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№ 4 (April 2010)

Shale Gas: Global Revolution or Yet Another Bubble?

   Growth of U.S. shale gas production could result in re-mapping the global energy resources market. Gazprom’s quest for higher natural gas prices has come back to bite the company, its consumers now having been forced to develop gas fields which were previously unprofitable.

By Svetlana Kristalinskaya

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This is part one is a three-part series on shale gas in Russia and Eurasia. Part 2 can be found here: "Russia Weighs Its Options as Shale Gas Wave Hits Europe".

  Oil and gas majors have already initiated the search for shale gas throughout the world. Anticipating a spike in shale gas production, Gazprom wants to acquire the technology for it. Still, experts hold varying opinions: some side with the Americans, who maintain that shale gas is the future of the global oil and gas industry; others say the commotion is simply a well-planned PR campaign.
The United States, which imports natural gas and is also the world’s largest consumer of the fuel, has long been trying to reduce its ‘energy habit’. In the process, it has become the leader in producing alternative energy. Shale gas is one such resource.

   According to a 2000 forecast by the Energy Information Administration, shale gas production will reach 0.8 trillion cubic feet (some 23 billion cubic meters of gas) a year by 2010. However, in 2006–2007, the United States witnessed a tremendous breakthrough in shale technology; combined with rising natural gas prices, this provided a cost-effective means for producing natural gas from shale rock. By the end of 2008, U.S. companies were producing 1.49 trillion cubic feet (42.6 billion cubic meters) of shale gas; by 2020 this volume is set to grow to 4.51 trillion cubic feet (129 billion cubic meters), by 2030 – to 5.5 trillion cubic feet (157 billion cubic meters), and finally reaching 6 trillion cubic feet (171 billion cubic meters) a year by 2035.

The Pioneer Hart and His Followers

   The first commercial shale gas well was drilled in the United States back in 1821 by William Hart, who is considered the “father” of natural gas. But industry-grade production of shale gas was set up by George Mitchell and Tom Ward. Mitchell set up an independent oil and gas company, which he sold to Devon Energy in 2001 for $3.5 billion. Word is the co-founder of Chesapeake Energy, the second-largest U.S. producer of natural gas.

   The technology for shale gas production emerged from a combination of technologies already in use for horizontal drilling and reservoir fracturing. The geologists also received great help from 3D seismic survey technologies. In 2002, Devon Energy drilled its first ever lateral well at the Barnett Shale play (at the end of the 2000s, the company was able to start large-scale industry-level production of shale gas in the United States).

   Devon Energy’s annual 2008 report says that in that year the company produced some 2.5 billion cubic feet per day (26 billion cubic meters a year) of gas, half of which was produced from Barnett field. By the end of 2008 the company’s share of proven reserves at Barnett Shale field reached 894.2 million barrels of oil equivalent, at Cana-Woodford field – 20.3 million barrels of oil equivalent, at Arkoma-Woodford field – 42.6 million barrels of oil equivalent. The company also holds stakes in Horn River (Canada) and Haynesville (Texas), with unproven reserves.

   Currently Devon Energy is streamlining its global assets, aiming to reduce its total debt and focus on North America-based natural gas production (the company estimates that alternative gas production will bring profits for many years to come). In November 2009, Devon Energy unveiled its plans to sell $7.5 billion worth of assets; by March 2010, the company had inked a $7-billion contract with BP to sell its assets in Brazil, the Gulf of Mexico and Azerbaijan.

An American Kovykta

   Chesapeake Energy, another large producer of shale gas, is moving in the opposite direction, trying to attract investors to its projects. The company holds stakes in six shale plays – Barnett, Fayetteville, Haynesville, Marcellus, Bossier and Eagle Ford, where some 14.6 trillion cubic feet (417 billion cubic meters) of proven gas reserves had been discovered by late 2009. By the end of 2012, this figure is expected to grow to 20-22 trillion cubic feet (570-630 billion cubic meters). The company thinks the fields hold about 65 trillion cubic feet (1.8 trillion cubic meters) of risky, unproved reserves, which is a level similar to that estimated for the Kovykta field, one of Russia’s largest gas deposits. In 2008–2009, Chesapeake Energy sold some of its shale deposits, attracting $10.7 billion in investments from oil and gas majors.

   The company’s largest shale asset is the Barnett field, with a current production level of 515 million cubic feet per day (some 5.4 billion cubic meters a year).
Just before the New Year 2010, Total acquired a 25-percent stake in Chesapeake Energy’s Barnett Shale. The deal will be completed before the end of 2010, and when the ink dries, the cautious French company will pay Cheasepeake Energy $800 million. Then, within six years, the French will have to fork over $1.45 billion, paying for 60 percent of the capital investments in the JV’s drilling programs. Following the agreement, Total will also have the option for another 25 percent stake in new Barnett Shale fields which Chesapeake may acquire.

   Entering the U.S. non-conventional gas business is a strategic move for the French company, Total CEO Christophe de Margerie said. He noted that shale gas is an “attractive long-term resource base under competitive terms”. Total also emphasizes that this U.S. asset will allow the company to develop its expertise in unconventional hydrocarbons in order to expand its unconventional business worldwide. Furthermore, the transaction provides yet another key support for Total to build the gas value chain position the group has established in the United States.

   He added that the company had put a priority on developing shale gas fields, trying to offset falling oil production levels linked to OPEC slashing its quotas. Notably, falling demand for oil products on the European markets is already forcing Total to sell refining assets in Europe.

“Hey, boys, what’s up?”

   U.S. gas professionals put much of their hope into Marcellus and Haynesville assets. In the end of 2008, Norway’s Statoil paid almost $3.4 billion for a 32.5 percent stake in the Marcellus project. Currently Chesapeake is drilling 24 wells on its licensed territory within the field. The company plans to boost this number to 175, in anticipation of production rates near 270 million cubic feet per day (2.8 billion cubic meters of gas a year) in the end of 2010, to grow to 450 million cubic feet (4.7 billion cubic meters of gas a year) by the end of 2011.

   “At this point in time, the more we work on this asset, the better we like it strategically, operationally, and value-wise. And I think that recent industry development within US shale gas further supports exactly that position. Average well results from Marcellus are so far above our initial assumptions,” says Statoil CEO Helge Lund. “We are achieving shorter drilling cycle times and lowering costs. At the same time, the operator is drilling long laterals and increasing estimated ultimate recovery. On that basis, we are confirming our ambition to deliver 50,000 barrels per day from this asset in 2012. As I see it today, Marcellus has the potential to become a long-lasting and highly profitable asset with very competitive costs compared to other sources of U.S. gas supply,” adds Lund.
In 2008, Chesapeake sold U.S.-based PXP a 20 percent stake in what he considers anther promising asset – Haynesville – for $3.1 billion. Meanwhile, BP paid $1.9 billion for a 25 percent stake in Fayetteville field.

   Japan's Mitsui inked an agreement with Marcellus Shale operator Anadarko Petroleum, paying $1.4 billion for a share in the project.

   But the largest deal on the shale gas market is undoubtedly the acquisition of XTO Energy by ExxonMobil for $41 billion – the latter was tempted by XTO Energy’s stakes in Haynesville, Marcellus, Barnett, Fayetteville, Woodford and Bakken assets. XTO proven gas reserves totaled 11.8 trillion cubic feet (337 billion cubic meters of gas) at the end of 2008, but it is unclear what share of that volume is actually shale gas.

   Meanwhile, some people, such as Texas geologist and consultant Arthur Berman, believe this is yet another market bubble. “If you’re not in one of these plays, then Wall Street says, ‘Well, what’s the matter with you guys?’” Berman thinks shale gas reserves are greatly overstated, while the cost efficiency of shale gas production is questionable at best.

(to be continued in the May issue)

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