Articles from 2013
Global Shale Ready for takeoff? Part two.
- Written by Nick Grealy
- Published: 01 November 2013
If, as I posited previously, Global Shale may be about to take off based on US slowdowns in services, where will it land first?
There are four main contenders: Argentina, Australia, China and Europe.
The two A’s both have significant amounts of gas and oil, but have their own problems. Argentina’s resources are so large enough to trump political concerns. But, in gas at least, do they have a market? Argentina has a history of mostly self inflicted gas shortages, but only used 47.2 BCM in 2012, and export possibilities are limited by distance, Brazil (a small user anyway at 29BCM) shale gas possibilities and Bolivia’s role as South America’s existing exporter.
The true revolution of shale stems from natural gas resources now being on customer doorsteps. A country like Turkmenistan has some of the biggest resources in the world, but it is cursed by geography. Gone are the days when oil and gas was considered so precious and rare that frontier provinces on and offshore ended up being accessed anyway. We already see only one bidder for Brazil’s offshore oil and a pull back from the Arctic from Alaska through Norway as the Peak Oil narrative gets swept away by the US bounty. I would like to see Argentina succeed, but perhaps it’s the downstream in me that asks, who is going to buy all this stuff?
Australia has it’s own complex gas economics. Even if there was a national pipeline system, Australian gas is competing with conventional offshore economics already pressured by the coming LNG glut. This is another case of who will buy this bounty?
China shale gas is going to happen and happen sooner than people think. I’m waiting on some tasty information from Beijing last week which unfortunately is not yet available, but it will be well worth the wait. China shale gas will change everything in ways that will truly change the world - for the better - yet the impact is going to be transformative for world gas markets in several disruptive ways. China obviously has the market, but few people realise that the price environment in China is going to be very attractive.
Back to our own European doorstep. The UK could end up getting far ahead, although Poland and Ukraine are still contenders. The UK experience will then inevitably lead to an uptick in Germany and France, but let’s see the reasons why the UK is so attractive, despite both itself and conventional wisdom. The UK’s problem is that the country itself does not see the obvious. In a country not renowned for optimism at the best of times, some parts of the UK narrative remains problematic in several key areas. The UK problem is that it is only barely getting to to understand it has two great attractions: it has the market and it has the price. It also has a government that has gone from lukewarm enthusiasm to unambiguous support in the space of a year. In short, the UK, could end up surprising many people, including itself.
The UK’s regulatory, tax and political environment provide very attractive incentives. The international service sector has worked in places far different from southern Britain and far less welcoming than Lancashire. Exploration companies have operated in much more exotic locations but the issues surrounding public acceptance in the UK are fairly unique. The issues, while often difficult, are not insurmountable and most of all, well worth the effort.
Current UK gas prices are over $10. This has to be the number that should make US exploration companies’s mouths water. Translating the revolution in US drilling efficiency to a UK context goes a long way to solving the key UK problem of footprint. The UK will be a difficult to operate and high priced environment. But, it will be well worth it. A worst case scenario for UK gas prices over the next five or so years would be a fall to $8 MMBTU, assuming US LNG exports. By the way, US LNG molecules may never even reach the UK, but they will put down prices nevertheless in much the same way that the mere possibility of Interconnector flows between the UK and Zeebrugge have a price influence far in excess of the physical volumes exchanged.
So to sum up:
- The UK has a world class resource play in the Bowland Basin
- US service industry is facing declining profitability at home
- US experience shows that large volumes of gas can be produced from efficient use of land needed to gain the UK “social license”
- The UK Government, at the national level, is unambiguously supportive of shale
- The political risk involved in the UK, sitting on a clear and robust regulatory regime is the lowest of any international frontier.
- The UK has a mature gas midstream infrastructure that sits on top of the resource
- The UK has gas prices that make returns profitable even in early stages.
With 10 to 20 wells to be drilled in 2014/15, at an average cost of $10million each, the exploration phase alone presents an opportunity to make money, and if successful, can make, by US standards, eye-watering profits in production.
Significantly, Duarte Figueira, head of the UK Office of Unconventional Gas and Oil is presenting at World Shale in Houston next week.
Guys in Texas will have to understand that drilling won’t start next week. The UK is going to have to learn that they operate in an international market and if they don’t lay out the welcome mat, there are other places that will.
China is the number one competitor to UK shale internationally. It would be especially ironic if UK operators end up drilling in China if the UK places too many more obstacles in their path at home. It would be an incredibly squandered opportunity.The patience of UK explorers is not limitless and they have the same opportunities as everyone else.