Shale Gas Developments Internationally And The Liquefied Natural Gas Global Trade (Part 2)

Includes: DVN, HES, MRO, PXD, TLM
by: Value Digger


The advent of horizontal drilling and hydraulic fracturing brought about a shale revolution that unleashed previously untouchable reserves and boosted U.S. production of the fuel to a record high. Worldwide oil and gas reserves previously inaccessible or too costly to tap are now within reach.

I discussed in my recent articles here, here, and here the "Silver Bullets" of the North American energy grid. I called "Silver Bullets" all the ongoing pipeline projects which will be the lifeblood of economic growth for North America during the next few years. The continuing unemployment drop in the U.S. since 2011 has not happened accidentally, but it occurs thanks to the widespread effects of this pipeline revolution on the U.S. economy.

The shale gas rush is also expanding internationally and new international players will be added in the LNG exporters list sooner or later. This is something that the Obama Administration needs to take into consideration because permitting delays in the US jeopardize US LNG exports. In July 2013, the American Council for Capital Formation (ACCF) published a paper "Liquefied Natural Gas: Why Rapid Approval of the Backlog of Export Applications is Important for US Prosperity," reporting that: "We fear that this protracted bureaucratic delay significantly undermines the vast potential that LNG exports can bring to our nation's economy" according to Dr. Margo Thorning, ACCF's chief economist. "This inaction endangers the state, local, national, and global benefits of producing and exporting LNG. America is racing against international competitors for LNG sales abroad, with at least 63 LNG export projects planned or under construction around the globe. So time is of the essence."

In the first Part of this series, I discussed the latest developments from the shale gas front in Argentina, Israel, Russia and South Africa along with the fragility of the LNG supply-demand internationally. That article is here.

This article captures all the latest developments from the shale gas front in several other countries that hold significant gas resources, according to the U.S. Energy Information Administration (EIA).

Shale Gas International Update

1) Poland: It is estimated that Poland has one of the largest European shale deposits that reside in the Baltic Sea Basin and the Lublin Basin. After an extensive evaluation of its exploration activities in Poland and unsuccessful attempts to find commercial levels of hydrocarbons, Marathon Oil (NYSE:MRO) has elected to conclude operations in the country. Marathon's concessions in Poland had a net book value at March 31, 2013, of $12 million. Following the completion of six exploration wells on its 11 licenses and its unsuccessful attempts to find commercial levels of hydrocarbons, Marathon decided to leave the country according to an earnings release in May 2013.

In May 2013, Talisman Energy (NYSE:TLM) also changed its strategy in terms of its Polish drilling program. Talisman reached an agreement to transfer its interests in Poland to its partner San Leon Energy. San Leon acquired 100% of the shares of Talisman, including all assets and drilling equipment. Talisman had drilled one vertical well in each of its three blocks in the Baltic Basin with unsuccessful results.

Talisman is in the midst of a restructuring and is also seeking to unload its Eagle Ford assets for $2 billion. However, this is a highly unrealistic scenario as I discussed in my recent article here.

Moreover, Exxon Mobil (NYSE:XOM) surrendered two of its six shale-drilling licenses to the Polish government after deciding to quit the country. Two exploratory wells failed to flow at sufficient rates to justify bringing them into production.

Exxon returned its Werbkowice license owned jointly with Total (NYSE:TOT) and the Legionowo permit in central Poland. Exxon hasn't decided about the future of the remaining four licenses yet. Exxon's CEO warned that shale-drilling techniques that unlocked bonanzas of oil and gas in North America were failing in Europe and China, and new equipment and techniques would have to be invented to tap some of those formations.

However, Chevron (NYSE:CVX) has a different opinion and believes that Poland is a key place for exploring natural gas. In late June 2013, Chevron dismissed protests from the Occupy Chevron (Poland) group that sought to stop the company from exploring natural gas in Zurawlow, Poland.

Opposition to drilling from green groups and local residents has so far been muted, but international environmental lobby groups are building up their presence in Poland and starting to scrutinize Polish shale gas projects. Chevron owns Polish acreage at Grabowiec, Zwierzniec, Frampol and Krasnik, and employs 30 people through its subsidiary Chevron Polska Energy Resources Sp Zoo in Warsaw.

About 25% fewer exploration wells were completed last year in Poland than forecast, amid complex permitting rules and the government's announcement that prospective output will be taxed. Poland's natural gas utility PGNIG, Orlen, 3 Legs Resources, San Leon Energy along with ConocoPhillips (NYSE:COP) and Eni (NYSE:E) still have operations in Poland.

2) China: In late July 2013, Hess (NYSE:HES) signed a production-sharing contract with China National Petroleum Corporation, marking China's first joint agreement to develop a shale oil block. Under the agreement, Hess will explore and develop the 800 square-kilometer Malang block of the Santanghu basin in China. Hess's contract with CNPC follows a joint study conducted by the two companies.

Hess is in the process of reshaping itself and becoming a pure-play exploration and production company. This is why, Hess wants to shed its downstream businesses of refining, retail and transporting oil. A few weeks ago, Hess picked Goldman Sachs (NYSE:GS) to sell its 1,361 gas stations in several eastern states. Most of the stations also operate convenience stores.

Hess's expansion in China is not an easy project. China's reserves of shale gas are not as easily accessible as the unconventional gas in the U.S. because of key geological differences. Much of the Chinese gas lies in mountainous regions that suffer from frequent earthquakes. Much of the country's shale gas is also buried twice as deep as the gas in the U.S. and may contain contaminants such as hydrogen sulfide, a gas that can be lethal.

Some of the biggest shale deposits are also in arid regions where large amounts of water are not available for the water-intensive hydraulic fracturing drilling process in a country where agriculture remains a primary occupation. It is also a well-known fact that China has many legal and bureaucratic hurdles.

This is why, the Chinese energy firms have completed several significant deals since 2011 in order to get educated on drilling, enhance their technical know-how and diversify their sources of supply. For instance:

A) In October 2011, Sinopec (NYSE:SHI) bought Daylight Energy for more than $2 billion.

B) In 2012, PetroChina (NYSE:PTR) made a JV with Encana (NYSE:ECA). PetroChina gained a 49.9% interest in Encana's 445,000 acres in the Duvernay play for total consideration of C$2.18 billion.

C) In 2012, Sinopec agreed to buy a one-third stake in five Devon Energy (NYSE:DVN) exploratory oil projects in the U.S. for $900 million to expand holdings of reserves trapped in shale. Sinopec paid $900 million in cash and as much as $1.6 billion in Devon's future drilling costs.

D) In February 2013, CNOOC (NYSE:CEO) acquired Nexen, gaining access to a diversity of oil and natural gas producing properties. The Nexen acquisition gave CNOOC new offshore production as well as producing onshore properties in the Middle East. In Canada, CNOOC gained control of Nexen's Long Lake oil sands project in Alberta, conventional natural gas and coalbed methane producing assets, as well as billions of barrels of reserves in the world's third-largest crude storehouse, the oil sands in Alberta.

E) In February 2013, Sinopec agreed to acquire a stake in Chesapeake's (NYSE:CHK) assets for $1.02 billion. Sinopec bought 50% of Chesapeake's 850,000 acres of net oil and natural gas leasehold properties in the Mississippi Lime shale field in northern Oklahoma. Chesapeake has about 2.1 million net acres of leasehold in the Mississippi Lime region, which covers northern Oklahoma and southern Kansas. Chesapeake's production from the Mississippi Lime region was approximately 32,500 boepd (54% oil and liquids). That deal could help Chesapeake cut down its long-term debt, which stood at $14 billion as of March 31.

F) In early 2013, Sinochem, China's biggest supplier of chemical products, agreed to buy a 40% stake from Pioneer Natural Resources (NYSE:PXD) for $500 million. Sinochem also paid $1.2 billion of Pioneer Natural's share of future drilling costs. Pioneer Natural remained the operator of the 207,000 net acres in the Wolfcamp. Production from the joint interest area was approaching 10,000 boepd, and Sinochem commenced receiving its share effective immediately.

Pioneer is the largest acreage holder in the Wolfcamp with more than 400,000 acres, and it has planned to drill 90 horizontal wells in the area by the end of 2013. Thanks to this deal, Pioneer and Sinochem will drill 120 horizontal wells in 2014 and 165 wells in 2015.

Nevertheless, some industry experts say that the US firms take China's money, but deny access to technology. They say that the Chinese companies are largely failing in their quest to obtain this specialized knowledge about cutting-edge drilling practices, because their US partners have structured the business dealings so that China can't obtain proprietary information about America's drilling-related technologies. This includes prohibiting employees of Chinese companies from setting foot on American drilling sites and entering US corporate boardrooms.

Devon Energy's spokesman Chip Minty supported this view by saying that there are a number of important restrictions in the deal that Devon inked with Sinopec. For example, while the arrangement allows Sinopec officials to track oil and gas production in the five plays, the deal explicitly prohibits them access to Devon's hydraulic fracturing technology.

Moreover, Devon's deal bars Sinopec employees from working in the five plays. "In terms of working shoulder-to-shoulder with Devon employees in these drilling plays, that doesn't happen," Minty said. "That's not the purpose of the agreement, and that's not the way the partnership is being carried out."

3) Algeria: In late July 2013, the Algerian Minister of Energy and Mines and Eni's CEO met to discuss Eni's ongoing activities, progress so far and the potential for future projects in the country. Eni's CEO confirmed the company's interest in the development of new exploration activities in Algeria, including future projects for the exploration and development of shale gas.

Eni has been present in Algeria since 1981 and has interests in 24 exploration and development licenses which are currently in production, and in 8 permits under development. In 2012, Eni was the leading producer in the country, with a daily equity production of approximately 80,000 boepd.

So Europe's answer to the U.S. shale boom might lie beneath the Sahara desert but Algeria's oil and gas potential still remains largely underexploited. Algeria has offered very attractive fiscal terms to help the E&P companies determine whether shale gas can be economically viable. However, given the early stages of the process and many remaining financial and legal obstacles, Algeria doesn't hope to produce unconventional gas commercially before 2020.

It must also be noted that Algerians in London protested against shale gas and the lack of a national debate in April 2013. The protestors awaited the Algerian Minister for Energy and Mines who arrived at HSBC Private Bank for a meeting with the representatives of 80 British companies. These Algerians also reached out to British activists opposing fracking in the UK. The participants learnt that on March 9, 2013, the Algerian authorities had passed amendments to the Hydrocarbon Law, which opened the way to the exploitation of shale gas in Algeria. This law was approved without an open national and public debate, necessary for the appraisal of such a potentially highly destructive project. Economists, environmental specialists, technical experts, local communities and civil society were not consulted prior to the introduction of this law in parliament.

4) Cyprus: In late June 2013, Total signed a deal to invest in facilities to export gas from Cyprus. Actually, Total signed a memorandum of understanding on a second LNG production line. The estimated cost is $3 billion which is in addition to the estimated $6 billion cost of the first LNG train.

Total follows Eni, Kogas and Noble Energy (NYSE:NBL) which have already signed deals to explore Cyprus's new-found gas potential. Cyprus wants to exploit its reserves rapidly to emerge from its financial crisis and aims to start building an LNG terminal by early 2016. The country's LNG exports will start from 2019.

5) France: France is a European country with notable shale resources but it has banned hydraulic fracturing for environmental reasons. However, the EU might need all of its resources to dig itself out of its current economic hole. This will probably mean the relaxation of current rules surrounding shale gas development. For instance, it is easy to see a troubled Eastern European country making this decision. Some French also say that the French anti-fracking law will allow some forms of drilling for research purposes under highly controlled conditions, something the government has so far blocked.

A few weeks ago, France's top court said it would examine a challenge to a law that bans hydraulic fracturing. U.S. firm Schuepbach Energy challenged the law in the local court of Cergy-Pontoise near Paris, which forwarded the case to France's highest administrative court, which then passed it on to the Constitutional Council. Schuepbach Energy holds two exploration permits that were canceled in 2011.

6) Mexico: Mexico is a leading oil exporter to the United States, but US natural gas exports to Mexico hit a record last year. US gas exports to Mexico rose 19% to 620 billion cubic feet last year, meeting about 20% of the country's demand. Domestic production has been in decline because of under investment by Pemex. Mexico plans to more than double its import capacity from the US with the Ramones pipeline project which is its biggest energy infrastructure development for 40 years. Phase one is planned to be in operation next year.

However, Mexico can get a big boost by developing its own shale gas play, replacing part of the US gas imports. EIA estimates that proven reserves of shale gas in Mexico is 32 times what is in the Texas portion of the Eagle Ford shale. Mexico is sitting on an estimated resources base which is comparable to Kuwait. At only 90% of this estimate, Mexico's proven natural gas reserves would be worth $2.4 trillion.

Pemex, the state oil company of Mexico, says only half the EIA estimate is recoverable, but it has been talking down Mexico's shale prospects for years in favor of shallow-water offshore oil fields. The Eagle Ford geological formation in south Texas extends into northeastern Mexico as some results showed recently. In April 2013, Pemex announced its first ever production of shale gas from a test well in the Burgos basin that lies across the border from Texas. The Chucla-1 well produced 1.9 billion cubic feet per day of natural gas, as well as 24 barrels per day of crude oil and other condensates.

Apart from Pemex, AHMSA, Mexico's top steelmaker, hopes to tap the country's ample shale gas reserves if an energy sector overhaul expected this year provides an opening. AHMSA holds 6 million acres of mining concessions near the U.S.-Mexico border in areas where shale deposits are believed to be concentrated.

President Enrique Pena Nieto has promised a reform to attract new investments from private oil companies aimed at boosting lagging production. He wants to open up Pemex to foreign capital to boost exploration and production of unconventional resources, including shale gas. The formal proposal of the reform is expected by September 2013. Mexico's constitution mandates that only the state can own and extract oil and gas resources. However, the country's energy minister admitted in May 2013 that his country is far from tapping its shale potential.

It must also be noted that Mexico lacks water to frack for shale gas. This is a major drawback in Mexico's efforts to ramp up the shale gas production because the drought is often there, having a heavy impact on agriculture and livestock, and on living conditions in dozens of rural villages.

7) Brazil: Brazil also prepares to join the shale gas revolution. A few weeks ago, a delegation from Brazil visited Pittsburgh to learn about the shale gas boom. The group of Brazilians had meetings with state regulators, drilling companies, and members of the K&L Gates law firm. They also visited a drilling site in western Pennsylvania.


The shale rush has transformed the American energy industry in a very short period of time but it is still in its infancy internationally. How will the shale rush evolve in Europe, South America and Asia? This is very intriguing to me and this is the reason why I plan to keep you posted with more articles about all the latest shale gas developments that take place worldwide.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.