FOCUS: UNCONVENTIONAL OIL & GAS: International roundtable discusses pace of world's shale development

March 4, 2013
Exploration and development of oil and natural gas from shale plays could spread worldwide beyond the US and Canada faster than many people currently assume, participants at an International Energy Forum Roundtable concluded earlier this year.

Exploration and development of oil and natural gas from shale plays could spread worldwide beyond the US and Canada faster than many people currently assume, participants at an International Energy Forum Roundtable concluded earlier this year.

"One need only look at the history of conventional oil and gas development to appreciate the potential for almost any nation to embrace rules of the game that would encourage unconventional production," an IEF report said.

At the Jan. 23 IEF Roundtable meeting in Riyadh, Saudi Arabia, 21 participants from five continents shared their experiences in government, the private sector, and research. The meeting resulted in a recent publication summarizing some of the main ideas exchanged during the roundtable.

The report noted that it does not represent a consensus view but rather is intended to stimulate conversation on unconventional resources in the US and beyond.

"Conventional hydrocarbon resource development has occurred around the world (and) in countries with contrasting fiscal regimes and differing royalty-sharing schemes. This leads us to the question: If so many nations have been able to develop conventional oil and gas, what is stopping them from setting their sights on unconventional resources?"

IEF suggests unconventional oil and gas production is more likely to expand faster in Asia than in Europe or South America. Other promising areas are North Africa and the Middle East although pipeline networks might prove to be a constraint in some countries.

Roundtable participants it could take 5-10 years before the start of significant production of unconventional oil and gas outside the US and Canada. The likeliest scenario is a decade, IEF said.

"In the final analysis, the revolution in unconventional oil and gas production outside the US and Canada can be expected to take root where these unconventional resources are the cheapest alternatives to others that are now in use or easily accessible," IEF said.

For some countries, the economics of coal, biofuels, or traditional sources of oil and gas will prove to be more attractive than unconventional resources.

"Nations that do not have an urgent need to develop their unconventional resources can afford to watch the industry mature, with the potential benefit of learning from the mistakes of others and letting related technology improve," IEF said. "On the surface, this wait-and-see approach sounds completely rational. Yet in order to capitalize on the unconventional revolution over the long term, policymakers would be well advised to give some thought to capacity building in the short term."

Skill sets limited

Worldwide, the necessary skills to develop unconventional resources are scarce, the report said.

"Even though expertise can be provided by global companies, the necessary skills are in short supply," IEF said. "There are simply not enough skilled workers to go around, and the learning curve is both steep and long."

If there were to be a "widespread rush to produce unconventionals" worldwide in 5-10 years, then knowledge and skills constraints likely would prompt rising costs, which would in turn influence investment decisions.

Many countries will build their own teams of geologists and hydraulic fracturing crews necessary for unconventional development and production.

Meanwhile, US unconventional oil and gas production might maintain the same momentum of recent years, but there is no guarantee. IEF believes a lower oil price or an environmental disaster could stall production from shale plays.

"Some observers suggest that, if prices were to fall below the range of $50-60/bbl of West Texas Intermediate, production of unconventional would be stopped in its tracks," the report said. "But break-even costs vary from play to play, so it may be too simplistic to generalize that if WTI stays above $50 all US unconventional oil production should continue."

The report noted that many wells must be drilled to maintain current production levels because shale well decline rates typically are high. Some wells in the Bakken formation are estimated to have a 70% decline rate in the first year and a 95% decline rate in 5 years, the report said.

"On a more bullish note, production costs for unconventional oil and gas in the US have been falling," IEF said. "Moreover in recent months, some producers have apparently been hedging at lower oil prices—presumably because their costs are coming down. This point strengthens the belief that falling production costs are giving producers more of a cushion and are likewise giving the US unconventional revolution more room to run."

Roundtable participants noted concerns that an unconventional production-related incident affecting water could spark a social or political backlash. But participants suggested that if companies commit to good practices, then environmental issues alone might not pose as much of a threat to US unconventional production as many people assume.

"It remains the case, nonetheless, that environmental concerns must be addressed if production from unconventional deposits is to increase," the IEF report said.