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№ 9 (September 2010)

The Russian View on Shale Gas Environmental & Financial Aspects Part 3

   On top of the huge investments required for shale gas development, there is another challenge – the environment. As Nikolai Ivanov, chief expert of the Energy Department at the Energy and Finance Institute, pointed out, in July 2008, the state of New York imposed a temporary moratorium on shale gas production at the local part of its Marcellus play.

By Svetlana Kristalinskaya

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    Large landowners in the area would have been happy to get royalties for field development, but they were defeated by local farmers who believe there is a risk of groundwater becoming contaminated by fracking liquids.

   The intensity of the farmers’ struggle for their rights is due to legislation in New York state. Under the law, a company does not need the consent of every landowner to commence work on a site. The “compulsory integration” rule requires a field developer to lease just 60 percent of a plot not exceeding 640 acres (259 hectares) in order to get permission to drill on the entire plot. In this case, the owners of the remaining 40 percent are paid a 12.5-percent royalty – far less than they would get if they leased their land separately.

   Prior to giving permission to drill, David Paterson, the state governor and a Democratic party member, ordered a state assessment of the environment. The situation in New York state raised eyebrows in Washington; the Energy and Commerce Committee at the House intends to elaborate the possible influence of hydraulic fracturing on the environment and human health. The committee intends to seek information from companies like Halliburton, BJ Services and Schlumberger. These firms argue that “fracking” has been used for a long time now and there is no record of groundwater becoming contaminated.

   Farmers also want oil and gas companies to implement a program for the comprehensive recovery of used water, as solutions used for hydraulic fracturing contain large quantities of salt and other chemicals. This could pose a serious challenge to the project; according to John Conrad, the head of the environmental consultancy Conrad Geoscience Corp., the companies lack the capacity to purify all of the water they use. Farmers are also concerned that shale gas production would let benzene, arsenic and radioactive materials from shale layers seep to the surface.

Majors Turn to Europe

   Experts unanimously cite environmental problems when explaining their doubts on shale gas production in Europe where shale deposits have already been acquired by Shell, ConocoPhillips, ExxonMobil, Marathon Oil, Chevron, Total and OMV. These companies are involved in exploration projects in Poland, Hungary, Germany, Sweden, Ukraine and other countries. But attempts to find commercial deposits have not always been successful – in February, ExxonMobil was forced to dump one of its Hungarian projects.

   With population densities higher than in the United States and with more stringent environmental protection laws, Europe finds the costs associated with producing alternative gas in the EU to be higher. “Come to Dallas and you’ll see drilling rigs for alternative gas production right around the airport,” GDF Suez CEO Jean-François Sireli says, “Do you really think that this would be possible in the Orly or Roissy neighborhoods around Paris?” Another giant – Shell – came under fire for the same reason, and was sharply criticized by environmentalists for its shale gas production plans in Norway. Given the sorry experience of its colleagues, Statoil is in no rush to look for shale gas in Europe – the Norwegian company prefers exploring in South Africa.

   Besides Europe, shale reserves can be found in Asia-Pacific countries and in Russia. Last November, China and the United States signed a cooperation agreement on developing shale deposits. This agreement means U.S. and Chinese companies will work together on shale gas E&P projects. Not satisfied to stop with a U.S. partnership, China’s PetroChina will cooperate with Royal Dutch Shell to explore for shale gas in Sichuan Province, while China Petroleum & Chemical Corp. (Sinopec) will cooperate with BP.

Gas Demand to Grow

   Interestingly, in late 2009, the EIA revised figures in its gas market forecast from the previous year. According to the Annual Energy Outlook 2010 (AEO2010), in 2008 natural gas imports stood at about 13 percent of consumption, and the 2009 forecast stipulated that by 2020 the share of gas imports would drop to 8.9 percent, declining to 1.6 percent by 2030.

   Yet the new forecast says that by 2020 natural gas imports will provide 11.3 percent of the total requirement (2.57 trillion cubic feet), edging down to 7.6 percent (1.84 trillion cubic feet) by 2030, and to 6 percent (1.46 trillion cubic feet) by 2035. The updated AEO2010 forecast also gives higher figures for the outlook on gas consumption: 22.63 trillion cubic feet instead of 21.53 trillion cubic feet in 2020, and 24.33 trillion cubic feet instead of 23.5 trillion cubic feet by 2030. However, domestic gas production forecasts differ far less. This essentially means that U.S. natural gas consumption will grow and domestic production will be unable to compensate this growth.

   For several years, the net back price for U.S.-produced natural gas has doubled – from about $4 per 1,000 cubic feet in 2000, to $8 per 1,000 cubic feet in 2008 (though prices fell to $3.8 during the economic crisis of 2008–2009). According to the AEO2010 forecast, the growth in prices will slow compared to the 2009 forecast; the authors contend that the $8-level will be reached in 2035 rather than in 2027, as was thought earlier.

   Statistical data is a stubborn thing – today we observe the results of shale gas production and changing emphases on the part of oil and gas majors. The only question that remains is which gas production technology will be cheaper in a given market.

   “I’d like to note that the 51 billion cubic meters of natural gas the United States is producing is not a myth – it’s a real fact. The United States also has a joint program with Canada for 2009 and 2010 which envisions producing 67 billion cubic meters of gas. This is on top of the fact that the United States is producing more gas than we are. And now they will have a significant share of shale gas. And even if one denies the growing impact of shale gas, he must do this conscientiously, after a deep analysis of the problem,” Valery Yazev, deputy speaker of the Russian Duma and president of the Russian Gas Society said in closing a roundtable in the Russian legislature.

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