A glimpse of how shale exploration works elsewhere in the world:

  • In March 2010, the French government granted a five-year permit to Paris-based energy giant Total SA to prospect for shale gas in Montélimar, an area covering 1,671 square miles between Valence and Montpellier in southeastern France;
  • In 2011, responding to protests by environmental groups, the French government banned hydraulic fracturing and revoked exploration licenses for shale gas, including Total’s–even though the company had neither employed hydraulic fracturing in its operations in Montélimar nor stated any intention to do so; and
  • Also in Europe, a writer laments in a recent article that “In Texas, it takes seven days to receive permission for the hydraulic fracturing of shale. In Britain, the wait has been going on for a whopping seven years.”

Dorothy, you’re not in North America any more.

‘Above-the-ground factors’

The U.S. Energy Information Administration (EIA) estimates 345 billion barrels (Bbbl) of shale/tight oil and 7,299 trillion cubic feet (Tcf) of technically recoverable shale gas outside the U.S. Russia leads the world with 75 Bbbl of technically recoverable shale oil; the U.S. is No. 2 with 58 Bbbl; and Canada is No. 10 with 9 Bbbl. China is atop the shale gas pile with 1,115 Tcf; the U.S. is No. 4 with 665 Tcf; and Canada is No. 5 with 573 Tcf.

Technically recoverable means that current technology makes it possible to produce the resources, not that such production is economical.

“Economic recoverability can be significantly influenced by above-the-ground factors as well as by geology,” the EIA said in its June 2013 report. Critical factors enjoyed in the U.S. and Canada in unconventional exploration and production (E&P) include:

  • Private ownership of subsurface rights that creates strong incentives for development;
  • Numerous independent operators and contractors in possession of expertise and suitable drilling equipment;
  • Existing gathering and pipeline infrastructure; and
  • Sufficient water resources to use in hydraulic fracturing. Those types of factors are difficult to duplicate, said BP’s Mark Finley at the Offshore Technology Conference in Houston. “It’s important that we not take the success of these factors here in the U.S. for granted.”

In combination with considerable amounts of time, patience and perseverance, these advantages have resulted in the development of an envy-inspiring industry. Around the world, many wish to mimic the North American experience and build Bakkens, Eagle Fords and Duvernays of their own.

Global game-changer in China

The defining moment in Asia’s recent energy history occurred three years ago: the disaster at the Fukushima Daiichi nuclear power plant in northeastern Japan.

“The strength in Asian LNG price coincides with the unexpected increase in demand that occurred in the wake of the disaster at Fukushima on March 11, 2011, and the subsequent shutdown of the entire Japanese nuclear power generation fleet,” wrote Kenneth B. Medlock III, senior director for energy studies at Rice University’s James A. Baker III Institute for Public Policy in Houston.

Medlock’s report, “Natural Gas Price in Asia: What to Expect and What it Means,” concluded that the spot price will remain high until there is sufficient investment in new gas delivery capability or Japan returns to the nuclear fold. In the meantime, there’s shale.

“Shale gas developments in China could be equally as game-changing over the next couple of decades as shale gas developments in North America have been in the last decade,” he stated.

China’s major producers include PetroChina Ltd., Sinopec Group, CNOOC Ltd. and Yanchang Petroleum International Ltd. They often work with international majors such as Royal Dutch Shell PLC, ConocoPhillips, Chevron Corp., Eni SpA and Hess Corp. The first commercial success appears to be Sinopec’s Fuling project in the southwest area of the country, estimated to be worth about $2.5 billion. The company has pumped $322 million into the project and is hoping to pump out 63.6 billion cubic feet (Bcf) this year. By 2017, Fuling could provide 353.1 Bcf of gas per year. Its estimated reserves are 74.2 Tcf. By comparison, reserves in the Marcellus Shale are estimated to be about 141 Tcf.

But shale development carries risk because hydrocarbons explode. That would go without saying, but the rather remarkable safety record that accompanied North America’s meteoric rise in production could allow for dismissal of this obvious characteristic.

Residents of the Chinese village of Jiaoshizhen witnessed what the New York Times described as a “tower of flames” about 100 feet high in April 2013 when a drilling rig allegedly exploded in the middle of the night. Villagers insisted that they saw managers running for their lives and were told that eight workers had died. A Sinopec official denied to a Times reporter that any incident took place.

Australian resurgence

In Australia, an offshore drilling bastion, exploration spending set a record of $4.2 billion in 2013, according to the Petroleum Exploration Society of Australia. The 13% increase over the previous year was spurred on by enthusiasm for unconventional onshore plays, reported Hart Energy’s Unconventional Oil & Gas Center.

“The last five years are marked by a resurgence in onshore activity, whereas offshore exploration has declined steadily,” said Patrick Despland, senior geologist with Santos Ltd. at the APPEA conference in Perth earlier this year.

Australia’s coal-seam-gas-to-LNG projects command a total capital investment of $60 billion, according to Wood Mackenzie, and are due to begin coming online in the fourth quarter. Significant portions of each project are located in zones of lower quality coals that require additional investment to extract the gas. Wood Mac believes that the economics will work if operators are committed to expanding the projects, though that is doubtful without sufficient quantities of high-quality coal seam gas reserves and short-term market demand.

Can Poland pull it off?

If France and Bulgaria have turned their backs on unconventional production and the U.K. is ambivalent, Poland takes the role of spurned but determined suitor. Intent on cutting the umbilical pipeline to Russia—Poland leaned on Russia for 58.6% of its total natural gas needs in 2012, according to Eurogas—the country offered tax breaks to industry players that explore and produce between now and 2020.

“Poland is open for your dollars,” Parker Snyder, president of the industry group Poland Shale Coalition, told Bloomberg. Pipeline ventures with the Czech Republic and Germany, and the potential to build a line to Lithuania starting in 2018, reflect a regional unease with reliance on Russia.

Trouble is, nobody’s dancing the polka over the country’s shale gas prospects these days. The EIA reduced its estimate of Poland’s technically recoverable shale gas resources by 21% between its 2011 study and its 2013 updated study.

ExxonMobil Corp., Marathon Oil Corp. and Talisman Energy Inc. abandoned their projects. The technology that proved so successful in the U.S. was not effective on Polish geology. When Total elected not to renew its exploration license in April, Reuters reported that the company had discovered gas, but it simply wasn’t economically viable to produce it.

The crisis in Ukraine may be a wake-up call to some that energy supplies are at risk, but geological and regulatory obstacles hinder E&P. In addition to bans in France and Bulgaria, shale gas drilling has been suspended in the Netherlands, Luxembourg and the shale-rich North Rhine-Westphalia region of Germany. Austria allows hydraulic fracturing, but onerous environmental regulations bury the economic viability of drilling there.

Investing in Argentina

Two years after Argentina seized Spain-based Repsol SA’s 51% stake in state-run YPF SA, the South American country is again open for business. The Repsol issue was resolved with a $5 billion payment and the country possesses 27 Bbbl of technically recoverable shale oil, according to the EIA.

In April, Chevron signed a deal with YPF to invest $1.6 billion in a project to drill 170 wells in a 96,000-acre area in the Vaca Muerta Formation, part of a $15 billion investment plan to drill 1,500 wells that Chevron hopes will yield 50,000 bbl/d of oil and 106 million cubic feet per day of gas.

Ryder Scott Co. LP estimates that the Vaca Muerta play in the Nequén Basin holds 21 Bbbl of oil equivalent and could double Argentina’s output with annual investments of $25 billion.

Demand and determination

Seventeen years of grim, relentless prodding and stubborn belief in a new-fangled technology called hydraulic fracturing resulted in legendary oilman George Mitchell’s success in the Barnett Shale in North Texas in 2002. The spectacular and ongoing rise in oil and gas production in North America has created a seismic shift in geopolitics and the desire and potential to greatly expand the world’s stores of energy.

And just in time: Global daily oil demand, now at around 91 MMbbl, will increase to 120 MMbbl by 2040, projects Rice University’s Baker Institute. The EIA estimates that global gas production will increase 68% between 2010 and 2040.

The new global village, however, retains the old planet’s geology. Shale-embedded hydrocarbons have proven to be more elusive on other continents—Chinese companies drill two to three times as deep as their counterparts in North America; easy access to gas in Poland has been anything but easy.

Treaties and regulations governing emissions and greenhouse gases, fear of fracking and added taxes discourage exploration in many places. But the long-term demand exists, as does the abundant potential. Repeating the North American shale experience will require Mitchell-like persistence.

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