Chinese Shale Gas Development May Act as Dampener for Other Gas Projects
U.S. shale gas production is squeezing out conventional gas production in the Gulf of Mexico. Shale gas development in China could put the brakes on other major gas projects such as liquefied natural gas (LNG) in Australia, floating LNG and Arctic projects like the Shtokman field.
“Should the Chinese be able to implement a shale gas program, this would have a material impact on gas projects globally in Australia and Russia. These shales are going to become very important in the calculus for various kinds of projects,” said Steven Kopits, managing director, Douglas-Woodward, New York.
“People I have talked to have been relatively pessimistic about China’s ability to exploit its shale gas,” he said during his presentation on “Global Offshore Prospects” on Jan. 12 in Houston. “This will be something for the post-2020 period. I am probably more optimistic on China. This is one area to keep an eye on that can affect economics for some of the other projects.”
In examining the impact of shale gas on U.S. production, he said, “Conventional gas production is not so much declining as it is being squeezed out. About 4.0 billion cubic feet per day (Bcf/d) was squeezed out of conventional production in 2011 in a big way.
“One factor here is that the momentum in shale gas is enormous. Shale gas production increased by one-third last year, peaking at 5.0 Bcf/d. To give you a sense of the scale, China’s consumption is about 11 Bcf/d,” he added.
Regarding shale gas economics in the U.S., he noted that there are only a couple of plays -- the Niobrara and Marcellus -- where the economics are good much below $3 or $4 per million British thermal units (MMBtu).
“If you take a look at most producers in the country, they need $5/MMBtu and probably above $5.50. I think our sense is that prices will tend to revert to that level,” he continued.
Looking at Europe, shales are now being discussed in Poland, Ukraine, Spain, England and other countries. “These are not very advanced yet in other venues but the sense is that European gas is going to be much more expensive than U.S. gas. The numbers we see here are at least twice the cost in the U.S.,” he emphasized.
Kopits was also quite optimistic about the offshore industry in 2012. Pointing to Barclays’ survey on upstream capital spending, he noted spending was up 20% in 2011 and was expected to go up another 10% in 2012.
“That’s another $60 billion or so on top of what we already had. This should be a ripping year for business on that basis,” he emphasized.
In assessing the offshore market by regions, he started in the Gulf of Mexico. “The dust is still settling in the Gulf of Mexico and new practices are gradually evolving. What we see is that permitting is going back to more normal levels since about mid- to late 2011. We see the rig count coming up now, even though it is still well below where we would expect it to be in normal times.
“Over the course of 2012, we should come back to more normal or historical levels. There will be a lag for service providers between the time the permits are issued and business is realized. But, the
general trend in the Gulf should be a return to normalcy during the course of the year. Even if we don’t get all the way there in 2012, it should be a better year than we’ve seen since 2010,” he said.
In Brazil, Petrobras would like to see an increase in crude oil production from 2.1 million barrels per day (MMb/d) to 3.1 MMb/d in 2015 and 4.9 MMb/d in 2020. That represents almost 10% per year of compound growth. In the last three years, Petrobras has averaged 4.3%. Even if the growth rate is more like 6% for Petrobras, production would likely be around 3.5 MMb/d by 2020, he pointed out.
“The track that Petrobras is on right now is marked by obstacles, largely bureaucratic, and it is going to be a challenge for them to keep the pace,” he added.
In turning to the Arctic, Shell is still the big company there with leases offshore in the Beaufort and Chukchi seas, “where they’ve invested something like $4 billion and untold hours of frustration. These two areas have the potential to produce 1.4 MMb/d at peak rates and total hydrocarbon value of $2 trillion. One of the goals will be to refill the Trans-Alaska Pipeline System, which is now running at 600,000 b/d.
“The pipeline’s viability threshold is thought to be 300,000 b/d. That means that around 2020, the pipeline would cross into being non-viable, assuming nothing happens here,” he explained.
“Shell is working hard to get permits and allegedly the Obama Administration is helping. But, given they can’t get Keystone XL Pipeline done, I have my doubts about whether they’ll do it for an environmentally sensitive project from a political perspective,” he added.
In 2011, Norway found several promising fields in the Barents Sea, which were in the 250- to 500-million-barrel range. “There are logistics problems in getting that out of there,” he commented.
Russia has three or four different places for potential production. Northern Russia includes the Yamal Peninsula, East Barents Sea and Kara Sea.
Shtokman is the big mega-project that has been put on hold. “Not only are there issues of politics, cost and logistics, there are also issues on how shale is going to play out elsewhere. It is a very big project and they may want to see more on how shale gas plays out before they approve the project,” Kopits noted.
In the unconventional plays, China and Venezuela are also important. In China, CNPC and Sinopec now have capex budgets that rival the biggest oil companies. China is very active worldwide, including Canada, the U.S., Cuba, Brazil, Iraq, Iran, East Africa and Australia.
“The issues in China are access to pipelines and access to water along with the fact that CNPC and Sinopec control the resources and infrastructure. CNPC has set a goal of increasing its pipeline network by 64,000 km by 2015. It currently operates 50,000 km. Sinopec is looking to increase its system by 14,000 km.
“That’s going to be a heck of a lot of pipeline building. If that goes through, then we will see what the Chinese shales can do,” he emphasized.
Venezuela is upgrading its oil sands capacity. However, the biggest potential change for U.S. companies revolves around the health of Pres. Hugo Chavez.
“Should he leave office for any reason, it is quite possible that someone may come into office who has a more favorable view of the opportunities there,” he added.
Source: epmag