Shale Investments Could Reshape Global Market

Source: By MARK SCOTTJUNE, New York Times • Posted: Thursday, June 19, 2014

Shale gas deposits in Argentina’s Vaca Muerta field, above, are estimated to be among the largest in the world. Tax breaks have led several global players to invest in the area, including Chevron. CreditAnibal Adrian Greco for The New York Times
LONDON — The shale revolution is going global.

From the Australian outback to the Argentine Andes, many of the world’s largest energy companies are on the hunt for new sources of what they call unconventional oil and natural gas.

The multibillion-dollar investments, which often involve hydraulic fracturing, or fracking, could change the face of the global energy markets.

China and Russia have some of the largest shale oil and gas reserves in the world, according to the United States Energy Information Administration.

The development of these resources over the next 20 years, particularly in emerging markets, may reshape how oil and gas are consumed in some of the world’s fastest-growing economies.

“Shale has an opportunity to become very important to these countries,” said Melissa Stark, global managing director of the new-energy practice at the consulting firm Accenture. “They are brand new markets. They are starting with a clean sheet.”

The size of the potential reserves has spurred a burgeoning of industries in countries that traditionally have not had local energy sectors. Domestic energy booms also have allowed some countries, including the United States, to steadily reduce their reliance on high-priced energy imports.

The importance of shale is expected to grow as emerging markets bounce back from the global financial crisis and as accelerating economic growth pushes up demand for energy, including fossil fuels. Growing middle classes in countries like Brazil and India are starting to buy more luxury goods like cars and high-end smartphones. And despite the rise of renewables like wind- and solar-power, oil, gas and coal are still expected to represent the lion’s share of worldwide energy consumption for the foreseeable future. Global demand for gas, for example, is expected to jump more than 50 percent over the next 20 years, according to the International Energy Agency, an intergovernmental policy-coordinating and advisory body based in Paris.

Amid this rising consumption, shale is expected to provide more than a third of global supplies over the same period, up from around 15 percent last year.

“The golden age of gas remains in full swing,” Maria van der Hoeven, the Paris-based agency’s executive director, said in a statement recently. “Gas is already a major fuel in power generation, but the next five years will also see it emerging as a significant transportation fuel.”

The rising importance of shale oil and gas comes as the industry in the United States, which began almost 20 years ago and is now the largest producer of unconventional energy, has gone mainstream.

Early trials of fracking, in which highly pressurized liquids are pumped deep underground to crack open oil- and gas-bearing rocks, proved economically unviable. But improvements in the technology and rising domestic costs of other fossil fuels have transformed the American oil and gas industry.

With billions of dollars of investment from major players like Exxon Mobiland smaller energy companies, shale gas now represents roughly 40 percent of America’s total natural gas production, compared to less than 5 percent of China’s overall gas production, according to the American energy data agency.

“International shale development could have an enormous economic impact like it has had in the U.S.,” said Chris Lewis of the consulting firm Ernst & Young in London.

Yet, despite the bullish prospects, many obstacles could still derail plans that have seen major players like Chevron, the American energy corporation, and Statoil, the Norwegian state-owned energy company, make multimillion-dollar investments from Argentina to Australia.

Environmental campaigners have raised concerns that the projects could have serious consequences on local ecosystems and populations that have yet to be touched by the invasive drilling techniques. That includes fears that water resources — a major component in fracking technology — could become contaminated after similar problems were highlighted at existing American shale sites.

Advocacy groups also have questioned whether developing countries have the environmental checks needed to hold companies accountable for ecological consequences.

A lack of local expertise and drilling equipment could also slow shale development, particularly in emerging markets.

Governments in countries like France and Bulgaria, meanwhile, have banned the development of shale sources in response to local fears that fracking could cause earthquakes.

“Each country has its own specific technical and commercial barriers,” said Emma Wild, head of the energy exploration and production advisory team at the consulting firm KPMG, who estimates that the commercialization of shale reserves could take up to 10 years in some countries. “Developers need to overcome a number of obstacles to create a viable shale industry,” she said.

Still, despite the potential problems, many governments are offering lucrative subsidies to entice global energy companies to invest.

Argentina, for example, passed laws last year allowing foreign companies to export 20 percent of their shale production tax free after the fifth year of development. Shale gas deposits in Argentina’s Vaca Muerta rock formation at the foot of the Andes are estimated to be among the largest in the world.

That has led to investment by several global players. Chevron, for example, agreed to spend $1.6 billion this year alongside Argentina’s nationalized energy company YPF to develop local oil and gas reserves. That comes on top of a previous $1.24 billion investment from the U.S. energy giant. Royal Dutch Shell also is expected to invest around $500 million this year in the Argentine region as it hunts for unconventional energy reserves.

The spending comes despite regulatory uncertainty surrounding Argentina’s energy sector. In 2012, the country’s government seized a 51 percent sake in YPF from the Spanish energy giant Repsol. The company said the nationalization was illegal, and analysts say similar efforts by lawmakers to maintain control over the country’s nascent unconventional oil and gas sector remain a sizable hazard for foreign companies.

“The energy majors have all considered the risk, and see it as tolerable,” Ms. Wild of KPMG said. “Argentina offers large areas of land where you can easily create a shale industry.”

In China, which has shale gas reserves almost two-thirds larger than those of the United States, national energy companies have teamed with international companies like Shell to bring their global expertise to local joint ventures. Sinopec and other Chinese state-owned energy companies have also bought minority stakes in American shale projects to gain much-needed expertise to bring back to their domestic operations.

As part of its energy strategy, the Chinese government wants to produce about 6.5 billion cubic meters of shale gas annually by next year. That target, however, is proving difficult to reach because the cost for each new wellhead is roughly three times the cost in the United States, making many sites uneconomic for now.

Yet, “even though the current break-even price is high relative to the U.S., it should go down with increased experience,” said Milo Sjardin, Asia-Pacific regional head for Bloomberg New Energy Finance in Singapore. “It is a domestic resource that will reduce China’s energy dependence.”