Dismissed for decades as too expensive to extract, shale gas is now a realistic energy supply. It's a geopolitical and investment game-changer, says Simon Wilson.
Why the interest in shale gas?
The 'unconventional' natural gas found in shale – a type of rock formation similar to slate – is tough to access. Energy firms have known about it for decades, but mostly dismissed it as too expensive to extract. But in the past few years the key technology needed to extract it from seams deep underground has been perfected. According to Petroleum Economist, recent estimates of total unconventional gas reserves suggest they will increase the world's overall gas reserves by between 60% and 250%. Other analysts put the figure much higher. So suddenly we have the prospect of a 'new' source of energy that is secure, affordable and even clean.
Where are the reserves?
So far, only America has started extracting shale gas. And it's made a huge success of it. In the space of a few years, shale gas has shaken up the American gas market, with small, specialised companies at the forefront of shale exploration. That has helped send the price of gas tumbling and turned America into a net exporter of natural gas. Now some claim it can revolutionise the global energy market, with all the strategic and geopolitical implications such a prospect implies. BP's Tony Hayward calls shale gas a "game-changer". And the scramble for shale is driving a wave of acquisitions and partnership deals in the industry. For example, three months ago ExxonMobil agreed a $41bn deal to buy shale specialist XTO. Meanwhile, BP, Statoil and Total have struck joint venture tie-ups with sector leader Chesapeake Energy. And few firms want to miss out on the next wave of shale exploration – in Europe.
What's the potential in Europe?
Decent enough, but probably not as big as in America. That's in part because the continent is more densely populated – shale exploitation requires wide-open spaces – and consumers may be more vocal about environmental worries. Yet according to an estimate by the International Energy Agency, Europe has around 35 trillion cubic metres of unconventional gas reserves – half of which is shale. That's far less than North America or Russia, but still around six times its remaining conventional reserves. And enough to make up for 40 years of gas imports at current levels. The big energy firms are convinced. Indeed, the current scramble for Europe's shale assets features many of the big players who missed the first US wave.
ExxonMobil is drilling in Lower Saxony, Germany, on assets it reportedly considers to be world class. ConocoPhillips is exploring a large tract of northern Poland in partnership with Lane Energy, a subsidiary of Isle of Man-based 3 Leg Resources. Austria's OMV is test drilling in the Vienna basin. Shell is targeting Sweden. And for some countries in central and eastern Europe, all this activity has some serious strategic and political implications. By sheer geological fluke, many of the most promising shale gas deposits are in countries most troubled by Russia's dominance of their energy supply. Think Poland, Hungary and Ukraine.
How does this affect Russia?
Kenneth Medlock, of the Baker Institute, argues that even the threat of credible shale gas development in Europe will weaken Gazprom's negotiating power, and may force Russia to become more co-operative and open to outside investment. In any event, as Alex Froley argued recently in Platts Oilgram News, it seems certain that shale gas will be important for Russia and Europe, "regardless of how much Europe itself can economically produce. If US production continues at current rates, and if shale gas takes off in other parts of the world such as China and India, it will shake up supply patterns regardless of Europe."
How is China responding?
Enthusiastically. Beijing wants to wean China off coal – for environmental reasons and for energy security. To date, China has focused on coal-bed methane and tight gas, but plans to start exploiting shale gas are well advanced. And a lack of home-grown expertise has opened the door to foreign businesses. According to a recent report in Petroleum Economist, Sinopec is in talks with BP over a possible venture, involving 2,000 sq km in Guizhou province and 1,000 sq km in Jiangsu.
Shell has also signed an agreement with PetroChina to develop shale gas resources in Sichuan province in the southwest, following its collaboration on the Chingbei conventional gas field in the north. Meanwhile, in November the US signed an agreement to help China exploit its shale gas resources. That, says the FT, could matter more long term than their failure to agree binding emissions targets at Copenhagen.
Why investors should tread carefully
It is practically an article of faith in America that shale gas is going to provide unlimited energy indefinitely, says John Dizard in the FT. Everyone from clean energy liberals to national security wonks and deficit-slashing fiscal conservatives is talking up the shale gas bubble. But don't rush in yet. A top shale analyst, Ben Dell of Bernstein Research, argues that production costs are high, "probably underestimated", and are set to be driven up by a shortage of the necessary equipment. He reckons shale gas is only economic at a spot gas price of $7.50 to $8 per thousand cubic foot, well above today's level. "Shale gas is not magic" – investors should tread carefully.
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