China National Petroleum — parent of PetroChina (PTR) — recently teamed up with Royal Dutch Shell (RDS.A) to figure out ways to become better at teasing the gas from shale beds.

Compared with Baker Hughes (BHI), which can now get a shale well pumping in 16 days, the Chinese drillers took 11 months to bring their first test well online. At stake is about 1.2 trillion cubic feet of “technically recoverable” shale gas, according to the U.S. Energy Information Administration. That is 50% more than estimated U.S. reserves.

Since Beijing has prohibited foreign companies from bidding directly for all that energy, some of the world’s top E&P interests are offering technology and capital to woo Chinese partners.

Chevron (CVX) and BP are talking to Sinopec (SNP), while Statoil (STO) is also looking for a piece of this action.

And the deal flow has been known to go the other way. China’s gigantic producer CNOOC (CEO) bought stakes in two Chesapeake Energy (CHK) onshore U.S. shale projects in the last year.

While nobody expects China to start producing serious shale gas in the next decade, there will be winners and losers. BHI and other oilfield service companies are set to gain if they can get the right kind of access to Chinese producers.

Source: Seeking Alpha

ExxonMobil, Royal Dutch Shell and now BG Group have been arguing that significant changes are afoot in the unglamorous world of natural gas that could have a big impact on patterns of energy consumption, carbon dioxide emissions and the balance of power in volatile energy markets.

The big driver of this shift is supply. Energy companies have done a remarkable job in recent years of finding vast quantities of natural gas, possibly adding more than a hundred years of supply of the fuel.

A boom in production of natural gas trapped in shale rock has already transformed the fortunes of the U.S. Just a few years ago, North America was grimly looking at the prospect of growing dependence on foreign gas. Now it’s sitting on so much of the stuff that people are seriously discussing export projects.

In other parts of the world, notably Australia and southeast Africa, new projects are starting and new discoveries being made that will be feeding growing Asian markets by the middle of this decade.

There is disagreement over the impact this will have. The International Energy Agency, which represents the interests of major energy consumers, says there will be a global gas glut lasting until 2020, leading to low prices for much of the decade.

But (not surprisingly) Shell, ExxonMobil and BG Group, all big producers of natural gas, disagree. Rather than swamping the market, they say the extra supply will stimulate greater use of gas either because it is cheaper, more secure or less carbon intensive than other energy sources.

Shell is the biggest promoter of the green credentials of natural gas.

“The quickest and cheapest way to cut CO2 emissions from the global power sector is to grow the presence of natural gas,” said Shell’s exploration chief Malcolm Brinded in a speech late last year. This is because natural gas produces less than half the emissions of coal for the electricity generated.

Brinded added: “Natural gas capacity is also considerably faster and cheaper to install than other new build sources of electricity.”

Shell has argued that the European Union could save half a trillion Euros while still meeting its ambitious target to cut CO2 emissions by 80% by 2050, if only it switched from promoting renewables and nuclear and instead focused on swapping coal for gas.

The sudden abundance of natural gas has also caused a substantial shift in its reputation as a reliable fuel source. Just a few years ago, many governments perceived natural gas as the weapon Russia would use to take over the world. The boom in gas production in a stable, friendly country like the U.S., and the hope it could be repeated elsewhere, has lessened those fears.

In its 2030 energy forecast last month, ExxonMobil predicted a shift toward natural gas by businesses and governments precisely because it is so reliable and affordable.

BG Group, in its long-term strategy update Tuesday, was particularly bullish, predicting gas demand will grow 3% a year between now and 2020.

“The increase in demand by 2020 will be equivalent to more or less the entire current North American gas market,” said BG Chief Executive Frank Chapman. Once you take into account the need to offset the natural decline in production from existing resources, more than two North America’s worth of new gas supply will be needed to meet this demand, he said.

A big part of this growth in natural gas demand could come at the expense of oil, Chapman said. As emerging economies develop, they will stop using expensive, dirty oil to fuel their homes and businesses and substitute it for cheaper natural gas. BG Group estimates that between 2010 and 2020, natural gas consumption could expand by up to 260 billion cubic meters a year at the expense of oil.

A switch of this magnitude could shave 4.4 million barrels a day off projected oil demand growth over the next ten years. To put this into perspective, BP recently estimated that total global liquids demand–oil, biofuels, natural gas liquids–will grow by 16.5 million barrels over the next 20 years. So a shift of this magnitude would surely affect the price of oil.

Unsurprisingly, Chapman saw all this as an opportunity rather than a problem. He reckons $2 trillion of new investment will be needed over the next nine years to meet these forecasts. Who wouldn’t want a piece of that action?

Source: Wall Street Journal

Europe’s second-largest supplier yesterday cut its estimate for gas yet to be discovered by 31 percent, or 570 billion cubic meters. That’s equal to more than five years of production at current rates and would be valued at about $186 billion based on today’s prices at the U.K’s trading hub.

“This will rack up the pressure on the European Union to develop and secure access to reliable energy,” Thina Saltvedt, an analyst at Nordea Markets in Oslo, said by e-mail. “The EU will be forced to increase imports from the Middle East and Africa to compensate for and reduce Russia’s domination.”

Shell, Statoil ASA and other companies have been finding smaller and smaller amounts or striking out in drilling off Norway, casting in doubt Norway’s status as reliable supplier of the fuel and its goal of transforming itself into a gas nation as oil production slumps. The troubles may help Russia, Europe’s biggest supplier, cement its grip on the market and provide an opening to exporters from the Middle East, where Qatar has become the largest producer of liquefied natural gas.

“It is the estimates for the gas resources in the North Sea and the Norwegian Sea that have been written down,” Bente Nyland, head of the Norwegian Petroleum Directorate, said yesterday in an interview in Stavanger, estimating a potential decline in gas production after 2015. “Our gas production will go down and other countries will pass us by.”

Undiscovered Gas
Norway’s undiscovered gas resources may total 1.26 trillion cubic meters, down from an estimated 1.82 trillion cubic meters last year. The country had total gas proven reserves of 2 trillion cubic meters in 2009.

As fields in the North Sea become depleted four decades after Norway first discovered oil, companies are moving north into the Norwegian Sea and the Arctic Barents Sea. Norway is counting on gas output to make up for declining oil production, which has dropped 50 percent in the past decade.

The “revised estimate of undiscovered reserves should be taken seriously, although it should also be remembered that it’s part of their job to be ultra-cautious in assessing the nation’s future hydrocarbons wealth,” said Patrick Heren, founder of European price-information service ICIS Heren. The implication may be that exporters in Central Asia or the Middle East will find it easier to sell their gas in Europe, he said.

Challenges
Statoil, Norway’s biggest oil and gas producer, has a goal of maintaining Norwegian production at current levels until 2020, which Chief Executive Officer Helge Lund on Nov. 3 called “ambitious.”

“Our goal hasn’t changed from what we’ve previously communicated,” Statoil spokesman Ola Anders Skauby said today. “The 2020 target is based in large part on discovered resources. The Norwegian shelf is definitely still interesting to Statoil.”

Shell drilled a dry well at the Dalsnuten prospect in the Norwegian Sea in November, a further blow to its nearby Gro discovery. An appraisal well at Gro had earlier indicated the find could be at the lower end of the 10 billion to 100 billion cubic meters estimate. Total SA also reduced the size of its Victoria field after more drilling in 2009.

Ormen Lange
“The fact that Gro didn’t deliver means that other surrounding prospects also decline and thereby the totality is gone,” said Nyland. “The question is whether Statoil will find profitability in the gas discoveries they’ve made.”

Shell last year had to cut the estimated reserves at its Ormen Lange field, Europe’s third largest, by 24 percent to about 302 billion cubic meters.

Norway may have to pin its hopes on the Barents Sea, where it’s preparing to map out an exploration area after reaching a maritime border agreement with Russia in September. Some seven to eight exploration wells are expected this year in the area, where there has been little exploration to date. So far this year, Eni SpA on Jan. 5 announced a dry well near its Goliat field in the Barents Sea, the directorate said on Jan. 5.

Norway estimates the Barents Sea holds 520 billion cubic meters and the Norwegian Sea 455 billion cubic meters in undiscovered gas resources.

“Most geologists are more optimistic than the Norwegian Petroleum Directorate about the prospects for large gas discoveries in the Arctic, where the Russians have already made a colossal find at Shtokman,” Heren said.

Source: Bloomberg

Yet this prediction is not unusual for Big Oil these days. In fact, most of the big boys are making big bets on natural gas.

Exxon Mobil completed eight projects last year. Seven of them were for natural gas projects – not oil. Of the three scheduled this year, two of them are gas. ConocoPhillips paid $5 billion for Origen, an Australian gas company.

Meanwhile, Chevron hammers away at its mammoth liquefied natural gas plant off the coast of Australia, at a total cost of more than $40 billion. (Liquefied natural gas, or LNG, is easier to transport.) Most of the oil giants are also slamming billion-dollar fistfuls on the table to pick up shale gas acreage in places such as the Marcellus in Appalachia.

This shift creates new opportunities for investors. But before we get to those, let’s try to understand what’s happening.

There are several things at work here. One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget. Another factor at work is that 90% of the world’s oil reserves are in the hands of national oil companies. They are off-limits for the likes of Exxon and others.

By contrast, natural gas deposits are more plentiful. They are also getting cheaper to develop. The cost to build an offshore LNG terminal is about half of what it was only two years ago. The big LNG plants can be just as expensive as anything in the oil world, but – unlike oil – these projects don’t usually go forward unless there are long-term contracts in hand to support them. Some of these contracts go for 20-year terms. This makes the business more appealing to the majors, who don’t have to sweat the huge ups and downs they endure in the oil markets.

With contracts in hand, the gas business is just one of putting together an Erector Set. As The Economist notes, “The gas business is really an infrastructure business: drill wells, build gas plants, install pipelines and accrue profits.”

But there is more. The world’s use of natural gas is growing faster than its use of oil. The IEA’s guess is that oil consumption grows half a percent a year. Natural gas consumption, by contrast, should rise more than 50% in the next 20 years. Total, the big French oil company, is even more bullish. It estimates that China will use much more natural gas than is commonly assumed. Only a lack of infrastructure keeps China’s appetite for natural gas under wraps. But China is in the process of building that infrastructure today. It is only a matter of time before the nat gas markets feel its impact.

Finally, natural gas is cleaner burning. There is a lot of talk of carbon taxes of one kind or another, not only in the US, but abroad. I believe it is a matter of when, not if, governments punish dirtier fuels. Natural gas will benefit.

However, I don’t expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it. Natural gas producers are all expanding production. Most are spending more to expand production than their cash flow supports. This is happening even though most look like they don’t make any money at $4 nat gas. (A recent survey put the industry average at $5.74.) This doesn’t bode well for the price of natural gas in the short term. As beaten up as it is, it could stay here for a while, or even go lower.

One of my favorite plays in the natural gas sector remains Contango Oil & Gas (AMEX:MCF). This is because it is a low-cost producer with no debt, so it can still create shareholder value in a low-price environment. Contango’s all-in costs are under $2 for nat gas.

Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.

At a recent conference, Ken Peak – CEO of Contango and the largest stockholder, with 19% of the shares – shared the following chart, which makes the point. It shows the cost curve for the lower 48 states in the US. This chart shows that these producers need $7 gas to make money. “If this is right,” Peak said, “I believe we will make a lot of money.”

He says this because logic dictates that we should expect the price of nat gas to gravitate toward the cost of the marginal producers. And since Contango’s costs are under $2, it stands to make a lot of money when gas turns around. I know it’s been almost two years and no dice on Contango’s stock price, but I’m content to wait it out (and buy more).

Even at today’s depressed gas prices, Contango’s SEC PV-10 value – think of it as a rough net asset value – is over a billion dollars. With 15.7 million shares out, Contango is worth at least $63 per share. And that’s why it is still a buy.

But let’s get back to natural gas in broad terms. Even though pricing looks unexciting in the near term, demand looks healthy long term. The world will burn more natural gas in cars and buses of the future than it does today. It will burn more natural gas to heat and cool homes than it does today. It will rely more on natural gas to provide electricity.

Long-term investors should treat these things as inevitable. Big Oil certainly is.

Source: Chris Mayer for the Daily Reckoning.

Europe’s leading Unconventional Gas conference brings together industry experts and project operators to discuss the drivers, constraints and opportunities for non-conventional operations.

Unconventional gas resources are expected to steer the future of the energy sector in the coming years.  Held at London’s Marriott Hotel Regents Park, SMi’s 3rd Unconventional Gas  conference will be taking a practical look at unconventional gas production challenges, where the pressure is on to reduce costs and still deliver positive results.

Key Topics Include:
•    Common challenges of unconventional gas reservoirs
•    Shale exploration for new entrants in Europe
•    Improving returns on tight gas

Keynote speakers and presenters include representatives of BG Group, Statoil ASA,  Royal Dutch Shell, GFZ German Research Centre for Geosciences, and the British Geological Society and Realm Energy International Corp.

SMi is also presenting two associated events at the same venue on March 17th -  Data Acquisition and Exploration Strategies in Unconventional Gas: Enterprise Value Assessment and Critical Elements of Gas Shale Reservoir Characterization.

Source: SMi

JPMorgan Chase & Co reported this week that Exxon Mobil has secured land in Europe, acquiring shale plays in Germany and Hungary, and has also applied for permits in Poland. Other companies like ConocoPhillips and Chevron are also exploring options in Poland, while Royal Dutch Shell has garnered contracts in Sweden. Other companies such as Vancouver-based Realm Energy have also made recent announcements of their intent to explore Europe’s shale potential (read “Realm Energy Makes Aggressive Play for European Shale Gas Deposits”).

Mark Greenwood, a Sydney-based analyst with JPMorgan, says the success of the US shale plays is driving companies overseas.

“A land-grab has occurred in Europe over the last two years with majors such as Exxon, Conoco, Chevron and Statoil ASA all participating, not willing to miss out as they did in the U.S.,” he says.

The International Energy Agency said in November the world may have an “acute glut” of gas in the next few years because production of so-called unconventional fuel, which includes shale gas, is set to rise 71 percent between 2007 and 2030.

Over the past three years, the development of technology to exploit shale gas and the boom in US shale success has led to major mergers and acquisitions between oil and gas companies, says Bloomberg.

A report by Wood Mackenzie Consultants Ltd. in the UK said overseas investment by national oil companies doubled from 2008 levels to $26 billion and accounted for 44 percent of spending outside North America.

Another analysis of shale gas done by Allen Brooks of Parks, Paton, Hoepfl & Brown anticipates that this unconventional gas is “likely to present a challenge for the market in 2010.”

SOURCES:
Bloomberg: “Exxon, Chevron ‘Land Grab’ for Europe Shale Gas, JPMorgan says”
Business Week: “Mergers in Oil, Gas Seen ‘Buoyant’ in 2010 by Wood Mackenzie”
Gerson Lehrman Group: “Excellent Analysis of Gas Shales Capabilities; Benefits and Problems for 2010”