The Shale Story - Some Realities & Trends

Kalyan Mukherjee
Senior Manager, Bharat PetroResources Limited
US has led the way in harnessing gas from shale, and today, shale gas development programmes exist in UK, Argentina, China, India, Lithuania, Poland, Romania & Ukraine, writes Kalyan Mukherjee, Senior Manager (Business Development & MIS) Bharat PetroResources Limited. He further explains the Positive & Negative facts /analysis towards shale exploration worldwide, Chinese Experience in Shale, Emerging Trends of Shale in world energy basket and Indian Scenario on Shale , etc.

Few developments in industry have the potential to step beyond their technical boundaries and move into the world of the common man. Developments which manage such movements are ones which usually have a pan-geographic and pan-cultural impact.

Shale Gas - a phrase which, from the lexicons of industry has today, tiptoed its way into common parlance in a matter of just a few years, and is an example of one such development.

Deeper understanding and richer perspectives come with time, and shale gas development does not have the advantage of 'historical distance' yet. In fact, outside of the US, harnessing this resource is still in its infancy in most places. The heady years towards the end of the last decade, when this 'game-changer' was the favourite champagne of energy parties, have given way to more tempered views. However, the party is by no means over, as the resource is undeniably there, sitting below the earth in enormous quantities waiting for us to tap it economically for our needs. Admittedly, the answer to the question: 'will shale gas be a game-changer' continues to have far more 'aye' sayers than 'nay' sayers.

This article is an attempt to capture the positives and negatives of shale gas situation worldwide based on developments over the past six or seven years only, i.e. since the phrase ‘shale-gas’ entered the world stage, and also try and identify the future trends in shale energy. While the view today may not be as exuberant as it used to be, it is by no means off the interest radar.

Let us begin by noting the following Positive Facts:
  • Huge Resources: Immense quantities of shale exist on earth. As per an EIA report of 2013, based on studies carried out in 95 basins across 41 countries, the technically recoverable shale gas reserves stand at about 7300 trillion cubic feet (tcf). To put numbers in perspective, one tcf of gas is sufficient to provide power to city of population 1 million for a period of 20 years.
  • Preferred Source of Energy: Gas will continue to be a preferred source of energy as it is clean and relatively eco-friendly. In US, in 2000, shale was 2 percent of natural gas supply; in 2012, it was about 37 percent; and will be about 65 percent within the next two decades.
  • Rising Demand: Demand for energy is bound to increase.
  • Outstanding Plays: There are heroes amongst Shale plays - The Marcellus shale play, already one of the most prolific unconventional regions in the world, could hold more than USD 90 billion more in hydrocarbon riches and is positioned to account for nearly 25 percent of total US shale gas output, according to consultancy Wood Mackenzie. The shale play remains the driving force behind the North America shale gas revolution, with current production of 12 Bcf/d surpassing production from any shale gas play worldwide.
  • Growing Production: The industry has seen a production growth of 1 mb/d seen over the last three years.
  • US has led the way in harnessing gas from shale, and today, shale gas development programmes exist in UK, Argentina, China, India, Lithuania, Poland, Romania & Ukraine.
As per reports, Reliance Industries is reportedly preparing to invest USD 2 billion on its three shale assets in the US. RIL has already invested over USD 7 billion since 2010 towards shale developments in the US, and RIL's US shale gas business has overtaken its domestic oil and gas operations.

All this is very good news from the Shale gas front. But there are other facts which are not so positive, and which we need to be mindful of. The following are some such Uncomfortable Facts/Analysis:
  • Increasing Costs: It is estimated that this year independent producers will spend USD 1.5 drilling for every USD they get back. The average Capex spending of the 35 companies analysed to serve as a guide to the industry has amounted to a staggering USD 50 per barrel of oil equivalent (boe) over the last five years, at a time when their revenue per boe has averaged USD 51.5. Cost of production/bbl in the US is expected to be 9 times that in the Middle East in the middle to long term. US drillers are expected to spend over USD 2.8 trillion by 2035. The Middle East is estimated to spend less than a third of that for three times more crude.
  • High Leverage: To meet their Capex requirements, the companies have had to take on increasing levels of debt, and this is where we highlight the key risk to this business. The companies involved in shale production are highly geared, Shale debt has reportedly doubled over the past four years.
  • Value Erosion: Fifteen of the main operators have wrote off USD 35 billion worth of assets since the shale boom started.
  • Modest Productivity: It will take 2500 new wells/yr just to sustain output of 1 million barrels/day in N.Dakota's Bakken shale. Iraq could do the same with 60. Hence, getting more oil is taking more energy and becoming more expensive.
  • Environmental Problems: Moratoriums on 'fracking' continue in France, Bulgaria, Germany, the Czech Republic, Luxembourg, Northern Ireland, parts of Spain and Switzerland and some states in the US. In fact in France, President Hollande announced this July that "As long as I am president, there will be no exploration for shale gas in France." Also, Germany's new government has said it plans to draft a law that would ban hydraulic fracturing for shale gas for seven years. Hence , Europe seems to be especially sensitive to environmental issues related to Shale gas.

    Despite years of research and communication with the public, oil companies have not been able to put the spectre of environmental issues behind them. A recent report has urged developers of Canadian shale to 'go slow' so that more research and evaluations can be done to assess the risks of hydraulic fracturing.
  • Challenging Business Model: Understanding shale and the developing a sustainable business model for long term Shale Gas development is taking time. Poland has enacted its new shale taxation measures almost three years after embarking on an overhaul aimed at revamping shale gas licensing and taxation to stimulate the resource's development. French oil major Total has allowed its only Polish shale gas license to lapse.
  • Declining IOC Interest: US oil major Chevron has concluded shale gas exploration in the Silistea-Pungesti perimeter in eastern Romania. Experts say that it would take at least five years before any exploitation of shale gas, with a clear regulation for environmental protection, can begin in Romania.
  • Challenging Matrices: Widely discussed and acknowledged features of this industry include high decline rates, high costs, extremely high Capex levels that are required to fund the drilling programmes, and, to a certain extent, the extremely light quality of crude oil (in the US) that cannot substitute one-for-one with declining conventional crude production.
  • In the US, these companies produce large volumes of super-light condensates and Natural gas liquids (NGLs). Prices for these liquids have started to fall sharply and disconnect from crude oil, in much the same way as natural gas did, and lower realised prices across the liquids and gas stream have begun to significantly impact baseline revenues.
  • Issues in India: Issues related to land acquisition, water availability, chemicals used in hydraulic fracturing are of critical importance and major challenges in India.
One of the hallmarks of science is that findings and truths are universal and replicable, i.e. the laws of nature don't change from person to person or from place to place. Geology has, for decades, been trying to get full membership into the 'science club' but it has, at best, been able to position itself only in a cusp between science and art. All said and done, even today, subjective interpretation plays a vital role in the geo -scientific world.

For decades, Conventional oil & gas exploration has been navigating on the decks of Geology, Geophysics, Petrophysics, Reservoir Engineering and other such ships of the Geoscientific fleet. Scientific endevour has definitely narrowed windows of uncertainty and aided decision making in business. Today, there is a great volume of work done on sub-surface evaluation and standard models exist which are scientific and fairly replicable across the globe. Comprehensive understanding, standardisation and replicability are some of the key requirements in today's world of business. A business which needs continuous R & D and newer and newer prototypes would take a long time to get off the ground and become a commercial endevour.

Alas, such is the problem with shale. Added to the usual basket of uncertainties inherent in a geology centric project, it brings with it an added complication. The possibility of replicability of shale projects seems to be a distant dream. No two shale plays are identical, below-ground (and even above-ground) conditions vary significantly from place to place.

This fact has been brought home to the world by the Chinese Experience in Shale.

China is estimated to hold the largest technically recoverable reserves of shale gas in the world—nearly twice as much as the US. However, China is finding it harder than it expected to unlock a shale gas boom like the one in North America, and is facing the following problems:
  • Complicated geology.
  • High production costs.
  • In many cases the formations that hold gas are deeper than in North America and more expensive to reach.
  • Chinese shale tends to have more clay in them, which is an obstacle to extraction.
In fact, recognising the fact that the above problems are going to slow down the shale gas programme, the Chinese government has cut its ambitious 2020 target for shale gas development roughly by half.

Emerging Trends
Despite all the above, shale is undisputably on its way to become a respectable member of the energy basket. Significant business interest persists in this space. Merger and acquisition (M & A) activity in the US reached its highest first-quarter total for more than a decade but lagged well behind last year's fourth quarter in terms of both volume and value.

Also, according to a recent report, Shale and tight oil plays are posing a threat to the floating production segment, with the pace of orders for new units already slowing. The US is poised for shipping out shale gas in liquefied form as a net exporter of energy.

As regards countries for shale development, after the US, the preferred investment destination would most likely be South America. China does not appear very keen to invite foreign investment in Shale; also, there are pricing issues which need to be addressed there. Europe appears bogged down with environmental issues.

Further, as it has in the United States, shale gas is tipped to emerge as a major new energy source in eastern Australia, particularly as three major liquefied natural gas (LNG) developments will be seeking supply after they come on-stream in Queensland during the next 18 months.

Shale energy is here to stay. Technological R & D is key to improvement in shale gas/oil output and, in the near future, it appears that R & D focus on shale would perhaps be a preferred option as compared to R & D focus on unconventional or Arctic ventures. Commercial factors are clear drivers for shale exploitation. Hence, shift in the US from shale gas to shale oil is to be viewed not as a 'mid course correction', but simply as a digression stemming from commercial necessities.