Thursday, 12 May 2011

Shale Gas impact on Energy markets?

Mr Drew has noted the interesting  Nick Grealy before on this blog. he writes at No Hot Air. I attended an interesting conference where he spoke this morning.

By way of background, grealy believes in climate change but also sees the huge potential for Shale Gas.

The US is the only country that is really into extracting shale gas. It is more complex than normal extraction as you need chemicals and lots of water to breakdown the rock formations which hold the gas.

However, he posited that it is so successful it he US that it has held down gas prices and caused the de-link between WTI and Brent crude.

More amazingly he described a recent report that identified 5.6 trillion TCF identified resources across the world:
UK 20TCF
France 180 TCF
Poland 187 TCF
Algeria 213 TCF
Argentina 774 TCF
China 1275 TCF

To put that into perspective, worldwide demand is only 50-60 TCF per year, with Europe at 20.

On this basis it really is a game changer and when the technology is applied to shale oil it will have a similar impact on global oil resources - Grealy is as you would imagine a lot less concerned than many about security of supply and peak oil.

All good so far, but the really interesting piece to me was the impact of Geo politics, outside the US everyone is against Shale:
Environmental concerns, hugely out of proportion, are a cover for lots of reasons not to be happy. Centrica and gazprom don't want to see cheap prices for their good, nuclear proponents hate it, OPEC hates it, Russia sees it revenues under threat, UK energy policy would have to change so our Government hate it, Greenpeace hate it.

In France (80% nukes and 10% hydro) all the political parties are against shale exploitation and there is a motion to ban extraction; maybe this will lead Europe down this path?

In any event the US is soon going to become a large exporter of Shale NG and this is great news fro consumers. Grealy went to far as to suggest with shale oil people might be paid to take excess gas away ($4 boe) to get at the oil ($100 boe).

Anyway, great listening and an interesting insight into a global changing development. San Leon are a small aim explorer in Poland who are looking to develop shale and I will research them a bit further. In the long-term the likes of BG and Centrica in the UK are looking at difficult times unless the lobby Government hard enough to stop this non-subsidised cheap energy from being extracted.

So, is he right about all this?

15 comments:

Dr Dan Holdsworth said...

As soon as someone comes up with a good catalytic route to turn methane into longer-chain alkanes (possibly using heated coal to get rid of the excess hydrogen such catalysis would generate) then the shale gas has the potential to replace mineral oil as vehicle fuel. At that point we've got a game-changer; shalegas can power industry, and anyone who doesn't fancy it can just sit back and watch their economy go down the toilet.

Mr Ecks said...

Some estimate enough shale gas to meet all our energy needs for 600,000 years. This may be hype but any road up this country should be focusing on shale (and thiswww.devilskitchen.me.uk--More-polywell-news).

To hell with eco-freaks and vested interests.

Nick Drew said...

it's handy that Poland is one of the most prospective areas in Europe - they are currently hooked on (a) lignite & (b) Russian gas imports, neither of which are ideal single-sources

so I can't see the Poles having too much concern over the environmental side (have you ever stayed in a town near a lignite-fired power station ?)

or Algeria for that matter ...

as for the French - who have already decided 'non' - they are barking: nul points, i diskard them uterly

James Higham said...

It is more complex than normal extraction as you need chemicals and lots of water to breakdown the rock formations which hold the gas.

Costs, relatively speaking? Who would take it away?

rwendland said...

I know little about gas production economics, let alone shale gas.

But I observe that some people claim that shale gas production is relatively expensive, needing a fair bit more of capital expenditure; and that the companies expanding this production are at risk of financial collapse from servicing borrowing if gas prices were to fall in the future. ie it could be a bit of a bubble being hyped up by analysts for the usual reasons.

What's more with shale gas, as I understand it, there is a continuous process of drilling new holes as the old ones clag/dry up after a while. So if the owner goes broke there is not a solid fixed asset for the creditors that can continue to operate with little further investment for a decade or so. So lenders are taking a higher risk.

Does anyone think there is much truth to this?

Nick Drew said...

Mr W - well certainly, enthusiasm for investment in shale gas is cyclical: in the US it was booming 2-3 years ago but there has been a big decline in new investments in 2011

because of course the surge in production from those 2+ year-ago investments has trashed the gas price! - welcome to capitalism

many of the US developers have been smaller co's (that doesn't mean tiny), and the marginal ongoing development (as the life of the field unfolds) tends to be cheaper than the initial, per unit of production - sunk costs at work, we've started so we'll finish

but directionally, they certainly throttle back as a consequence of falling prices - as they always did with 'conventional' onshore production in the States, year on year (conventional onshore production in N.America also involved an annual 'drilling campaign', which would be scaled up or down according to prevailing price)

offshore production (e.g. North Sea) has different dynamics: the upfront costs are so immense that once you've started you generally carry on at full bore (despite what Centrica would have you believe) until all economic reserves have been recovered - and sometimes even beyond that, if you can defer abandonment, see this earlier post

the overall picture is best summed up by the sheer scale of US shale gas production in such a short space of time: i.e. whatever the exact economic dynamics, it can work just fine

N.America has now become a 'gas island' with separate price-formation (after years of convergence w. Europe via growing LNG trade): in consequence Eu gas prices are quite a bit higher than US now, and should sustain a shale industry in fruitful overall conditions (= Poland & maybe parts of UK/DE/NL)

certainly all the big players from Exxon down (including our very own Centrica) are massing in Poland with serious intent

rwendland said...

Luckily I kept a copy of my comment, before the Great Comment Loss, so here again:

I know little about gas production economics, let alone shale gas.

But I observe that some people claim that shale gas production is relatively expensive, and needs a fair bit more of capital expenditure; and that the companies expanding this production are at risk of financial collapse from servicing borrowing if gas prices were to fall in the future. ie it could be a bit of a bubble being hyped up by analysts for the usual reasons.


What's more with shale gas, as I understand it, there is a continuous process of drilling new holes. So if the owner goes broke there is not a solid fixed asset for the creditors that can continue to operate with little further investment for a decade or so. So lenders are taking a higher risk.

Do you think there is any truth to this?

ND's reply was along the lines: sort-of, shale gas investment has dropped of the last year or so as gas prices dropped - but it is only the reality of supply and demand in play. The large amount of interest in Polish shales shows that shale gas economics are still OK.

Nick Drew said...

a great precis of my reply Mr W, I must learn to be as concise as that !

Laban said...

That diagram looked very similar to what I saw a few years back when flying over Northern Alberta, north of Fort McMurray.

I always assumed it was some kind of oil extraction, but most of that seems to be done with massive diggers - was I seeing oil extraction via steam injection, or shale gas extraction?

Anonymous said...

France has banned shale hydrocarbon production, by banning fracing:
http://www.upstreamonline.com/live/article255972.ece

Can an EU wide ban be long in coming?. Would cast Iron Dave and his greenest ever government disobey such a dictat?.

rwendland said...

Kind words ND. I'm sure your reply had more good stuff, and the conciseness was merely due to the limit of what my ageing braincells could retain!

The Select Committee meeting that Nick Grealy spoke at had some detail on economics at 11:37:30 on the video. Though most of the facts came from the other gas expert from the Geological Society of London giving evidence at the same time:

$5/MCF is the rough break-even point for US unconventional gas, a little higher in the EU as the shales are deeper and costs a bit higher. This is lower than current US spot price (around $4/MCF I believe). So currently US shales are only profitable due to:

1) US shale-gas producers hedged forward supplies as the fields were developed, so are currently still getting more than costs.

2) Small US shale-gas companies had large investments funds, so can use this to subsidise marginal production in the interim.

3) Some shale-gas needs to be cleared out to make shale-oil available, and these companies are willing to sell that gas at almost any price. (Mostly in Gulf of Mexico region.)

Grealy was much more positive than the Geological Society expert, but was quite light on facts, so to me came across less convincingly. He said there had been much continuous improvement so far, and he expected production costs to fall. He did say Cabot Petroleum claim production cost is now $1.30/MCF.

Worth watching that section of the video. I'm not saying the stuff above is right; I don't really know much about this - just reporting what was said in the evidence.

rwendland said...

... Dah. Typo. I of course meant costs at roughly $5/MCF are higher than current US spot prices, not lower as I typed!

NB MCF is a thousand (mille) cubic feet of gas.

rwendland said...

Noticed that John Dizard of the FT also figures shale costs are higher than US spot prices, though his ring around of experts makes full shale costs at $8 per MCF, higher than the Geological Society expert.

Dizard's theory is:

"the shale gas exploration and production companies leased a lot of acreage in the recent boom that needs to be proven as gas-laden within a short time to be kept on the books. They drilled with investors’ and lenders’ money to do that, and squeezed their suppliers to stretch out the budgets.

Now they’re selling the semi-proven acreage. The majors, which can’t seem to explore their way out of a grocery bag these days, at least in the onshore US, needed those elastic “reserves” to replace politically risky hydrocarbons in geologically better locations. They, and the remaining independent producers, will be bailed out by gas at $10 an mcf – double today’s level – or higher."

As far as I can see, there are quite a few cynics about a shale-gas hype. But I really don't know which side of the story is the correct one.

Nick Drew said...

hard to be entirely skeptical about a phenomenon that, unheralded, has turned N.America around from being a net & growing importer of gas to a net exporter !

that's tangible, that is

CityUnslicker said...

Also, thanks for all these comments. it sticks too that one thing shale is going to do is keep nat gas costs down for a long time; which in turn is going to have a big effect on the oil price as lots of transport can swtich, knowing that the ever increasing price of oil is going to limited by using gas.

Also, grealy is onto something with people saying gas will be free from those trying to get hold of shale oil.

All this does seem to be a great boon to those who decry peak oil - and something which also underpins perhaps the end of the commodity super-cylce for hydrocarbons.