Will the GCC jump on the global shale hydrocarbon bandwagon? And if so can the economic benefits outweigh the technical challenges of exploiting reserves?
Shale hydrocarbons, both oil and gas, have transformed energy markets in North America – but what about the Middle East? A number of factors – including geology and resource potential, demand, energy prices, environmental and social factors and infrastructure and service capabilities – will influence the pace and feasibility of shale development. Looming gas shortages in some countries could make shale gas a more likely prospect in the Gulf Co-operation Council (GCC) – so how likely are we to see shale gas being produced in the region?
Driven by technological advances, in particular hydraulic fracturing and horizontal drilling, shale gas production in the US has increased at a rapid pace. According to the US Energy Information Administration (EIA), the annual average growth rate in shale gas production was 48 per cent between 2006 and 2010, making the US now largely self-sufficient in natural gas. The EIA predicts US shale gas production will continue to increase strongly, almost fourfold from 2009 to 2035, to 342 billion cubic metres.
The US experience may not, however, be replicable here, as petro-physical properties vary. Gas shale basins are different and have unique sets of exploration criteria and operational challenges. A step change in exploration and appraisal drilling activity will be required. Estimates of technically recoverable shale gas reserves are certain to be revised, upward and downward, over time. Even then, there is no guarantee that any confirmed deposits would be economical to develop. The business case will depend on the price of gas – and not just international market prices.
The price of gas was an important factor in the rapid increase in shale gas production in the US. The subsidised price of gas in the GCC will therefore change the prospects of success in this region. Shale gas production costs in the GCC are likely to be higher than in the US, at least until an understanding of the geology improves and further advances in technology can help drive down costs. The International Energy Agency estimates that production costs for US shale gas range from $3/MBtu (million British Thermal Units) to $7/MBtu (or approximately $18 to $42 per barrel of oil equivalent) – although production costs in North America have declined markedly over time through improving technologies and increased volumes. Technologies for drilling and fracking continue to develop, improving efficiency and lowering the cost of exploration and production. At the same time, a gas supply bubble has developed in the US from the combined impact of an upsurge in shale gas production and a drop in demand, leading to a sharp decline in US natural gas prices – the current Henry Hub price is $2.80/MBtu.
Predicted gas demand growth will be important. The IEA assumes a positive outlook for natural gas leading up to 2035. Demand in the GCC is conservatively forecast to be 20 per cent higher. There could also be increasing demand from Europe, driven by uncertainty in Europe over nuclear energy, coupled with cost and investment issues with renewables, leading to gas becoming the primary energy source there in the next 20 years, rather than being a transition fuel to a low carbon economy.
Shale gas will need to compete with existing energy sources, where investments in infrastructure have already been made. There is a significant amount of additional LNG liquefaction capacity coming online between 2011 and 2012 that was sanctioned based on expectations that the US would become a major import market. Over the last three years, some LNG volumes that were initially intended to supply the North American market have been diverted to other markets due to low natural gas prices. Any additional LNG supply coming onstream may have to find new markets.
Therefore, shale gas is unlikely to be transformational in the GCC – but it could prove to be significant for individual countries which do not want to rely on natural gas imports. Higher development costs and lower gas prices mean that shale gas projects in the GCC are unlikely to be immediately economical. The impact on energy markets will vary from one country to the next, depending on national energy strategies, projected growth in gas demand and the cost and social acceptance of alternative, competing supply sources. The shale gas debate in the US and Europe has become increasingly contentious, but there is no denying the economic benefit that the evolution of a shale gas industry in the GCC could bring. The increase in jobs and government revenues would be especially welcome in these times of fiscal austerity. Any risks that are shown to be linked to shale gas development need to be balanced with its potential contribution to energy security and economic development.
Marek Mikitiuk is a Partner with Ernst & Young’s Global Oil & Gas Center of Excellence. The views expressed in the article are his own