he says.
A source familiar with the world view of Shell says that other potential prospects include those in Germany, Ukraine and South America. Nonetheless, closing the gap with the US will remain difficult. One hotly touted prospect has, for several years, been Poland, but although it shows promise of substantial reserves, its potential has not yet been realised. “For as long as there are more conferences on Polish shale gas than there are actual wells drilled, commercial production is a very long way off,” says Mr Rowantree. Recent regulation in the country, which will increase tax on gas, is set to further hinder any progress.
The rub, Mr Rowantree says, is that producers are looking for four critical pillars on which to develop a prospect: sub-surface deliverability, a decent gas price, the right fiscal regime and the right regulatory regime. “If the sub-surface is brilliant, companies will be patient,” he says.
Ultimately, the variables affecting the further progress of the shale revolution are too many to take in hand. As an example, the Panama Canal is being widened so as to enable the transit of LNG carrying vessels – but the price impact is unknowable until the transit price is calculated.
Geopolitics will always impact smartly. For example, if Russia threatens Europe with a gas squeeze, exports from the Middle East will rise in importance. Already in the Middle East, the government of Oman is exploring the viability of potential shale gas fields. While shale gas almost certainly has exciting prospects, its relationship status with reality will be best described as “it’s complicated”, for some time to come.