Shale Development Keeps Us Guessing: Who Will Frack Next? PART I

Data point to a handful of hotspots of shale gas reserves across the globe.

It’s a race to see who invests wisely and can emulate North American successes while adapting shale fracking and drilling technologies to unique (and often quite different) geological formations.

“Everybody around the world has taken notice [of shale] the past few years. They’re taking notice and starting to wonder if they can get a part of the same energy revolution that we have here,” said Daniel Simmons, an energy scholar with the Institute of Energy Research.

Tempted by the fracking and horizontal drilling successes in the US, several countries are beginning similar projects to extract energy from shale – and with varying results. It’s anyone’s guess who’ll ultimately gain market share in shale. Countries are bandied about as the next “sure thing” in shale – only to provide dismal results that ultimately can’t meet lofty expectations.

Let’s consider some of the frontrunners in a three-part series:

1. This initial post in our 3-part analysis suggests that China, Argentina, and South Africa have a high potential to realize their shale aspirations in the near term.
2. Meanwhile, our second post in this series shows why Poland and Russia deserve “Honorable Mentions” to bear shale fruit, too… as long as all the requisite stars align.
3. Keep reading for our third and final post in this series for a peek at the long shots who are nonetheless worth mentioning: Colombia, India, and Mexico.

All the competitors in the global shale race are all eyeing their sizable shale deposits – but just sitting atop huge shale reserves does not inherently lead to huge profits! They must also overcome the challenges standing between them and fracking, although these candidates seem to benefit from fewer limitations imposed by environmental controls as in other shale-rich regions and opposition movements with less traction than elsewhere.

Will China Ditch Coal?

Facing record pollution levels – ­15 times what is considered “unhealthy” in some of its bigger cities – China needs cleaner fuels or risks a public health and environmental catastrophe. The country consumes almost half of the world’s coal, and natural gas usage is surging to support China’s energy demands. As traditional gas supplies dry up, though, the Chinese government will need to refocus its production, adopt new energy strategies, and exploit shale reserves while continuing to import natural gas from Russia and other sources.

China has scores of untapped shale potential.

China’s shale reserves are extensive; the country may have more recoverable shale gas than any nation in the world. Estimates based on preliminary measurements range from 1,115 trillion cubic feet to 1275 trillion cubic feet. But the billion-dollar question remains whether the country can overcome substantial barriers to rapid shale development. These include a dearth of existing pipeline infrastructure, water scarcity in shale-rich areas, and a lack of regulatory frameworks to guide upstream activities and protect the intellectual property of technology providers.

“Oil companies and foreign interests – China and the rest – are [currently] gaining both the technical understanding and trying to figure out how to apply these techniques to reserves in their lands. That is a much more difficult task in a foreign country than it is in the United States – and…there are an awful lot of drivers,” says Paul Hagemeier, Senior Advisor and Vice President of ALL Consulting (Tulsa).

That said, Hagemeier definitely sees China developing its capabilities. In fact, EIA reports from February 2015 indicate that a partnership between Chinese energy companies Sinopec and PetroChina is having some success in the Sichuan Basin, reaching a combined shale gas output of 0.163 Bcf/d, or 1.5% of total natural gas production.

One of the major challenges for hydraulic fracturing in China is the country’s unique “buckled” geology which consists of folded, twisted faults requiring wells dug two to three times deeper than those in the United States. China’s State Council, the country’s chief administrative authority, called in October 2013 for the energy industry to produce 6.5 billion cubic meters of natural gas from underground shale formations by 2015. However, conventional fracking and horizontal drilling technology developed in the US may need further adaptation to work in a geology as complex as Sichuan’s. “There is no guarantee that the technology will be suitable for China,” Tao Wang, a scholar at Beijing’s Carnegie-Tsinghua Center for Global Policy, told Public Radio International.

China also has a strong track record of learning from other nations’ failures and successes, particularly the US, and customizing technology to fit the country’s own needs. The country can afford to invest heavily in new energy projects and technologies – and has already bought stakes in North American shale businesses. Sinopec, for example – now the world’s fourth-largest company by revenue after Royal Dutch Shell, Walmart, and Exxon Mobil – paid $2.2 billion in 2012 for a 30% stake in Devon Energy’s US shale operations.

This outside-the-box thinking, Hagemeier contends, is a big element driving shale innovation. Likewise, China is also astutely aware of its own limitations with regard to its technical know-how. While lacking the domestic expertise might be a colossal barrier, China seems to be solving this conundrum through imports.

“Finding experienced geologists and petroleum engineers and environmental engineers that have experience with this—building a workforce that’s needed to take it on—I think they’re going to have to import an awful lot of that,” Hagemeier notes. “They have been very keen on making US deals so they can participate here and learn the technology. In some cases, they’re taking people with them.

As the Chinese government continues to “deincentivize” coal use, shale development could become a keystone of its future energy policy. Its next five-year plan should provide some insight into new energy strategy.

“Think about the global impact on our environment if China would simply switch from coal-fired electrical generation,” he continues. “You remember the Beijing games, where people had to wear masks and some athletes wouldn’t even go because the air was so bad? I’m sure that’s going to have a lot of benefit for them – and frankly, I think it’s a world-win if China goes to natural gas.”

Will Argentina Cry for Shale?

You probably know the line from the musical Evita: “Don’t cry for me, Argentina!”

But did you also know that the South American powerhouse sits on top of the second-largest reserves of shale gas and the fourth-largest reserves of shale oil in the world? Vast oil deposits – 927 million barrels of total proven reserves – were discovered in the Vaca Muerta formation in 2010. The US Energy Information Agency estimates total recoverable hydrocarbons are 16.2 billion barrels of oil and 308 trillion cubic feet of natural gas. The formation covers a total area of 12,000 square miles – almost twice the size of the Eagle Ford shale formation – at a depth of about 9,500 feet.

Argentina’s Vaca Muerta began showing its true colors in 2010.

With all these reserves, Argentina is one of the first countries to commercially develop shale after the US. And a number of foreign investors are targeting the Vaca Muerta’s Neuquen Basin.

National oil company YPF, partnering with Chevron, was producing about 20,000 barrels of tight oil per day as of February 2015. Likewise, multinational Royal Dutch Shell PLC and French supermajor Total SA are partnering with Gas and Oil Neuquen (GyP), an energy company owned by the Argentine province of Neuquen, to develop two shale oil and gas projects. Meanwhile, US major Exxon Mobil reported success in December with its second shale oil and gas well in the Vaca Muerta. During its first test, the well produced daily flow rates of 448 barrels per day of oil and 1 million cubic feet of gas.

Unfortunately, Argentina’s shale energy industry is struggling to fulfill its true potential because of long-standing price controls on natural gas. Indeed, government energy subsidies have made natural gas and electricity 70 percent cheaper than Argentina’s neighbors. The result has produced spikes in demand leading to winter energy rationing. Argentina has seen a precipitous drop in oil production output (-27% from 1998 to 2010) as well as gas output (-10% since 2004). The country needs energy investment, but has been excluded from international debt markets since its economic crisis of 2001.

But the situation could be changing. New legislation approved in October 2014 should promote foreign investment in exploration and production, particularly in shale oil and gas. The bill lowers the minimum amount that foreign companies must invest to avoid import and foreign-exchange controls. The new law also standardizes the regulatory framework, which in the past was dictated by the individual oil-producing provinces that, under Argentina’s constitution, own the nation’s oil and gas reserves. It also lengthens the terms of production concessions to 25 years for conventional deposits and 35 years for shale deposits.

Argentina hopes that the new law will put the country back on the path to regain energy self-sufficiency by 2019. And the YPF Argentine energy company (short for Yacimientos Petrolíferos Fiscales, roughly translated as “Treasury Petroleum Fields”) CEO Miguel Galuccio calls it “probably reasonable” to hope that his country will become a net exporter within 10 years.

Will South Africa’s Bounty Translate?

South Africa is also promising. The government believes that a new energy resource is well within its reach, although the country traditionally has relied heavily on coal. However, now with new geological surveys, the EIA estimates that some 485 trillion cubic feet of shale gas lies beneath South Africa’s Karoo Desert between Cape Town and Johannesburg, while the Petroleum Agency of South Africa (PASA) estimates a more modest 40 trillion cubic feet. In either case, these resources represent real opportunity to give South Africa the reliable energy system it needs – protecting the country’s economic growth and laying a foundation for more.

South Africa’s Karoo holds potential.

A number of companies have seen the potential in South African shale gas production, and they’ve applied for exploration permits there. Shell Oil, for one, has received the go-ahead to begin exploratory operations for shale gas production in the Karoo Desert. Shell committed $200 million in gas exploration in the area, projecting that extracting 50 Tcf of gas would add $20 billion (or 0.5% of GDP) annually for 25 years to South Africa’s economy and create 700,000 jobs – a dramatic number for a country facing staggering 25% unemployment (South Africa’s unemployment rate has not dipped below 20% in more than 17 years).

The economic benefits of shale gas production, such as these, could help transform the country. South African President Jacob Zuma told Parliament last year, “The development of petroleum, especially shale gas, will be a game changer for the Karoo region and the South African economy.”

Despite such optimism, South Africa’s leaders are moving forward with extreme caution. From April 2011 until September 2012, the government placed a moratorium on shale gas exploration while it worked to develop fracking regulations. In March 2014, the government completed its work but was waylaid by yet another call from a South African environmental group to suspend fracking. In October, 2014, though, the government agreed to start processing exploration permits – at least a limited number of pending applications received before February 1, 2011. New applications will not be accepted until South Africa’s Mineral Resources Minister Ngoako Ramatlhodi announces otherwise; what this really means is that the government has yet to decide whether to proceed with shale development or scuttle plans in the wake of stiff anti-fracking opposition.

There’s no word on how long such decisions will take, but analysts predict that South Africa will ultimately swing toward fracking. Its energy situation and blackout rates are abysmal – the country has less than 6% reserve capacity – as a result of underinvesting in energy for the past several decades. Before reforms happen, a number of items need to fall into place. Darren Spalding, a London-based energy attorney with Bracewell & Giuliani, told us in a recent interview that the most important consideration is whether or not the rocks “work.”

“It is too early to tell whether South African geology can match expectations. Secondly, the regulatory environment needs to be sufficiently certain for explorers to take comfort. Finally, a battle of the hearts and minds of the general population needs to be won,” Spalding said.

There have been questions raised about whether the shale boom under way in the US would lose something in translation if attempted in South Africa. First of all, the country lacks a natural gas infrastructure. Its aging state power company, Eskom Holdings SOC Ltd., is in dire financial straits; its greatest problem, aside from debt, is the electricity shortages which pose the biggest risk to the country’s economy. Then there’s the issue of limited economic resources necessary for an American-style shale discovery boom in South Africa. “Geographic hospitality” is also key: Productive shale wells are generally found in easy terrains at depths that are quick to drill with plenty of water – something that the semi-desert Karoo region lacks. The region also lacks a skilled, trained workforce to implement any substantial shale program, which means that workers would need to be imported.

While South Africa’s energy infrastructure is far from comparable to the US, Spalding hopes that South Africa doesn’t give up on the promise of shale gas production. “These are issues worth solving as the prize is potentially enormous and could be a game-changer for South African energy policy.”

Interested in other potential shale hotspots around the world? Read our second post in this series.