An unconventional revolution?

Oil and gas industry leaders have forecast a year of improved performance and higher levels of capital investment in 2012, according to an Economist Intelligence Unit report commissioned by industry technical advisor,
GL Noble Denton.

The rise of the unconventional gas sector is a major contributor to the sector’s renewed confidence, giving cause for debate on the wider implications for the LNG market, and whether it will be the game changer that the industry once thought.

The report reveals that shale gas production will be an area of particular focus for oil and gas executives this year, and the investment could be worthwhile.

Unconventional energy sources reportedly have the potential to significantly strengthen worldwide energy security. Even oil and gas companies with no previous exposure to these sources have been affected by their speedy rise to prominence, and a number of E&P firms are ramping up their unconventional portfolios across the globe.

The US natural gas market has been transformed by the unconventional gas revolution over the past five years in particular, providing the country with an energy landscape that few could have predicted. According to Big Spenders, gas from shale accounted for barely 2% of US natural gas production a decade ago. Today it is approaching 30% and rising.

In Europe, there is potential to tap vast shale reserves too, with Poland and Ukraine emerging as a particular focus for exploration. The UK, Spain and France have promise for unconventional gas development too, with more than 500 billion m³ of recoverable gas lying under British soil alone.

China has also been talked up as a major future source of unconventional developments, with shale gas reserves estimated to be even greater than those in North America.

Meanwhile, Australia has begun an enormous ramp-up in gas production, with the development of its coalbed methane (CBM) reserves promising to make the country the world’s biggest exporter of LNG.

But this revolution does not come without its problems. It is causing a glut that continues to depress worldwide gas prices. In Europe, for example, the sector is under more constraints than its North American cousin, as it comes up against environmental and technological concerns that have seen France and Bulgaria restrict shale related exploration activity.

North America: foundations for success

The groundwork for the unconventionals revolution has primarily been laid in the USA, where the operating climate is extremely supportive. A robust service industry and favourable regulatory environment also provide a strong foundation for this type of activity.

Advances in horizontal drilling and hydraulic fracturing have played a role in increased levels of production in North America and. In the Eagle Ford play in Texas, for example, 1010 permit applications were filed to drill in 2010, a tenfold rise on the previous year. Last year it attracted more than 2000 permit applications.

Meanwhile, in western Canada and Alaska, ConocoPhillips has invested in a number of opportunities, with focus on the Deep Basin and central Alberta.

North America, one of the world’s largest importers of natural gas, is now beginning to sustain demand with its own supply, which could have significant impact on the LNG industry. Indeed, ExxonMobil has spent billions of dollars building LNG receiving terminals that may never reach their intended capacity.

A drawback of this success is that the surge in production has forced domestic natural gas prices to plummet.

Is North America on its own?

The Economist Intelligence Unit’s research findings suggest that there is widespread doubt as to whether the shale revolution can be exported outside of North America.

A study by the European Centre for Energy and Resource Security has reported that the quantity of recoverable reserves in Europe would be enough to cover its gas demand for at least 60 years. Yet the shale gas reserve base in Europe remains largely unmapped. The US Energy Information Administration thinks that European reserves, which include those of Ukraine, Norway and Turkey, amount to approximately 500 trillion ft³, competing favourably with North American reserves.

But the technologies that made the rapid US advancement possible continue to draw criticism in Europe.

Asia Pacific: the next frontier

While the discovery of the Asia Pacific region’s unconventional gas reserves is relatively new, its potential to outperform the West in terms of volume and speed of production is impressive.

China, which is thought to be home to more shale gas than North America, held its first shale gas licensing round in June last year, with several exploration blocks awarded to domestic companies.

Expected to ramp up at a rate that would compete with North America, the development of China’s shale gas reserves could cause the Asia Pacific region to better supply its growing demand for energy, while reducing dependence on LNG imports from Qatar and other supplies from Russia and the Caspian region.

Meanwhile, in Australia, the LNG industry is booming, thanks to the development of CBM to LNG. Supported by the technical advice of GL Noble Denton’s consultants, Australian CBM explorer and producer QGC is expected to supply in excess of 8.5 million tpy of LNG through the development of two LNG trains.

The development of this project clearly reveals Australia’s aspirations to become the world’s largest exporter of natural gas and improve upon its current position as the world’s fourth largest LNG exporter.

An industry game changer?

Despite the rapid development of shale gas in North America and the huge potential to exploit reserves in the Asia Pacific region, the long-term success of the unconventional gas market remains unproven.

Research has revealed that nearly two thirds (63%) of oil and gas executives intend to increase capital expenditure significantly over the next 12 months, with North America emerging as the area with the greatest opportunities. It is certain that the unconventional gas industry will benefit from this, leading the region to reduce its dependence on LNG imports in the long run.

But the success of the North American unconventionals revolution has not resonated elsewhere, particularly in Europe, where horizontal drilling and fracking technologies remain highly controversial, slowing progress in exploration and production.

While China’s future role in the gas market remains uncertain, it seems that the oil and gas industry is beginning to ask whether unconventionals will be the game changer that the industry once thought in every region.

Time will tell whether the reality of unconventional gas will live up to the hype, and what its effects on the LNG market will be.

Author: Pekka Paasivaara, GL Noble Denton, Germany.

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