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    Opportunity, Risks and Direction of the Shale Gas Market

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Matthew Scotland, Energy Reports Writer, Visiongain provides an overview of The Shale Gas Market 2011-2021 The amalgamation of hydraulic fracturing...

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Opportunity, Risks and Direction of the Shale Gas Market

Matthew Scotland, Energy Reports Writer, Visiongain provides an overview of The Shale Gas Market 2011-2021

The amalgamation of hydraulic fracturing and horizontal drilling technologies in the 1980s enabled the US to become the pioneers of commercial shale gas production. Although the first shale gas well was drilled in 1821, the technical and economic feasibility of producing from deep-lying horizontally planed shale formations has inhibited their development. These two fundamental technologies have provided the key to unlocking this troublesome hydrocarbon, and the US has quietly gone about expanding the industry from the late 1980s onwards.

US shale gas production had crept up to 300 billion ft3 by 1996 and then more than tripled to 1.1 trillion ft3 by 2006. In 2010, according to the US Energy Information Administration, production of shale gas in 2010 stood at 4.9 trillion ft3. This expeditious expansion in US shale gas production in the 21st Century has sparked enormous attraction from overseas nations looking to see whether they too have the resources and capabilities of producing shale gas on home soil.

The attractions of doing so are multifarious, but most importantly it reduces energy dependency on a resource that is expected to play an ever increasing role in the energy mix of nations. The recent turbulence in the Middle East, ongoing terrorist concerns post 2001, and political disputes with key producing nations have led to more concerted efforts by the US government to increase national oil & gas production.

For natural gas, there is also a growing fear that the Gas Exporting Countries Forum (GECF) will create a cartel similar to OPEC, allowing them to dictate future production levels and prices. The prospect of a gas cartel may put a dampener on the natural gas sector and projected growth in natural gas consumption over the coming years. Shale gas is thus a very real opportunity to circumnavigate any unfavourable future dependencies. And while a cartel in the short-term may be unlikely, simply the prospect of one will drive shale gas development.

According to the World Energy Council (WEC), there is approximately 16,110 trillion ft3 of global shale gas resources, of which around 40% is thought to be recoverable. These figures are, however, preliminary and with more extensive investment in exploration activity the recoverable reserve estimate is likely to expand.

Countries outside of North America that have already carried out exploratory activity into viable shale gas reserves include Australia, China, South Africa, New Zealand, the UK, France, Sweden, Germany, Poland, Hungary, Argentina, Ukraine, Algeria, Indonesia and India.

As it currently stands only the US and to a lesser extent Canada have managed to produce commercial levels of shale gas. But the mounting interest from nations and international companies, as well as mushrooming investment in exploratory drilling, is now palpable. All of the supermajors and many of the world’s largest oil & gas companies have made their first steps into large-scale shale gas projects – most of the US and Canadian production being conducted by local independent energy firms to date.

In China, the three largest energy companies – China National Petroleum Corporation (CNPC), Sinopec and China National Offshore Oil Corporation (CNOOC) – have all invested billions of dollars in North American shale gas projects, including CNPC’s $5.4bn joint venture deal with Canada’s Encana Corporation. Australian mining giant BHP Billiton also invested approximately $4.75bn in a deal with Chesapeake Energy for shale gas interests in the US, while France’s Total spent $2.25bn for 25% of Chesapeake’s shale plays.

The shale gas market has also seen the largest acquisition made by an energy company since the 2008 recession, with ExxonMobil acquiring shale gas specialists XTO Energy in a deal worth approximately $41bn. In a time when major acquisitions and investments have fallen across the oil & gas industry, shale gas projects have bucked the trend.

According to Visiongain, the global shale gas market is expected to grow at a strong rate from 2011-2021, with a gathering momentum towards the end of this time-frame. The US and Canada are both expected to increase production over the next decade, with the former looking to supply 26% of domestic gas consumption from shale gas by 2035. But it is in the fledgling national shale gas markets where the most significant growth will take place.

China is one nation which is looking to develop shale gas from national resources estimated to be around 1,000 trillion ft3. China’s Ministry of Land and Resources (MLR) has set a target for the country to locate 35 trillion ft3 of recoverable shale gas and to build 500 billion ft3 to 1.1 trillion ft3 of production capacity by 2020.

As previously noted, the three largest Chinese energy companies have made substantial investments in the US shale gas market, in the perceived interest of acquiring skills, experience and technical know-how to develop resources in China. IOCs such as Shell, Chevron Corp. and Statoil ASA have all either signed or have been linked with shale gas projects in China. Indeed, Shell’s Peter Voser recently claiming the company would invest $1bn per year over the next five years should appraisal wells prove to be producers.

Countries in the EU have also been attracted to developing untapped shale gas resources, with dwindling reserves in the North Sea and a growing reliance on natural gas imports from Russia and the Middle East. Drilling has begun in nations such as Poland, the Netherlands, the UK, Germany, France, Hungary, Sweden and Austria. The consensus among many experts is that it is too early to know with any certainty whether commercial shale gas production will be achieved within the coming ten years. However, Visiongain forecasts a significant increase in investment in exploratory and appraisal drilling in this time-frame, with commercial production achieved in Poland and to a lesser degree in the other EU states mentioned above.

Other national shale gas markets that are forecasted to expand rapidly over the next ten years are the Indian, Australian and Argentinean markets. In India there have been talks by government members with the US Geological Survey (USGS) over the development of Indian shale gas, while the largest energy firm, Reliance Industries Limited, has invested over $3bn on acquisitions in the US shale gas market. Shale gas acreages are expected to be auctioned in India in August 2011.

Australia is on the cusp of realising shale gas production from the highly prospective Cooper Basin, where companies have recorded positive appraisal tests – local firm Beach Energy declaring commercial production would commence in 2015. The country is also keen to develop its LNG industry to enable it to export natural gas to the vast and expanding Asian market.

In Argentina, there are numerous basins believed to hold commercial levels of shale gas, with local energy company YPF (part of Repsol-YPF) claiming that a single deposit in the Loma de la Lata in the Neuquén Province of Patagonia may hold as much as 257 trillion ft3. The company has chalked up 11,412 exploratory wells for drilling over the forthcoming years, and has recently signed a $140m contract with Brazil’s Vale SA to develop 4.5 trillion ft3 of reserves encountered at a discovery in the Neuquén basin. France’s Total has also acquired four six-year shale licenses in partnership with YPF, as well as 85% of two additional Neuquén shale blocks.

Visiongain also forecasts strong growth in the Ukrainian shale gas market, which has been identified by US supermajor ExxonMobil as having high potential, with an MoU signed with local Naftogaz to explore for shale gas deposits in the nation. According to the Deputy Director of the Ukrainian Department of Technology Policy at the National Agency of Effective use of Energy Resources, Aleksandr Semchenko, Ukraine has between 2-32 trillion m3 (70-1,130 trillion ft3) of recoverable shale gas reserves.

In June 2010, Deputy Prime Minister Adrey Klyuyev stated that Ukraine planned to double natural gas production to 1.4 trillion ft3 per year, with a large percentage of this coming from unconventional coalbed methane and shale gas. According to the national bank company Nadra Ukraine, the nation has the largest shale gas reserves in Europe.

It is clear, therefore, that while the oil & gas industry has distanced itself from achieving large-scale production in nations outside of North America over the coming ten years, some in fact may achieve this inside this time-frame, and potentially within five years. The booming levels of investment in exploration and appraisal activity will ensure market growth over the next ten years is strong, and providing wellhead natural gas prices can climb to around the $6 per million Btu mark, production will be sought more rapidly than has been predicted.

There have also been fears raised in media over the safety of using hydraulic fracturing, despite over 50 years of the technology being used across the US. A recent report by Robert Howarth from Cornell University in the US has also suggested that shale gas has a far more harmful impact on the environment as methane is a considerably more powerful greenhouse gas, with a footprint of around 20% greater than coal. However, if the industry can, as it should, prove that both fears are overstated if not inaccurate, then shale gas development will abound unaffected.

Natural gas prices will of course play a major role in the direction of the shale gas market, as will natural gas consumption levels and public sector involvement. However, the signs all lead to first commercial shale gas production from nations outside of North America within ten years. To what degree is the only question.

The Shale Gas Market 2011-2021 report is published by Visiongain, an independent business intelligence provider for the Telecoms, Pharmaceutical, Defence, Aviation, Energy and Materials industries.

The Shale Gas Market 2011-2021 provides a comprehensive analysis of the global shale gas market and addresses evolving opportunities and risks. More information on The Shale Gas Market 2011-2021, including a download sample, can be found HERE