The Fuse

A Challenging Outlook for International Shale

by Leslie Hayward | May 17, 2015

poland shale

The recent decision by state-owned China National Offshore Oil Corporation (Cnooc) to cancel its shale gas project in Anhui province is the latest failed effort to replicate the tremendously successful shale energy revolution outside of North America. The move comes a few months after Chevron abandoned its shale oil ambitions in Poland, joining ExxonMobil, Eni, and a number of other producers in backing away from the central-European country.

Poland and China are only two of the most prominent examples of countries with attempted and failed shale development projects, but they contain some of the best shale geologies outside of North America, and some of the largest and most promising resources in Europe and Asia.

Why it works in the United States

According to the Energy Information Administration, the United States only accounts for about 10 percent of global shale oil and gas reserves. But an enthusiastic industry, combined with ample supporting infrastructure and extraction-friendly property rights, have enabled the shale bonanza in the U.S., establishing the country as the world’s single largest producer of oil and gas. In Poland, for example, the cost to drill an exploratory well is nearly twice as high as in the U.S., since industry needs to import the drilling equipment, and Poland’s roads and other infrastructure are not as sophisticated.

Around the globe, regional differences present challenges not found here—although in some countries such as Argentina, the shale geologies will likely prove too good to resist.

In China: Low oil prices meet water scarcity and population density

In the case of China, the collapse in oil prices and low gas prices are the most significant reasons driving Cnooc to abandon the project. Shale projects are extremely expensive, particularly in their inception, potentially costing tens of millions of dollars per well. Oil prices near or below $60 per barrel undermine the viability of breaking even. One of China’s other state-owned oil companies, PetroChina, last year scaled back on a shale project in Sichuan province that it was working on with Royal Dutch Shell.

The Chinese government has grand ambitions to develop the country’s shale gas formations as a way to both support its manufacturing industry and offset the country’s rampant coal consumption—and the debilitating air pollution that comes with it. Beijing announced last month that it would close the last of the city’s four major coal-fired power plants by 2016, each of which will be replaced with gas-fired plants. But China’s imports of natural gas have already surged, climbing from zero in 2006 to 2 trillion cubic feet per year in 2014. Development of their domestic shale gas resources would help offset the import bill and meet the country’s climbing natural gas demand.

Almost all of China’s shale gas formations lie in regions with inadequate water supplies to support fracking operations.

Unfortunately, petroleum geologists have yet to successfully extract natural gas from China’s more promising formations. An additional barrier exists in the fact that almost all of the country’s shale gas formations lie in regions with inadequate water supplies to support fracking operations—visualized in the map below. Shale oil and gas development is most viable in areas where significant water supplies intersect with low population density.

china shale

In Poland: Unwillingness to compromise

In Europe, low oil prices certainly make a difficult situation worse for shale development, but challenges arose long before the oil price collapse began in October. Not least are nation-specific political problems, which include a ban on fracking in France, a moratorium in Germany, and public protests in the United Kingdom.

But political opposition to fracking in E.U. member states contradicts recent pushes for greater European energy security, against a backdrop of Russian aggression in Ukraine. Last year, Russia cut off gas supplies to Ukraine for several months due to various disputes surrounding Ukraine’s failure to pay its natural gas bill. In February of this year, Russia’s Gazprom renewed threats to terminate its contracts with Ukraine, which could result in cutting off of flows to the rest of Europe in the process. With so many European countries almost entirely dependent on Russian natural gas supplies, there is no lack of incentive for E.U. countries to develop domestic resources and sever their reliance on a hostile supplier.

eu gas

Poland is Exhibit A in this European dynamic. Although Polish policymakers would actively embrace the opportunity to move away from their heavy dependence on Russian gas, the public is sour on hydraulic fracturing, at least when it occurs in their immediate vicinity. One well in southeastern Poland was recently blockaded for 400 days by local residents with environmental concerns—although some sources familiar with the situation allege that Russian interests are financially supporting anti-fracking environmental groups. The country’s bureaucracy has also served as a significant deterrent to prospective international investors.

Although Polish policymakers would actively embrace the opportunity to sever their heavy dependence on Russian gas, the public is sour on hydraulic fracturing, at least when it occurs in their immediate vicinity.

Although a few small independent companies are still drilling exploratory shale gas wells in Poland, the major players have abandoned their projects, and the current outlook for the industry is weak at best.

Argentina: Promising geology counteracts political risks

There is one glimmer of hope on the international shale landscape. Argentina, who’s vast Vaca Muerta formation exceeds any single U.S. shale formation, has producers drooling. However, the oil and gas industry has little trust for the Argentine government, which not only presents various regulatory roadblocks, but has expropriated resources from international companies in the past. The dangers of investing in Argentina are best exemplified by the bitter battle between YPF, Argentina’s state oil company, and Repsol, the Spanish oil major, over Argentina’s multi-billion dollar expropriation of Repsol’s petroleum discoveries and assets in 2011.

But when it comes to the oil and gas industry, in the long-term, promising geologies have a way of overcoming the above-ground political challenges. Undeterred by Repsol’s cautionary tale, Chevron has already invested $2.8 billion in the Vaca Muerta shale, and Malaysia’s state oil company, Petronas, just penned a deal with YPF to explore the territory. Shell and Total have also inked deals in recent months. While significant production volumes have so-far eluded producers at this stage, early wells have yielded very promising results. At CERAWeek, the CEO of YPF commented on the quality of the Vaca Muerta resource, reporting that one of his wells was pumping as much oil as the best wells in the Bakken and Eagle Ford (over 1,200 barrels per day), even though it was a shallower well with a small number of fractures. On the issue of expropriation he was somewhat less encouraging, stating, “In the long history of Argentina, not that many companies have been expropriated.”

We’ll leave it to oil and gas companies to determine if such a comment is reassuring. But one way or another, despite the risks, and as other parts of the world struggle to tap their domestic resources, Argentina could be experiencing the early days of the first shale boom outside of North America.