Developments in the US and Australian unconventional gas sectors have grabbed the headline in recent years, but new regions are about to step into the limelight

Unconventional gas has driven some of the biggest energy news stories in North America and Australia in recent years as production ramps up and companies look to build positions in this long-term growth play. There remain many growth opportunities in these regions and, despite the slowdown driven by the market turmoil over the past 18 months, unconventional gas remains an attractive long-term investment. Meanwhile, outside North America and Australia, momentum is also building and these new regions could create the headlines of the future.

The dramatic rise in shale-gas production in the US, following tight-gas and coal-bed methane (CBM) production growth, has demonstrated the scale of the effect unconventional gas can have on even the very largest gas market. Unconventional gas production in the US Lower 48 has risen from 33% of the total output in 2000 to 59% today, and this is expected to rise to 73% in 2020. North America now has the potential to be essentially self-sufficient in gas over the next decade or more, which not only has significant implications for the US’ LNG-import requirements, but will also have a knock-on affect on other gas markets.

The effect of unconventional gas on the market in eastern Australian has been just as dramatic and Queensland’s prolific coal seams have proved a reliable source of gas even at prices below $3/’000 cubic feet. As a result, long-held plans for pipeline imports from Papua New Guinea have been cancelled and projects to export large volumes of CBM as LNG are moving forward – 10 or more LNG trains are under consideration.

The promise of large resource volumes and long-term growth is an attractive mix. Companies with no, or limited, previous exposure to unconventional gas, such as BG, Petronas and StatoilHydro, have built substantial positions in a relatively short period of time. Additionally, others such as Shell, ConocoPhillips and BP have added to their positions over the last 18 months.

For companies looking to gain a position, the upheaval in financial markets is providing an opportunity, as the independents that have been the engine of unconventional-gas growth seek partners to help fund their plans. As a result, new partnerships are emerging such as StatoilHydro with Chesapeake and Eni with QuickSilver in the US, and Shell with Arrow in Australia.

There remains much to do in North America and eastern Australia, but attention has also turned to the next areas for potential unconventional gas production. Positive long-term gas-market conditions are driving interest, most notably in Europe, India, China and southeast Asia. Companies from the very largest down to new start-ups are hunting for the next Barnett Shale, Pinedale Anticline or San Juan basin. Areas with good potential for tight gas, shale gas and CBM have been identified across these regions, but many questions still remain including:

• Where are the sub-surface conditions right for commercial production?
• How do you gain access to the land, both in terms of licensing and then physical access?
• Can you access suitable low-cost equipment and resources to run an efficient, long-term drilling campaign over a wide area?
• Are the fiscal terms sufficiently attractive to support commercial development?
• Are there pipelines to deliver the gas to market, and can they be accessed?
• What effect will environmental and regulatory restrictions have? and
• Will the gas price sustain development?
Many of these questions are applicable to conventional gas production, but they become even more important for unconventional gas developments where, for example:
• More drill sites are required;
• Continuous drilling is needed to offset well decline rates;
• Land may be held by incumbent companies, or split between many land owners;
• No suitable supply chain may exist;
• Higher costs mean economics are marginal; or
• The additional environmental challenges, such as water management and surface footprint, can be challenging.

Despite the challenges, unconventional gas production will take off in new areas – the preliminary economics look attractive for many of these emerging plays, with rates of return above 10%. However, there remains much uncertainty as little or no pilot testing has been carried out on them and more work is required by operators to test their viability.

Many of the above ground issues are only just being encountered in these new areas, but in some regions they are already stalling developments. In India, for example, initial progress with licensing was rapid, with three CBM licensing rounds having been completed and a fourth on the way. But progress has been slowed by local demands and gaining access to land. By contrast, initial progress in China was very slow as companies entered protracted negotiations with China United Coalbed Methane, although momentum is now building and the government remains extremely supportive through both targeted regulation and fiscal terms.

In Europe, licences are being acquired across the continent and pilot testing is starting to progress. Issues with accessing land are yet to have a large effect as operations are at a small scale. But if developments progress, this will be a significant challenge because of the strong environmental lobby; an innate conservatism of local communities towards new developments; and diverse land ownership. The limited supply chain in Europe is also being tested even at this early stage and new equipment and expertise will need to develop.

While these issues vary on a play-by-play basis, understanding the above ground risks becomes essential for assessing the real opportunity that unconventional gas presents. As a result, companies need a solid understanding of these risks if they are to successfully drive growth.

As a result of the many uncertainties, it is too early to forecast exactly when unconventional gas will take off in these new areas. But unconventional gas is unlikely to have a substantial effect on regional energy markets outside North America and eastern Australia for more than five years. From the middle of the next decade, however, production in China could begin to make an important impact, particularly if strong government support remains in-place.

In Europe, India and southeast Asia, unconventional gas is unlikely to have a significant effect on regional energy markets for the next decade, but local supplies could ramp up over this period. Beyond this, volumes could increase and play an important role in the supply mix. And other areas should not be overlooked: possible plays are being examined, and in some cases progressed, in Latin America, southern and northern Africa, and the Middle East, for example.

In these new areas, important milestones will signal progress. Initially, these include: successful pilot projects with repeatable flow rates; the announcement of the first commercial projects, however small; continued licensing; and a flow of new pilot projects. After the initial phase, companies will need to demonstrate that they can scale-up developments in a play and this means overcoming land access, supply chain and environmental issues on a much larger scale. For this to occur, continued government support will be essential and positive market fundamentals must remain in place.

If these milestones are met across Asia and Europe, then it could be these regions generating the unconventional-gas headlines of the future.

By Rhodri Thomas for Petroleum Economist

SOURCE:
Petroleum Economist: “Unconventional gas gaining momentum worldwide”