Progress on fracking ‘glacially slow’ despite backing from prime minister and promise of generous tax breaks
Via Fidan Aliyeva
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Progress on fracking ‘glacially slow’ despite backing from prime minister and promise of generous tax breaks
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Australia is in the midst of a massive construction wave for new liquefied natural gas (LNG) capacity, seeking to profit off of sky-high demand in Asia for the fuel. Already one of the world’s largest exporters of LNG, Australia plans on moving to the top spot over the next 3-4 years, potentially overtaking Qatar. It currently has the capacity to export 23 million tonnes per annum (mtpa), but it plans to almost quadruple that total by 2017. The 62 mtpa under construction in the land down under accounts for almost two-thirds of the total LNG capacity under construction around the world.
We have written in the past about the investment opportunities in Australian LNG, particularly with the coming wave of Chinese demand for the liquid fuel. But this time, let’s take a look at Australia’s natural gas sector from an upstream perspective.
Booming Natural Gas Production
Australian LNG could be a hugely profitable opportunity before the decade is out, but the export terminals are going to need enormous volumes of natural gas in order to supply all of those LNG trains. And once Australia is able to connect to China, Japan, and South Korea via LNG, demand for Australian natural gas is going to surge. That, in turn, will cause natural gas prices to rise.
That means that there will be a great opportunity to invest in upstream Australian natural gas producers. Australia has already steadily lifted its production of natural gas over the last thirty years, and there is no reason to think that is about to slow down.
The Carnarvon Basin holds some of the country’s most prolific natural gas fields, and accounts for more than 40 percent of Australia’s existing oil and gas production. It supplies the North West Shelf LNG facility, which has been shipping LNG to major customers around the world for 20 years.
The Carnarvon Basin is also home to the truly massive Gorgon project, spearheaded byChevron Corporation (NYSE: CVX) and its partners. While many energy analysts are watching the project because it is one of the largest LNG terminals under construction in the world – with a capacity of 15.6 mtpa when completed – the upstream part of the project is equally impressive. The consortium led by Chevron is developing the Gorgon and Jansz-lo gas fields off the northwest coast of Australia. The area holds an estimated 40 trillion cubic feet (tcf) of natural gas, according to the U.S. Energy Information Administration. The fields are expected to come online next year and will amount to the largest single resource project in Australia’s history.
The Cooper Basin – The Next Shale
But it is the potential of gas from shale that could be the most exciting energy opportunity on the horizon. Australia has an estimated 437 tcf of shale gas, seventh largest in the world according to EIA estimates.
The Cooper Basin is on the border between Queensland and South Australia and represents the most promising spot for an emerging shale gas boom. Magnum Hunter Resources Corporation (NYSE: MHR), a Houston-based oil and gas company has already had some success there. Kip Ferguson, Magnum Hunter’s Executive President, spoke at Houston conference recently where he talked up the potential for American drillers. “You have a lot of Australian companies coming and saying ‘we want that knowledge,’ and we’re saying ‘we want an area that’s not overbought,’” he said. Whereas American shale basins are so saturated with drillers these days, Australia’s remain underexplored.
The state government of Queensland is so confident that there is an enormous bounty within its borders that it recently opened up a trade office in Houston, Texas. “There’s no question we have an abundance of and a diverse range of energy resources,” Queensland’s Trade and Investment Commissioner to North America, David Camerlengo, told the Houston crowd.
The Nappamerri Trough appears to be the richest area within the Cooper Basin for shale gas, holding an estimated 88 to 100 billion cubic feet per square mile. Neighboring Patchawarra Trough only holds about 16 to 19 billion cubic feet of natural gas per square mile, so concentrations are much thinner. However, the Tenappara Trough is rich in oil, holding 22 million barrels per square mile.
Santos (ASX: STO) is probably the best positioned company to ride the Aussie shale wave. It produced 21.1 million barrels of oil equivalent (MMboe) in 2013, and has a market capitalization of $13.6 billion. It has the largest acreage in the Cooper Basin and has demonstrated commercial success. For example, its Moomba-194 vertical shale gas well began flowing 3 million cubic feet per day in December 2013.
This came on the heels of its first well, the Moomba-191, which showed similar flow rates last year and could become Australia’s first commercially viable shale gas well. Santos claims that taken together, its two wells establishes the Cooper Basin as the only successful shale producing region outside of the United States. “It shows it's not just a one-hit-wonder, and that there's much more to come,” Santos Vice-President for Eastern Australia, James Baulderstone, said after the second well came through.
Santos owns natural gas processing facilities nearby and plans on connecting its wells to them.
Beach Energy (ASX: BPT) is another company in the Cooper Basin. Operating with a much smaller capitalization of $2.1 billion, Beach often works in joint ventures with Santos. Beach has 20 oil fields on the western edge of the Cooper basin, and two producing gas wells. It has an annual production of 8 MMboe, and controls a total of 91 MMboe. It drilled two test wells a few years ago and achieved gas flows of 2 million cubic feet per day. And its Encounter-1 field in the Nappamerri Trough is also one of the earliest commercial shale gas wells in Australia.
The region’s existing infrastructure – for conventional natural gas drilling – gives the Cooper Basin the best shot at propelling Australia’s shale gas industry forward.
And companies are taking notice. “Within 12 months, you’re not going to have the ability to find a deal, or find acreage, in the Cooper,” Magnum Hunter’s Ferguson said in an interview with Bloomberg earlier this year.
There are other promising shale basins in Australia but most are much less explored relative to the Cooper. The Maryborough Formation on Australia’s eastern coast could hold an estimated 19 tcf of technically recoverable shale gas, according to an EIA assessment. ThePerth Basin in Western Australia holds around 25 tcf of technically recoverable shale gas and 500 million barrels of oil. While it is far behind the Cooper, the Perth Basin does have an active conventional sector. Several smaller conventional companies operating in the region have explored their leases for shale potential, including Norwest Energy (ASX: NWE) andAWE Limited (ASX: AWE), but have not had success thus far.
The Canning Basin in Northwest Australia has a sizable resource base but is largely unexplored. The Goldwyer Shale in the Canning Basin holds an estimated 235 tcf of technically recoverable shale gas and 9.8 billion barrels of oil. ConocoPhillips (NYSE: COP)dipped their toes in the water with a $119 million multi-year exploration program in a joint venture with New Standard Energy (ASX: NSE) in the Goldwyer Shale.
Finally, the Georgina Basin in Northern Australia is another unexplored basin in Northern Australia. It holds up to 13 tcf of technically recoverable shale gas and 1 billion barrels of oil.PetroFrontier (CVE: PFC), a small Canadian company, holds some acreage in the area, and decided to farm out its operation to Statoil (NYSE: STO). The joint venture will drill 10 to 20 wells by 2017. Statoil put in an initial $25 million and plans to scale that up to $100 million if it feels good about the results.
Australia has always been a massive producer of natural resources whether it was coal, natural gas, or hardrock minerals. As a developed country with a mature economy, growth rates are lower than what you would find in emerging economies. But its shale basins are almost entirely untapped and offer huge promise. The Cooper Basin in particular is set to take off. The region can claim to have the first commercially viable shale gas wells outside the United States – an indication that much more is in the offing.
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How much faith can we put in our ability to decipher all the numbers out there telling us the US is closing in on its cornering of the global oil market? There's another side to the story of the relentless US shale boom, one that says that some of the numbers are misunderstood, while others are simply preposterous. The truth of the matter is that the industry has to make such a big deal out of shale because it's all that's left. There are some good things happening behind the fairy tale numbers, though—it's just a matter of deciphering them from a sober perspective.
In a second exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman discusses:
Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt's Energy Week, BNN, Bloomberg, Platt's, Financial Times, and New York Times. You can find out more about Arthur by visiting his website: http://petroleumtruthreport.blogspot.com
Oilprice.com: Almost on a daily basis we have figures thrown at us to demonstrate how the shale boom is only getting started. Mostly recently, there are statements to the effect that Texas shale formations will produce up to one-third of the global oil supply over the next 10 years. Is there another story behind these figures?
Arthur Berman: First, we have to distinguish between shale gas and liquids plays. On the gas side, all shale gas plays except the Marcellus are in decline or flat. The growth of US supply rests solely on the Marcellus and it is unlikely that its growth can continue at present rates. On the oil side, the Bakken has a considerable commercial area that is perhaps only one-third developed so we see Bakken production continuing for several years before peaking. The Eagle Ford also has significant commercial area but is showing signs that production may be flattening. Nevertheless, we see 5 or so more years of continuing Eagle Ford production activity before peaking. The EIA has is about right for the liquids plays--slower increases until later in the decade, and then decline.
The idea that Texas shales will produce one-third of global oil supply is preposterous. The Eagle Ford and the Bakken comprise 80% of all the US liquids growth. The Permian basin has notable oil reserves left but mostly from very small accumulations and low-rate wells. EOG CEO Bill Thomas said the same thing about 10 days ago on EOG's earnings call. There have been some truly outrageous claims made by some executives about the Permian basin in recent months that I suspect have their general counsels looking for a defibrillator.
Recently, the CEO of a major oil company told The Houston Chronicle that the shale revolution is only in the "first inning of a nine-inning game”. I guess he must have lost track of the score while waiting in line for hot dogs because production growth in U.S. shale gas plays excluding the Marcellus is approaching zero; growth in the Bakken and Eagle Ford has fallen from 33% in mid-2011 to 7% in late 2013.
Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let's face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.
The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story--shale wells can be drilled and brought on production fairly quickly and this masks or smoothes out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars.
None of this is meant to be negative. I'm all for shale plays but let's be honest about things, after all! Production from shale is not a revolution; it's a retirement party.
OP: Is the shale “boom” sustainable?
Arthur Berman: The shale gas boom is not sustainable except at higher gas prices in the US. There is lots of gas--just not that much that is commercial at current prices. Analysts that say there are trillions of cubic feet of commercial gas at $4 need their cost assumptions audited. If they are not counting overhead (G&A) and many operating costs, then of course things look good. If Walmart were evaluated solely on the difference between wholesale and retail prices, they would look fantastic. But they need stores, employees, gas and electricity, advertising and distribution. So do gas producers. I don't know where these guys get their reserves either, but that needs to be audited as well.
There was a report recently that said large areas of the Barnett Shale are commercial at $4 gas prices and that the play will continue to produce lots of gas for decades. Some people get so intrigued with how much gas has been produced and could be in the future, that they don't seem to understand that this is a business. A business must be commercial to be successful over the long term, although many public companies in the US seem to challenge that concept.
Investors have tolerated a lot of cheerleading about shale gas over the years, but I don't think this is going to last. Investors are starting to ask questions, such as: Where are the earnings and the free cash flow. Shale companies are spending a lot more than they are earning, and that has not changed. They are claiming all sorts of efficiency gains on the drilling side that has distracted inquiring investors for awhile. I was looking through some investor presentations from 2007 and 2008 and the same companies were making the same efficiency claims then as they are now. The problem is that these impressive gains never show up in the balance sheets, so I guess they must not be very important after all.
The reason that the shale gas boom is not sustainable at current prices is that shale gas is not the whole story. Conventional gas accounts for almost 60% of US gas and it is declining at about 20% per year and no one is drilling more wells in these plays. The unconventional gas plays decline at more than 30% each year. Taken together, the US needs to replace 19 billion cubic feet per day each year to maintain production at flat levels. That's almost four Barnett shale plays at full production each year! So you can see how hard it will be to sustain gas production. Then there are all the efforts to use it up faster--natural gas vehicles, exports to Mexico, LNG exports, closing coal and nuclear plants--so it only gets harder.
This winter, things have begun to unravel. Comparative gas storage inventories are near their 2003 low. Sure, weather is the main factor but that's always the case. The simple truth is that supply has not been able to adequately meet winter demand this year, period. Say what you will about why but it's a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever.
I sat across the table from industry experts just a year ago or so who were adamant that natural gas prices would never get above $4 again. Prices have been above $4 for almost three months. Maybe "never" has a different meaning for those people that doesn't include when they are wrong.
OP: Do you foresee any new technology on the shelf in the next 10-20 years that would shape another boom, whether it be fossil fuels or renewables?
Arthur Berman: I get asked about new technology that could make things different all the time. I'm a technology enthusiast but I see the big breakthroughs in new industries, not old extractive businesses like oil and gas. Technology has made many things possible in my lifetime including shale and deep-water production, but it hasn't made these things cheaper.
That's my whole point about shale plays--they're expensive and need high oil and gas prices to work. We've got the high prices for oil and the oil plays are fine; we don't have high prices for the gas plays and they aren't working. There are some areas of the Marcellus that actually work at $4 gas price and that's great, but it really takes $6 gas prices before things open up even there.
OP: In Europe, where do you see the most potential for shale gas exploitation, with Ukraine engulfed in political chaos, companies withdrawing from Poland, and a flurry of shale activity in the UK?
Arthur Berman: Shale plays will eventually spread to Europe but it will take a longer time than it did in North America. The biggest reason is the lack of private mineral ownership in most of Europe so there is no incentive for local people to get on board. In fact, there are only the negative factors of industrial development for them to look forward to with no pay check. It's also a lot more expensive to drill and produce gas in Europe.
There are a few promising shale plays on the international horizon: the Bazherov in Russia, the Vaca Muerte in Argentina and the Duvernay in Canada look best to me because they are liquid-prone and in countries where acceptable fiscal terms and necessary infrastructure are feasible. At the same time, we have learned that not all plays work even though they look good on paper, and that the potentially commercial areas are always quite small compared to the total resource. Also, we know that these plays do not last forever and that once the drilling treadmill starts, it never ends. Because of high decline rates, new wells must constantly be drilled to maintain production. Shale plays will last years, not decades.
Recent developments in Poland demonstrate some of the problems with international shale plays. Everyone got excited a few years ago because resource estimates were enormous. Later, these estimates were cut but many companies moved forward and wells have been drilled. Most international companies have abandoned the project including ExxonMobil, ENI, Marathon and Talisman. Some players exited because they don't think that the geology is right but the government has created many regulatory obstacles that have caused a lack of confidence in the fiscal environment in Poland.
The UK could really use the gas from the Bowland Shale and, while it's not a huge play, there is enough there to make a difference. I expect there will be plenty of opposition because people in the UK are very sensitive about the environment and there is just no way to hide the fact that shale development has a big footprint despite pad drilling and industry efforts to make it less invasive.
Let me say a few things about resource estimates while we are on the subject. The public and politicians do not understand the difference between resources and reserves. The only think that they have in common is that they both begin with “res.” Reserves are a tiny subset of resources that can be produced commercially. Both are always wrong but resource estimates can be hugely misleading because they are guesses and have nothing to do with economics.
Someone recently sent me a new report by the CSIS that said U.S. shale gas resource estimates are too conservative and are much larger than previously believed. I wrote him back that I think that resource estimates for U.S. shale gas plays are irrelevant because now we have robust production data to work with. Most of those enormous resources are in plays that we already know are not going to be economic. Resource estimates have become part of the shale gas cheerleading squad's standard tricks to drum up enthusiasm for plays that clearly don't work except at higher gas prices. It's really unfortunate when supposedly objective policy organizations and research groups get in on the hype in order to attract funding for their work.
OP: The ban on most US crude exports in place since the Arab oil embargo of 1973 is now being challenged by lobbyists, with media opining that this could be the biggest energy debate of the year in the US. How do you foresee this debate shaping up by the end of this year?
Arthur Berman: The debate over oil and gas exports will be silly.
I do not favor regulation of either oil or gas exports from the US. On the other hand, I think that a little discipline by the E&P companies might be in order so they don't have to beg the American people to bail them out of the over-production mess that they have created knowingly for themselves. Any business that over-produces whatever it makes has to live with lower prices. Why should oil and gas producers get a pass from the free-market laws of supply and demand?
I expect that by the time all the construction is completed to allow gas export, the domestic price will be high enough not to bother. It amazes me that the geniuses behind gas export assume that the business conditions that resulted in a price benefit overseas will remain static until they finish building export facilities, and that the competition will simply stand by when the awesome Americans bring gas to their markets. Just last week, Ken Medlock described how some schemes to send gas to Asia may find that there will be a lot of price competition in the future because a lot of gas has been discovered elsewhere in the world.
The US acts like we are some kind of natural gas superstar because of shale gas. Has anyone looked at how the US stacks up next to Russia, Iran and Qatar for natural gas reserves?
Whatever outcome results from the debate over petroleum exports, it will result in higher prices for American consumers. There are experts who argue that it won't increase prices much and that the economic benefits will outweigh higher costs. That may be but I doubt that anyone knows for sure. Everyone agrees that oil and gas will cost more if we allow exports.
OP: Is the US indeed close to hitting the “crude wall”—the point at which production could slow due to infrastructure and regulatory restraints?
Arthur Berman: No matter how much or little regulation there is, people will always argue that it is still either too much or too little. We have one of the most unfriendly administrations toward oil and gas ever and yet production has boomed. I already said that I oppose most regulation so you know where I stand. That said, once a bureaucracy is started, it seldom gets smaller or weaker. I don't see any walls out there, just uncomfortable price increases because of unnecessary regulations.
We use and need too much oil and gas to hit a wall. I see most of the focus on health care regulation for now. If there is no success at modifying the most objectionable parts of the Affordable Care Act, I don't suppose there is much hope for fewer oil and gas regulations. The petroleum business isn't exactly the darling of the people.
OP: What is the realistic future of methane hydrates, or “fire ice”, particularly with regard to Japanese efforts at extraction?
Arthur Berman: Japan is desperate for energy especially since they cut back their nuclear program so maybe hydrates make some sense at least as a science project for them. Their pilot is in thousands of feet of water about 30 miles offshore so it's going to be very expensive no matter how successful it is.
OP: Globally, where should we look for the next potential “shale boom” from a geological perspective as well as a commercial viability perspective?
Arthur Berman: Not all shale is equal or appropriate for oil and gas development. Once we remove all the shale that is not at or somewhat above peak oil generation today, most of it goes away. Some shale plays that meet these and other criteria didn't work so we have a lot to learn. But shale development is both inevitable and necessary. It will take a longer time than many believe outside of North America.
OP: We've spoken about Japan's nuclear energy crossroads before, and now we see that issue climaxing, with the country's nuclear future taking center-stage in an election period. Do you still believe it is too early for Japan to pull the plug on nuclear energy entirely?
Arthur Berman: Japan and Germany have made certain decisions about nuclear energy that I find remarkable but I don't live there and, obviously, don't think like them.
More generally, environmental enthusiasts simply don't see the obstacles to short-term conversion of a fossil fuel economy to one based on renewable energy. I don't see that there is a rational basis for dialogue in this arena. I'm all in favor of renewable energy but I don't see going from a few percent of our primary energy consumption to even 20% in less than a few decades no matter how much we may want to.
OP: What have we learned over the past year about Japan's alternatives to nuclear energy?
Arthur Berman: We have learned that it takes a lot of coal to replace nuclear energy when countries like Japan and Germany made bold decisions to close nuclear capacity. We also learned that energy got very expensive in a hurry. I say that we learned. I mean that the past year confirmed what many of us anticipated.
OP: Back in the US, we have closely followed the blowback from the Environmental Protection Agency's (EPA) proposed new carbon emissions standards for power plants, which would make it impossible for new coal-fired plants to be built without the implementation of carbon capture and sequestration technology, or “clean-coal” tech. Is this a feasible strategy in your opinion?
Arthur Berman: I'm not an expert on clean coal technology either but I am confident that almost anything is possible if cost doesn't matter. This is as true about carbon capture from coal as it is about shale gas production. Energy is an incredibly complex topic and decisions are being made by bureaucrats and politicians with little background in energy or the energy business. I don't see any possibility of a good outcome under these circumstances.
OP: Is CCS far enough along to serve as a sound basis for a national climate change policy?
Arthur Berman: Climate-change activism is a train that has left the station. If you've missed it, too bad. If you're on board, good luck.
The good news is that the US does not have an energy policy and is equally unlikely to get a climate change policy for all of the same reasons. I fear putting climate change policy in the hands of bureaucrats and politicians more than I fear climate change (which I fear).
See our previous interview with Arthur Berman.
By. James Stafford of Oilprice.com