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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and working in Chicago. A complete collection of his work can…

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Where In The World Is The Shale Gas Revolution?

As it stands the global shale gas revolution is missing in action. To be sure, its impact in the United States – and the subsequent ripple worldwide – was nothing short of game-changing, but the wave of enthusiasm has yet to produce substantial results outside of North America.

Still, the dream is far from dead and exciting prospects abound from Argentina to China, and elsewhere in between. Both shale gas and tight oil – more than happenings in Iran, or drilling in the Arctic – look primed to be the dominant market movers in the short- to medium-term.

The U.S. experience is hard to replicate, and with the custom-tailored approach that hydraulic fracturing demands, it’s a difficult template for shale hopefuls to follow verbatim. It does however, provide a basic outline for what works and what doesn’t – an outline that explains the muted success abroad.

First, a helpful tax regime minimized the risk for early, pre-commercial, shale wildcatters. Between 1980 and 2002, tax credits via the federal government subsidized shale gas producers by between 20 to 60 percent of market prices. Also of note is the U.S.’ extensive – and unbundled – pipeline network, robust service sector, and the relative widespread availability of water. Related: China Doubles Down On Dirty Fuel

Perhaps more important though, are mineral rights. One of the key ingredients to the shale revolution in the U.S. is the ownership of mineral rights for landowners. That gives them a stake in the boom. But that is rare outside of the U.S. – in many other countries the government owns the mineral rights beneath a landowner’s land. That has slowed development in China, and contributed to preventing shale gas development across mainland Europe.

In the U.S., federal or nationally owned lands hinder, rather than help, development. Since fiscal year 2010, production of primarily shale gas and tight oil on federal land is down 31 percent and 10 percent respectively. Conversely, nonfederal lands have seen shale gas and tight oil production grow 37 percent and 89 percent respectively.

Of course, none of the aforementioned factors are prerequisite for shale success. Where there’s a will, there’s a way – and several countries are blazing their own trail in the pursuit of shale spoils.

Relatively new on the scene, but hot out of the gates is Argentina. The South American country is believed to hold more than 800 trillion cubic feet of technically recoverable shale gas – ranking it at number three globally. At 27 billion barrels, its technically recoverable shale oil resources rank fourth worldwide. Related: What Is In Store For the Halliburton-Baker Hughes Tie-Up?

Argentina has yet to produce commercial volumes of shale gas – April saw production hit 67 million cubic feet per day (MMcf/d) – but interest and capital are present in abundance. Americas Petrogas, Chevron, Dow Chemical, Gazprom, Petronas, and Sinopec are just some of the players working with the national energy company, YPF, to tap the massive Vaca Muerta shale play.

Fiscally, the cards are far from all there, as Argentina and president Christina Kirchner have created an intriguing, if a bit unstable, environment for international majors. The country’s long-standing and much-maligned oil price controls are somewhat shielding the domestic market from low global prices and the government’s loosening of natural gas controls is a boon for shale gas producers, but mismanagement under Kirchner still leaves many wary. The upcoming presidential election will go a long way toward determining large-scale success – the top three candidates are all shale supporters.

In China, commercial shale gas production is underway, with Sinopec and PetroChina leading the charge in the Sichuan Basin. Production is estimated to have reached 250 MMcf/d in 2014 and is projected to rise some 350 MMcf/d by the end of 2015. While positive, it’s a far cry from the 2.9 billion cubic feet per day (Bcf/d) China expects by 2020.

Geological and hydrological challenges abound, not to mention serious infrastructure deficiencies, but natural gas remains crucial to China’s future industrial and climate goals and the government is committed to exploiting its unconventional reserves. As such, several tax incentives and federal subsidies are in the works. Related: Ongoing Security Concerns In Kurdistan Have Oil Companies On Edge

Western companies – Anadarko, Hess, Noble, and Shell, to name a few – have largely been unable to find their footing, but joint ventures with service companies look to supply the country with a competent tech foundation and cement Sinopec as the leading shale producer in China. The Chinese NOC has inked partnerships with Texas-based FTS international and Geneva-based Weatherford International for vital equipment and advanced drilling tools.

Elsewhere, the revolution is progressing more slowly. Exploration is entering advanced stages in Algeria, Mexico, Poland, and Russia among others, and fiscal regimes are increasingly taking note. Still, the U.S. remains the undisputed champ, and that doesn’t look likely to change anytime soon. By 2020, Argentina and China will produce just 23 percent of what the U.S. averaged per day in 2014 (14.6 Bcf/d). The picture remains unchanged by 2030 as U.S. shale gas production is projected to outpace remaining global production by roughly 10 Bcf/d.

As production ramps up globally, and natural gas demand falls short of expectations, the downward pressure on prices is all but guaranteed. Shale’s – still just indirect – pricing impacts on regional markets have already been felt. Just how far prices drop is impossible to say, but some estimates suggest that, minus shale gas, the projected price of natural gas in the U.S. by 2040 would be some 70 percent higher.

Revolutionary changes are coming; we’ll just have to wait a bit longer.

By Colin Chilcoat of Oilprice.com

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