Shale Gas and LNG

This week, Australia's Beach Energy signed an MOU with Japanese commodities brokers Itochu to examine the possibility of building an LNG plant fed by shale gas from Beach's tenements in the Cooper Basin.

The deal is still early-stage. Beach has yet to even prove a resource on the project, let alone demonstrate economic viability.

But shale LNG makes a lot of sense.

Shale gas plays are scalable. You can drill a large number of wells, which will have relatively similar characteristics.

After a certain amount of drilling, a shale development company should be able to figure out what the average well for the play looks like. Most plays have some "sweet spots" where production rates and reserves are highest. And then some outlying areas where economics are more marginal.

Averaging all of these together, a good developer can determine their break-even price for the play as a whole. The level at which gas must be sold to make an acceptable return on the project.

Here's where LNG comes in handy. By selling gas on a long-term LNG contract, a shale gas developer can lock in the price they need to make a project work. As long as you did your initial analysis on the play correctly, you can be assured that the economics will be favorable over the project's lifespan. (And as long as you build in provisions for escalating costs. If labor, steel or other supplies get more expensive, sale prices need to adjust accordingly.)

This works much better for shale than for conventional gas plays. Where individual wells can be more variable, making the breakeven price more difficult to determine.

If shale LNG does catch on, there's going to be a niche for good reserves engineers. People who can break down a play and tell developers and LNG buyers what price is needed to keep everyone happy. There's a handful of firms in the U.S. doing great work on play-wide analysis for a number of shales.

As I've mentioned many times, price volatility is a major challenge today for resource projects. Shale LNG might be one way to ensure success.

By. Dave Forest of Notela Resources