Unconventional Shale Gas Could Soon Be A Global Resource

Shale gas has been called a “game changer” in the US. By the end of 2010, production reached 12 Bcf/d; by the end of 2011 it could be 15 to 16 Bcf/d. LNG imports, once believed to be a necessity, have all but halted. A key question is, “Can this success be replicated outside of North America?”

This abridgement of the Hart Energy Global Shale Gas Study examines which countries are next, what market and geopolitical factors could make shale gas a better option than conventional gas, and what countries have to do to make shale gas attractive to investors.

A world of resources

The Wytowno #1 shale gas well is being drilled in the Baltic Basin of Poland. BNK Petroleum Inc. is managing Saponis Investments Sp Z o.o., which is the listed operator. The well’s primary targets are the Lower Silurian, Ordovician, and the Cambrian shales. (Images courtesy of BNK Petroleum Inc.)

Shale gas is plentiful around the globe. Conservative estimates place the total resource volume at about 20,000 Tcf. This volume is likely to increase as more shale gas plays are identified and evaluated.

There are many compelling reasons to develop shale gas outside North America, and these reasons vary among regions and countries. First, conventional gas is distributed unevenly; more than half of proven reserves are located in just three countries – Russia, Iran, and Qatar. Some countries in Europe rely on gas imports

for nearly all of their needs. In Latin America and Asia, increasing demand is requiring imports to be secured at high prices. Growing reliance on imports creates energy security concerns that can be alleviated by domestic shale gas production. Another reason for growing interest in unconventional gas is that natural gas is a clean fuel that can be used for residences and industry.

Shale gas activities are under way all over the world, with Europe leading the way. Exploration licenses have been awarded in Austria, Poland, Sweden, Denmark, Germany, the UK, the Netherlands, France, Spain, Romania, and Ukraine. All of these countries except for Denmark and the Netherlands rely on imports to meet a substantial portion of their gas demand. Thus, energy security is a major concern in Europe. Gas prices generally are high, which will favor shale gas development. Costs also will be higher because of the need to import rigs, hydraulic fracture units, and personnel, but with higher gas prices, shale gas could be an attractive investment. Most activity to date has been confined to re-analysis of existing well and seismic data, though a few wells have been drilled in Poland and Germany, and one is drilling in the UK.

Outside Europe, there are many interesting shale gas plays. Some are under evaluation, and others exhibit significant potential. Argentina is rapidly becoming a center for shale gas exploration. Apache Corp. and YPF are drilling wells to test the thick, high-quality Los Molles and Vaca Muerta shales in the Neuquén Basin. ExxonMobil and Total have acquired exploration licenses. Other shales are present in the Cuyo and Nirihuau basins and still others in the Chaco and Tarija basins that extend into Bolivia and Paraguay.

International shale gas plays are going beyond Europe. (Source: Reservoir IntelliLogic; Hart Energy)

Shales are found throughout Latin America. One interesting prospect is located in northeast Brazil in a populated area with a rapidly growing industrial base. This region is far from the gas infrastructure in Rio de Janeiro and São Paolo. Thus, even though Brazil could face a gas glut once the high gas/oil-ratio presalt fields come on production, it could be more cost-effective to develop shale gas in the northeast than to build pipelines to serve this region.

Further north, Colombia is planning a licensing round within the next two years in its shale gas prospect.

Asia Pacific prospects

In the Asia Pacific region, shale gas activities are under way in China, India, and Australia. China and India have been importing increasing volumes of gas year on year to meet rising demand. China is planning to offer shale gas exploration rights in a licensing round in the near future. Only Chinese companies have been prequalified to bid, but international oil companies can partner with them later.

Indonesia, which has been an exporter of LNG, soon could begin developing its unconventional resources. Indonesia already is evaluating coalbed methane (CBM), so shale gas may be the next step. Gas prices

are relatively high, at about US $7/Mcf, making unconventional gas a potentially attractive investment.

China and Mongolia have numerous shale gas prospects, and many are located far from gas pipelines. India’s petroleum basins have potential shale gas formations, but little is known about them at this time. ONGC, India’s national oil company, and others are taking a look at them.

Australia’s gas markets are segmented into three regions, with domestic gas available only within each market. This presents an opportunity for shale gas to supply local needs and even for export where offshore conventional gas is more costly than shale gas. Shale gas development in Australia has been overshadowed largely by the rapid commercialization of CBM in Queensland and New South Wales, which is cheaper to produce.

In the west, however, shale gas has been attracting increasing interest in recent months due to high local gas prices. Australian operator AWE has been reviewing the Carynginia shales of the Perth Basin, where it has drilled and cored the Woodada Deep-1 well. Australian shales are reportedly similar to commercially successful shales in North America.

International shale activity is centered in Europe. (Maps courtesy of Rextag, a Hart Energy Mapping & Data Services company)

Massive Middle East, Africa reserves

The Middle East, with its vast conventional gas resources, would seem an unlikely place for shale gas to be viable. However, a large part of the conventional reserves – more than 50% in some countries – are associated gas. Most non-associated gas reserves are located in Qatar and Iran. With a few notable exceptions, there is no regional gas trade in the region. Gas demand is increasing rapidly, and associated gas production cannot keep up.

Shale gas is present in petroleum basins throughout South America.

Conventional gas often is found in deep reservoirs that contain sour gas, which is very costly to produce. Thus, shale gas could present an excellent opportunity to increase gas supplies in the region, particularly in Oman, UAE, Saudi Arabia, Kuwait, Syria, and Jordan. Oman has begun tight gas exploration, and shale gas may not be far behind. The Silurian-age “hot” shale formations have favorable shale gas properties and are prevalent throughout the region. Major challenges include low regulated gas prices and, in general, poor fiscal terms.

Shale gas is found all over Africa, but so far only the northern and far southern regions have infrastructure and markets. North Africa has huge conventional gas reserves and is a major gas exporting region. Even so, Algeria is finding it difficult to replace conventional reserves and may be inclined to exploit shale gas in the not-too-distant future. Tunisia, meanwhile, has taken initial steps toward unconventional gas development, contracting with Cygam Energy of Calgary and Perenco of France to test the potential of a well in central Tunisia that could produce shale gas.

Exploration activities already have begun in South Africa – home to the Karoo shale – and in Botswana. Both countries would like to increase the use of natural gas for power generation and other uses.

Development challenges

Indonesia has shale gas on the island of Sumatra, close to markets.

There will be challenges in replicating the North American shale gas success story internationally.

Shale gas development is an intensive process requiring large amounts of capital, labor, and logistical support. North America has been able to deploy enormous physical resources, mostly in regions that are familiar and comfortable with petroleum development. Hundreds of rigs drill thousands of wells each year.

By contrast, Europe, for example, only has about 50 land drilling rigs operating at any one time, which means only a relatively small number of wells are drilled each year. This amount of drilling would not support even one shale gas play. There is an order of magnitude difference in scale, and scale is needed to advance the technology, bring down costs, and maintain material levels of production.

In North America, there is a deep pool of experienced field personnel, engineers, and geoscientists working on shale gas development. Other countries may have some expertise, but currently they do not have the numbers of people that are needed. Still other countries have no current oil or gas production and no experience with such operations. Most or all of the equipment and personnel will have to be imported until local operations can be built up.

Another significant difference between North American and international shale gas development is the number of potential operators. There are hundreds of companies in the US, many of which are small independents that were the first to try producing shale gas. The rapid innovations that led to the shale gas revolution would have been impossible without the experimentation and adaptation carried out by hundreds of such companies. Although other countries will benefit from the gains in North America, success will come only from adaptation to each unique set of circumstances.

In countries with high population densities, such as those in Europe, surface impacts, water rights, and regulations will be major issues. Though horizontal wells drilled from a single pad can reduce the surface footprint, there still is the problem of land access, not to mention increases in traffic congestion and noise from equipment. Access to water is another concern, and there could be local resistance to using water for shale gas operations. Techniques developed in North America to deal with these issues could be adapted to the circumstances unique to each country.

A fourth consideration is gas markets. The American gas market is large and liquid, allowing companies to sell gas easily and to use the futures market to support drilling programs that require constant reinvestment. Outside North America, most gas is purchased and distributed by the government at fixed regulated prices or by a few large buyers that purchase gas under long-term contracts. In many countries, regulated gas prices are too low to support shale gas development. If shale gas prices must be regulated, they should be tied to gas import prices rather than to low fixed domestic prices.

There are many attractive opportunities to develop shale gas outside North America, but it will take a concerted effort on the part of government officials working with experienced operators to develop fiscal terms and regulations that allow shale gas development to proceed. The many economic and energy security benefits to countries that develop their own gas resources provide incentives for cooperation in developing this important resource.