Global shale ambitions wane as oil price war deepens

Dec 08, 2014 12:00 AM

Efforts to replicate the U.S. shale revolution are under threat as a price war by OPEC pushes crude to levels last seen during the global financial crisis.

From the U.K. to Australia, countries without government-backed energy producers appear the most vulnerable to delays in extracting shale oil and gas. Even nations such as China and Argentina, where state-run producers have a government mandate to drill, could see a slowing in investment.

The Organization of Petroleum Exporting Countries, responsible for about 40 percent of global supplies, has maintained output in the face of an oil glut. The move has sent prices lower, challenging shale plays in the U.S., and the rest of the world where production is more costly.

A prolonged oil slump “could be a nail in the coffin” for some shale projects outside North America, Michiel Soeting, global chairman of energy and natural resources at KPMG LLP, said by phone from London. “It was already a question with high oil prices.”

Brent crude has plummeted 40 percent since an annual high hit in June. Prices are now at the lowest since 2009 as growth in global demand fails to keep pace with surging U.S. output.

Extracting oil and gas trapped in shale rocks already faced difficulties due to water scarcity and environmental concerns around the world. Falling prices will leave explorers with less cash to spend on higher-cost shale regions outside the U.S., according to Australian financial advisory firm Ord Minnett Ltd.

“Low oil prices will slow the pace at which unconventional oil and gas will be explored and appraised around the world,” Ord Minnett analyst John Young said by phone from Melbourne. “A lot of these shale developments are relatively high-cost, unless one can identify sweet spots.”

Richest Reserves

Russia, China, Australia, Mexico and Argentina hold some of the richest shale reserves and are seeking to use the same technologies that sparked an industrial boom in the U.S. A process known as fracking uses high speed water jets to crack open rocks bearing oil and gas.

“It’s very difficult for private companies to take this long-term view and take on the risk,” said Melissa Stark, global managing director of Accenture Plc’s new energy business in London. “The low oil price makes this even more challenging.”

For some state-run companies, the challenges aren’t as daunting. Argentine state-run energy company YPF SA is partnering with Chevron Corp. to tap deposits in Vaca Muerta, a formation the size of Belgium that contains at least 23 billion barrels of oil in the southwestern part of Argentina, where Royal Dutch Shell Plc and Exxon Mobil Corp. are also drilling.

Buenos Aires-based YPF is also working on a deal with Malaysian state-run company Petroliam Nasional Bhd. for a venture in Vaca Muerta and is looking at possible partnerships with Exxon to ramp up production, YPF Chief Executive Officer Miguel Galuccio said in an interview.

“OPEC has decided they are not going to give away their market share very easily,” Galuccio said. “Many of the projects that we are discussing with $80 per barrel fly. I don’t believe in long-term $50 or $70. With $80, we’ll be ok. If it’s $70, we’ll have to become more competitive.”

In the U.S., fracking will slow as producers cut back amid lower prices, Harold Hamm, the billionaire who helped develop North Dakota’s Bakken shale, said Dec. 1.

Russian Resources

Russia has potentially the biggest shale oil resources, followed by the U.S., China, Argentina, Libya and Australia, according to a January report by the U.S. Energy Information Administration. China and Argentina lead the way in shale gas, with Mexico, Australia and South Africa among the top 10.

The price needed to make a profit on shale drilling varies by region, Emily Stromquist, London-based analyst for energy and natural resources at Eurasia Group, said in an e-mail. “In the case of riskier markets, governments will have to try and incentivize producers to remain in the market and continue to invest,” she said.

The EIA estimates Russia holds 75 billion barrels of technically recoverable resources. A weakening ruble and sanctions are already pushing the economy toward its first recession in more than five years and President Vladimir Putin may not be in a position to give incentives for shale.

Nations including Australia and Mexico, where there are alternatives competing with shale resources, will probably be most affected by falling crude prices, according to Stark of Accenture. Lower oil prices also will make development challenging in Europe, she said.

Mexico, which is ending a 76-year state oil monopoly, could remodel a planned auction of shale licenses because of crude’s rout, Energy Minister Pedro Joaquin Coldwell said Dec. 4.

Prolonged Slump

Australia’s shale reserves have attracted companies including Chevron, which joined local explorer Beach Energy Ltd. to search for shale. The venture is a “potential candidate for exploration cuts” by Chevron, according to a JPMorgan Chase & Co. report on Dec. 4.

In the U.K., the government is trying to stimulate development through tax breaks for drillers amid declining North Sea reserves. Public opposition to fracking and concerns about the industrialization of the countryside has meant that exploration has been slow to start as planning applications by local councils get rejected.

For national oil companies in countries such as China, there’s “scope to consider strategic objectives other than profit maximization,” Soeting said. If the price of oil recovers, the impact on shale development globally will be limited, he said.

China has cut its 2020 shale gas production targets to about a third of an earlier estimate. The new goal of 30 billion cubic metres reflects “the difficult geology of its shale basins, higher drilling costs, water scarcity and the limited success domestic operators have had so far with shale blocks allocated in the two rounds since 2011,” Fitch Ratings wrote in Dec. 8 report.

China Foray

China’s latest foray into shale involves PetroChina Co. and three partners investing more than $4 billion to drill for gas in fields in the southwest of the nation. The projects will have a little chance of making money in a low crude-price environment, according to Lin Boqiang, director of the Energy Economics Research Center at Xiamen University.

“There is no way large-scale shale gas production could be viable at $60 or $70 a barrel,” Lin said.

China, which has the world’s largest shale gas reserves, awarded 18 companies exploration rights in two auctions in 2011 and 2012, to cut its reliance on imports. Only one of the auction winners, state-owned energy giant China Petroleum & Chemical Corp., has started to commercially produce the fuel.

The world has 345 billion barrels of technically recoverable shale oil resources and 7.3 quadrillion cubic feet of shale gas, the EIA estimates. At an average Brent crude price of $102 a barrel this year, the shale oil is worth more than $35 trillion.

How much of those reserves are extracted will depend on the price of oil.

“Given the increasingly challenging nature of these plays and the lower oil price environment, this will certainly prompt a rethink among oil companies about their risk appetite,” Eurasia’s Stromquist said.

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