CMS shale gas update – UK, Algeria, USA, Poland, Canada, China and Ukraine

UK

On 17 April 2012 the Department of Energy and Climate Change published an independent expert’s report recommending measures to mitigate the risks of seismic tremors from hydraulic fracturing - and is inviting public comment on its recommendations. The invitation for comment is open until 25 May.

The report recommends an effective monitoring system and a traffic light control regime and confirms that minor earthquakes detected in the area of Cuadrilla’s Preese Hall operations near Blackpool in April and May of last year were caused by fracking.

The measures proposed by the report to mitigate the risk of any damaging seismic activity from future shale gas operations in the Bowland Basin include:

• hydraulic fracturing procedure should include a smaller pre-injection and monitoring stage;
  
• effective monitoring system to provide near real-time locations and magnitudes of any seismic events should be part of any future hydraulic fracturing operations;
  
• future fracking operations for shale gas should be subject to a “traffic light” control regime. A red light at activity levels of magnitude of 0.5 or above means fracking should be stopped and remedial action taken (this is lower than the magnitude 1.7 proposed by Cuadrilla’s report). Unusual seismic activity, even at lower levels, should be carefully assessed before operations proceed; and
  
• for any future operations elsewhere in the UK the review recommends suitable actions to assess the seismic risk before any operations take place.

Lord Browne, a director of Cuadrilla, has stated that he hopes the government will approve Cuadrilla's plans to resume fracking: "We could potentially double the reserves of gas in the UK, we could add 50,000 jobs maybe, and probably even reduce the price of gas."¹ Cuadrilla has calculated that there is 200 tcf of gas trapped in the rock beneath Blackpool, Preston, Southport and the surrounding countryside. This would amount to enough fuel to supply the UK for 70 years.²

Further potential shale gas sites have been found throughout the UK including:

• the Widmerpool Gulf, which starts in Melton Mowbray and stretches through south Nottinghamshire into Derbyshire;
• the Edale Basin in north Derbyshire and south Yorkshire; and
• the Gainsborough Trough in north Nottinghamshire.³

Additionally, IGas has more than doubled its estimate of the volume of shale gas contained in its assets in Lancashire and Cheshire such that the volume of “gas in place” is near 10 tcf. The company is now seeking a partner with whom to develop the shale resources.⁴

Algeria

Algeria has set its sights on developing a major shale gas business. The country’s energy minister, Youcef Yousfi, stated last month that he believes the potential is “at least comparable to the biggest American fields”. Algerian state-owned oil and gas company Sonatrach is actively preparing for work at the Ahnet Basin in the extreme southwest of the country “alone or in partnership with international companies”. Last year Sonatrach signed a cooperation agreement with Eni to explore and develop shale gas in Algeria.⁵

The Energy Minister said Algeria was working with partners with the technical expertise to study the potential further⁶ however he warned against hasty exploitation, as Algeria still needs to acquire certain high-tech means to avoid any negative impact on the environment.⁷

At a recent international shale gas workshop in Oran, organised by Association Algerienne de l’Industrie du Gaz, and attended by Sonatrach, other local companies and many international companies, Youcef Yousfi was upbeat about potential investment in Algeria’s shale gas development and sent a clear message that Algeria is keen to establish an appropriate regulatory regime (both environmental and fiscal) to encourage investment to access the country’s enormous shale gas reserves.

USA

Emerald Oil & Gas NL recently announced that the company has signed a non binding letter of intent with a private US company to acquire approximately 9000 plus net lease acres with production, reserves and an active non-operated development drilling program in the Williston Basin Bakken Three Forks shale oil play, located in North Dakota and Montana.⁸

Despite the huge development in shale gas in the US, there has been criticism that some states are not prepared for this new industry and perhaps have been tied up in the hype without thinking through the consequences. "Some states have just launched into it and are trying to catch up later on environmental regulation," says Joseph Martens, commissioner of environmental conservation in New York. "We've had the advantage of seeing what's happened there and doing it differently."⁹

Poland

In March the Polish Geological Institute (PGI) revised down its shale gas reserve estimate for Poland. PGI assessed most likely recoverable shale gas reserves to be between 0.35 and 0.77 tcm, which is approximately one tenth the 5.3 tcm estimated by the US Energy Information Administration in April 2011.¹⁰

The PGI shale gas reserve estimate is still substantial however and the Polish government strongly supports shale gas exploration activity. The revised shale gas reserves would be sufficient to cover Poland’s gas consumption for 25-55 years, in addition to 10 years coverage by conventional gas reserves.¹¹

Poland is likely to start commercial production of shale gas as early as 2014 and is expected to be self-reliant in gas by 2035 according to Prime Minister Donald Tusk. A number of foreign companies already have exploration concessions for shale gas in Poland including ExxonMobil, Chevron, Conoco Phillips, Marathon Oil and Eni.¹²

The industry will also be closely watching any move by Poland to tap capital markets in order to exploit its shale gas resources. In a November 2011 interview, Slawomir Hinc, chief financial officer of Polish gas monopoly Polskie Gornictwo Naftowe i Gazownictwo (PGNiG) told Reuters that his company was considering listing its drilling arm. The listing would offer investors direct exposure to the company’s aggressive shale drilling campaign and would in return provide PGNiG with cash for its ambitious capital expenditure plans.¹³

Canada

Spending and activity on the Mackenzie Valley natural gas pipeline has been scaled back in part due to burgeoning shale gas production elsewhere in North America. Conoco Phillips recently announced that it expected to take a $525 million after tax writedown during the first quarter of 2012 on the Mackenzie pipeline as well as associated gathering systems and the Parsons Lake natural gas field in Canada’s Northwest Territories.¹⁴

China

China has now released its first five-year plan for the development of shale gas, setting ambitious production targets and emphasising the need for foreign co-operation and better technology in developing the sector. The Policy released in early March sets a goal of 6.5bcm of shale gas production by 2015, which is equivalent to 2- 3 per cent of projected 2015 Chinese gas production, and more than 60 bcm of shale gas production by 2020.¹⁵ Whilst it has been acknowledged that shale gas provides some difficulties the China’s Premier, Wen Jiabao said he would “tackle key problems more quickly in the exploration and development of shale gas”.¹⁶

There have been similarities drawn between China and the US, with China keen to follow in the US’s success but it has been acknowledged that whilst there may be sufficient resources in China the geology and landscape is very different to that in the U.S.. Liu Zhenwu, a vice president at state-run CNPC’s advisory center, said in a 7 February interview in Bangkok: “Technical issues need to be solved first. It may take a few years, maybe a decade, maybe more, before large quantities of shale gas are produced in China.”¹⁷ However, in order to develop shale gas industry knowledge, China has teamed up with foreign companies, and according to data compiled by Bloomberg, Chinese companies announced $18.3bn worth of bids in 2011 for overseas oil and gas exploration and production companies.¹⁸

Zhang Yuqing, head of NEA's Oil and Gas Department, has said foreign firms can enter product sharing contracts with Chinese firms or provide engineering services, and Shell has now signed a production sharing contract with CNPC to develop a shale gas block in China.¹⁹ This deal is still subject to government approval but it is the first shale gas PSC ever signed in China.²⁰ Other foreign firms are also becoming involved and BP, Chevron and Total have signed agreements to look for shale gas in China.²¹ Earlier this year Sinopec agreed a £1.4bn deal with Devon Energy, giving it access to shale deposits in the US. Sinopec obtained a one-third stake in five new shale projects and expect to drill 125 wells this year.²²

A study by China’s Ministry of Land and Resources says the country has the potential to recover resources of 25 tcm of shale gas, which is almost 200 times its annual gas consumption.

China will hold a second tender offer for shale gas blocks this year and could extend the invitation to more Chinese companies, including Sinochem and ZhenHua Oil.²³ Executives at CNPC – China's biggest energy company – have said they aim to produce 500 mcm of shale gas by 2015.²⁴

Ukraine

Years of economic belt-tightening on the back of sky-high gas import prices from Russia are putting pressure on the Ukraine to maximise domestic gas production and diversify supply. On 23 February the Ukraine launched tenders for two of its most promising shale gas deposits – the western Olesko and eastern Yuzovsky acreages, which the Ukrainians claim hold reserves of 3 tcm and at least 4 tcm respectively.²⁵

Investors will be watching the shale tenders closely. The Black Sea was home to Ukraine’s only other hydrocarbon PSA to date, the Prykerchenska licence awarded to US energy firm Vanco in 2006 but it was revoked after a change in government. Former Prime Minister Yulia Tymoshenko, whose administration revoked Vanco’s licence has since been thrown in jail but with parliamentary elections scheduled for October, investors could be forgiven for asking what might happen to their contracts if another administration is voted in.²⁶