The scramble for shale gas

Dismissed for decades as too expensive to extract, shale gas is now a realistic energy supply. It’s a geopolitical and investment game-changer, says Simon Wilson.

Why the interest in shale gas?

The ‘unconventional’ natural gas found in shale – a type of rock formation similar to slate – is tough to access. Energy firms have known about it for decades, but mostly dismissed it as too expensive to extract. But in the past few years the key technology needed to extract it from seams deep underground has been perfected. According to Petroleum Economist, recent estimates of total unconventional gas reserves suggest they will increase the world’s overall gas reserves by between 60% and 250%. Other analysts put the figure much higher. So suddenly we have the prospect of a ‘new’ source of energy that is secure, affordable and even clean.

Where are the reserves?

So far, only America has started extracting shale gas. And it’s made a huge success of it. In the space of a few years, shale gas has shaken up the American gas market, with small, specialised companies at the forefront of shale exploration. That has helped send the price of gas tumbling and turned America into a net exporter of natural gas. Now some claim it can revolutionise the global energy market, with all the strategic and geopolitical implications such a prospect implies. BP’s Tony Hayward calls shale gas a “game-changer”. And the scramble for shale is driving a wave of acquisitions and partnership deals in the industry. For example, three months ago ExxonMobil agreed a $41bn deal to buy shale specialist XTO. Meanwhile, BP, Statoil and Total have struck joint venture tie-ups with sector leader Chesapeake Energy. And few firms want to miss out on the next wave of shale exploration – in Europe.

What’s the potential in Europe?

Decent enough, but probably not as big as in America. That’s in part because the continent is more densely populated – shale exploitation requires wide-open spaces – and consumers may be more vocal about environmental worries. Yet according to an estimate by the International Energy Agency, Europe has around 35 trillion cubic metres of unconventional gas reserves – half of which is shale. That’s far less than North America or Russia, but still around six times its remaining conventional reserves. And enough to make up for 40 years of gas imports at current levels. The big energy firms are convinced. Indeed, the current scramble for Europe’s shale assets features many of the big players who missed the first US wave.

Such as?

ExxonMobil is drilling in Lower Saxony, Germany, on assets it reportedly considers to be world class. ConocoPhillips is exploring a large tract of northern Poland in partnership with Lane Energy, a subsidiary of Isle of Man-based 3 Leg Resources. Austria’s OMV is test drilling in the Vienna basin. Shell is targeting Sweden. And for some countries in central and eastern Europe, all this activity has some serious strategic and political implications. By sheer geological fluke, many of the most promising shale gas deposits are in countries most troubled by Russia’s dominance of their energy supply. Think Poland, Hungary and Ukraine.

How does this affect Russia?

Kenneth Medlock, of the Baker Institute, argues that even the threat of credible shale gas development in Europe will weaken Gazprom’s negotiating power, and may force Russia to become more co-operative and open to outside investment. In any event, as Alex Froley argued recently in Platts Oilgram News, it seems certain that shale gas will be important for Russia and Europe, “regardless of how much Europe itself can economically produce. If US production continues at current rates, and if shale gas takes off in other parts of the world such as China and India, it will shake up supply patterns regardless of Europe.”

How is China responding?

Enthusiastically. Beijing wants to wean China off coal – for environmental reasons and for energy security. To date, China has focused on coal-bed methane and tight gas, but plans to start exploiting shale gas are well advanced. And a lack of home-grown expertise has opened the door to foreign businesses. According to a recent report in Petroleum Economist, Sinopec is in talks with BP over a possible venture, involving 2,000 sq km in Guizhou province and 1,000 sq km in Jiangsu.

Shell has also signed an agreement with PetroChina to develop shale gas resources in Sichuan province in the southwest, following its collaboration on the Chingbei conventional gas field in the north. Meanwhile, in November the US signed an agreement to help China exploit its shale gas resources. That, says the FT, could matter more long term than their failure to agree binding emissions targets at Copenhagen.

Why investors should tread carefully

It is practically an article of faith in America that shale gas is going to provide unlimited energy indefinitely, says John Dizard in the FT. Everyone from clean energy liberals to national security wonks and deficit-slashing fiscal conservatives is talking up the shale gas bubble. But don’t rush in yet. A top shale analyst, Ben Dell of Bernstein Research, argues that production costs are high, “probably underestimated”, and are set to be driven up by a shortage of the necessary equipment. He reckons shale gas is only economic at a spot gas price of $7.50 to $8 per thousand cubic foot, well above today’s level. “Shale gas is not magic” – investors should tread carefully.

6 Responses

  1. 19/03/2010, Shaker13 wrote

    A large shale gas deposit discovery in China was announced by Canada’s
    publicly traded Petromin Resources in May of 2010
    The discovery occurred on their TerraWest property in the Junngar Basin. This property is part of a production sharing contract on their partner PetroChina’s lands.
    Petromin trades under the ticker PTR on the Vancouver exchange and their website is http://www.Petromin.ca

    receive a 20% gross overriding royalty from all production on a go forward basis.
    The stock appears to be very under radar and they are about to announce both a reserve estimate and the 2010 drilling program

  2. 19/03/2010, Shaker13 wrote

    Post error
    re-Petromin
    20% gross overriding royalty is related to their enhanced coalbed methane project by utilizing CO2 sequestration.
    Partnered with the Alberta Research Council and China United Coalbed Methane Co.
    They will be conducting the worlds first ever multiple-well CO2 sequestration project to take CBM production from average 35% up to 70%
    I own shares of PTR.V and their partner in Hong Kong / Enviro Energy International Holdings Limited which trades on the Hong Kong / ticker is 8182

  3. 19/03/2010, Nick Grealy wrote

    If shale gas is going to have such a huge impact, why no discussion of the impact in the UK? The UK’s Ofgem wants us to think that the UK is a special case and we are the only place on the planet which won’t be impacted by shale: Lights out Britain and all that rubbish.
    http://www.nohotair.co.uk has been talking about the impact of shale gas on energy consumers for over 18 months, way before the mainstream press. During that time, business users who followed our advice and only bought on the falling wholesale market have saved over 20% on electricity and over 45% on gas compared to those who were sold into the myth of gas scarcity by energy brokers and the mainstream media and fixed prices for a year or more.

  4. 19/03/2010, shaker13 wrote

    Apologies….Petromin’s Shale Gas Discovery was announced in May of 2009…not 2010
    The next news announcement’d they should have will be their reserve report and the commencement of their 2010 drilling program

  5. 22/03/2010, Peter Rillion wrote

    NightHawk Energy are sitting on a large shale gas area. The SP has been falling as production figures for their oil reserve are not being realised but the oil is there, they are simply only producing from 3 small wells and not even at their full productivity.

    NightHawk are rumoured to be in talks for a take over and this is almost certainly going to be the case. Their shale gas will provide a long term income and they are situated in the perfect place in the US, while their long awaited oil production is seeing a large increase with RNS on this about to be released.

    Shale gas will be a very important energy supply in the near future.

  6. 16/04/2010, cladd wrote

    Shale gas activity in Europe appears to be intensifying with Canada’s Talisman Energy recently entering into the picture.

    http://www.naturalgasforeurope provides all of the updated activity.

    Cheers,
    CG

Commenting on this article closed

MoneyWeek magazine

Latest issue:

Magazine cover
Hard cash

What's next for gold and silver?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking