FOCUS: UNCONVENTIONAL OIL & GAS – Deloitte: Pace of shale gas development won't be easy to repeat outside US

June 3, 2013
The progress of major shale gas developments outside North America is apt to lag the pace of the US shale gas revolution, according to a recent report from Deloitte analysts, who note that developers of US unconventional assets had advantages over their counterparts in Poland, China, and Argentina.

The progress of major shale gas developments outside North America is apt to lag the pace of the US shale gas revolution, according to a recent report from Deloitte analysts, who note that developers of US unconventional assets had advantages over their counterparts in Poland, China, and Argentina.

"These countries still have a long road ahead before they can begin to see the gas volumes and supporting infrastructure needed to dramatically lower natural gas prices and create export opportunities," the report said.

Deloitte Touche Tohmatsu Ltd. released the study—"Oil and Gas Reality Check 2013: A look at the top Issues facing the oil and gas sector"—on May 6. The study focuses on shale gas, LNG pricing, resource nationalism, national oil company expansion, and market complexity.

Adi Karev, DTTL oil and gas global leader, said, "The global oil and gas industry is going through a phase of renewal with the entrance of new producing countries and traditional producing countries exploiting new, unconventional and frontier ventures."

Oil and gas companies operating in the US benefit from an established regulatory setting and existing infrastructure compared with operators worldwide. Deloitte sees the US as being on the cusp of becoming a shale gas globalizer, saying US gas producers want to export gas to get higher prices.

"The US is not constrained from an export decision by its reserve per capita or domestic demand as it moves towards globalization of its shale gas," Deloitte said.

Countries seeking to replicate the US shale gas revolution are finding that they face more complex geology along with infrastructure gaps, said Deloitte, which expects shale gas will remain a regional resource for 1-3 years.

Deloitte believes four countries—Poland, China, Argentina, and the US—represent distinct phases of shale resource development.

"Each country is positioned differently on the spectrum of shale gas development," Deloitte said. "The mere existence of shale gas does not immediately lead to energy independence or make a major impact on the global energy market. The shale gas development spectrum serves well to summarize each country's potential for reaching global gas development."

Development stages outlined

Poland's shale industry is struggling to maintain international interest, said Deloitte, saying Poland is in a dormant stage with little or no exploration and production activity. Although Poland has granted 111 exploration licenses to nearly 30 companies, only about 33 test wells were completed with 10 completed using hydraulic fracturing.

San Leon Energy PLC agreed to buy Talisman Energy Inc.'s share of a shale gas joint venture in Poland. Talisman is the second international major oil company to withdraw from Poland, following a decision last year by ExxonMobil Corp. to exit Poland after early results failed to produce commercial wells (OGJ Online, May 13, 2013).

San Leon is acquiring 100% ownership of the Gdansk W and Braniewo S licenses and increasing its interest to 50% in the Szczawno license in Poland's Baltic basin (see map, OGJ, Nov. 7, 2011, p. 36).

Despite the exit of ExxonMobil and Talisman, the Polish government is pushing for commercial unconventional production by 2015 and anticipates companies could drill 270 shale wells through 2020. The Polish Geological Institute also is scheduled to release a new resource assessment in 2014.

Poland's shales are 1-2 miles below the surface, as deep or deeper than US shale formations. The depth of Poland's shale resources will make them more costly to develop. Poland has only limited gas pipeline infrastructure and a small services industry.

Deloitte described China as being in the nascent stage. While working diligently to promote shale development, China is unlikely to export unconventional production because of its rising domestic demand, Deloitte said.

The Sichuan basin, China's most active shale basin, has access to water resources that make it suitable for fracturing despite its low per capita water supply. But the region also faces high population density.

Success in Sichuan basin would indicate China's transition to an incubator, Deloitte said. As of May, only about 60 exploration wells have been drilled. Deloitte said China's services industry is inexperienced with shale and has only limited fracturing experience.

Argentina has entered the incubator stage, Deloitte said, citing Argentina's positive production results and its efforts to scale up production by bringing shale basins on stream.

The outlook for Argentina was described as the decoupler stage referring to midstream and downstream projects to link new unconventional production with markets. The establishment of gas processing plants will require large capital investments, Deloitte said.

In April 2012, Argentina nationalized YPF and vowed to spend $1.5 billion to test unconventional drilling technology. YPF also has said it plans to spend $12 billion on shale from 2013 to 2017. The government created the Gas Plus program in a move geared toward obtaining high prices for producers of unconventional gas assets.

"Over the short term, Argentina will continue as an incubator assisted by recent successes in the Vaca Muerta," Deloitte said. "Longer term, Argentina has the potential to become a decoupler as other shale basins in the country are brought online."

Industry strategy outlook

The direction in which US medium integrated companies, supermajors, and NOCs have evolved shows that vertical integration is far from becoming a market certainty as the winning business model, Deloitte said.

"Instead, vertical integration largely depends on aligning company strengths and strategy with local and global market conditions," the report noted. "Deloitte's analysis indicates that uncertainty is very much the order of the day. How companies react to and deal with this uncertainty is changing the notion of a singular business model and giving rise to different business models."

Karev said, "The industry has evolved to a point where market complexity is best managed through diversification of companies, partnerships, and flexible business models. As we look towards the next 3 to 5 years, what previously seemed more certain will become less so."