Shale shock reverberates across US and beyond

While the initial wave of shale gas development has largely been a US story, the wave is gathering international force and momentum. Increasingly, US shale gas experience and technology are being applied to comparable and potentially attractive geologies elsewhere. The size of the prize is also attracting the larger, financially stronger international companies and will have substantial implications for natural gas and energy strategies.

Technology transfer
Worldwide unconventional gas resources are substantial. In its 2007 report, the US National Petroleum Council (NPC) estimated that global unconventional gas resources could reach 32,450 Tcf. While only a portion may be technologically or economically recoverable, the NPC estimates global shale gas resources at more than 16,000 Tcf, with more than 75% outside North America.

Potential shale gas opportunities and/or attractive geologies for applications of US shale gas experience and technology include:
• Canada, where development is ongoing in western Alberta and British Columbia, particularly the Montney and Horn River plays. The eastern Utica shale play in Quebec is still in exploratory stages;
• Europe, where shale and other unconventional gas resources have been identified in Austria, France, Germany, Hungary, Italy, The Netherlands, Poland, Romania, Spain, Sweden, Switzerland, and the UK. Land acquisition and early-stage exploration are under way in a number of countries;
• China, where shale resources could rival those of the US; ongoing discussions regarding joint development are being held with Shell and BP; and
• Other: some shale or unconventional gas potential also has been identified in South Africa, Morocco, Russia, and Ukraine.

Consolidation
The international majors have not significantly participated in the US shale gas boom so far. The driving forces have primarily been large and medium-sized independent E&P companies.

Now the majors are taking an increasing interest in shale gas, both in the US and in Europe. ExxonMobil has moved aggressively by acquiring one of the major players in US shale, XTO Energy Inc. Statoil has moved into the Marcellus through a joint venture (JV) with Chesapeake, and French Total SA has substantially increased its North American presence through a Barnett shale JV with Chesapeake. BP, Enid, and BG also are building North American shale positions through acquisitions.

A European land grab could swallow up many of the smaller companies with local and regional shale positions. The Chinese national oil companies are keen to develop their huge shale resources and are turning to international majors for assistance.

A large number of shale gas plays are being developed across the US.

Natural gas balances: supply, demand, trade
Transaction activity and growth in the unconventionals space have not been supported necessarily by supply and demand fundamentals. The medium- to long-term view of the US dynamic for natural gas has shifted dramatically in the last five years. Demand growth has dropped, while domestic production expectations have gone up.

Looking at the future, global gas demand forecasts are the greatest unknowns. The baseline forecast from the International Energy Agency at 1.5% per year growth through 2030 is considered quite conservative. Alternative growth projections range as much as several times higher. As would be expected, gas demand growth in China and other parts of Asia is hard to predict, but so is the uncertainty that surrounds the degree of global commitment to natural gas as a significant and critical part of a global carbon reduction strategy.

Long-term growth in shale gas should play an important role not just in North America but in Europe and Asia as well.

Even without shale gas, European governments are looking to reduce reliance on Russian gas. Diversification strategies include increasing LNG imports from the Middle East (Qatar in particular), pipeline infrastructure growth from the Caspian and Middle East regions into Europe, and boosting domestic production.

Russia stands to be particularly challenged by the shale boom. Along with other Atlantic Basin gas suppliers, Russia’s Gazprom now finds that the prospects for a strong mid- to long-term market for LNG imports to North America are greatly diminished. Gazprom’s expensive Shtokman LNG development is being delayed along with other high-cost developments targeting Atlantic Basin gas markets, and Russia’s strategic gas focus will likely now shift from West to East.

The global gas battleground is still likely to be Asia, with increasing LNG supply capabilities into the region, from the Middle East as well as Southeast Asia and Australia, along with increasing pipeline capacity into Asia from both the Caspian Sea and Russia.

Growth presents risks
Since the first large-scale hydraulic fracturing development in Texas in the 1950s, improvements in hydraulic fracturing techniques and technology have accelerated, and the use of horizontal drilling applications has grown. While US-developed shale gas production technologies are being tested in fields far and wide, the debate surrounding the application of those technologies in US shale plays is heating up, presenting substantial risk for producers.

The big issues for shale developers today are groundwater protection, contamination concerns, and lifecycle water and waste management. Multistage hydraulic fracture operations used in horizontal wells could require three to four million gallons of water per well. Water withdrawals for hydraulic fracturing must be balanced with existing water demands. It is important for operators to convey to concerned communities the care taken to protect water supply and quality.

While challenges continue to exist with water availability and water management, innovative regional solutions are emerging that allow shale gas development to continue while ensuring the water needs of other users can be met and that surface and ground water quality is protected.

Other environmental risks related to shale gas development include:
• Emissions: on a per million BTU basis, total emissions from natural gas produced from shale formations differs little from that from conventional sources. But natural gas offers a number of environmental benefits over other sources of energy, including coal; and
• NORM: additional consideration in shale gas development is the potential for low levels of naturally occurring radioactive material (NORM) to be brought to the surface. However, the radiation from this NORM is weak and cannot penetrate dense materials such as the steel used in pipes and tanks. While NORM may be encountered in shale gas operations, there is negligible exposure risk for the general public, and there are well-established regulatory programs that ensure public and worker safety.

Additional operational risks include:
• Sharp declines;
• Lease terms;
• Regulatory structures; and
• Operational environment.

A typical shale production profile, which often reflects sharp declines, can intensify volatile fundamentals, particularly in conjunction with weather uncertainty, and it entails substantial reinvestment to sustain production. Periods of low gas prices could restrict some companies’ ability to sustain necessary reinvestment.

Leasing terms can differ widely for federal, state, and private lands. In some cases, mineral rights are severed from surface rights (i.e., so-called “split estates”) and, therefore, compound lease negotiations. Lease bonus payments have escalated in some areas, as have some royalty rates. Severance taxes are increasingly important to state governments. The degree of fragmentation or concentration of operators also varies among shale basins, affecting acquisition and consolidation potential. Further, the growing interest of “Big Oil” in shale is changing the competitive dynamic as well.
State and local permitting processes vary, particularly as related to state and local water resource management. Particularly in the booming Marcellus shale region, public and regulatory interest has increased dramatically.

Infrastructure availability (i.e., pipeline connections, storage capacity, roads, and bridges) affect development economics, as do the general terrain, proximity to population centers, and the extent of service company availability and capabilities.

Notwithstanding these risks, the rewards of shale gas development and production are considerable. Most notably, shale gas is a plentiful and environmentally friendly domestic energy source that can help the US reach its carbon emission goals and avoid the financial loss and political complexities that come from dependence on crude oil imports.