Your SlideShare is downloading. ×
The geopolitics of shale gas
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

The geopolitics of shale gas

2,182
views

Published on

Konstantin Simonov’s speech presentation at The Shale Gas World Europe 2010 Conference …

Konstantin Simonov’s speech presentation at The Shale Gas World Europe 2010 Conference

Warsaw, Poland, December, 01, 2010.

Published in: News & Politics

0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
2,182
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
4
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. National Energy Security FundNational Energy Security Fund The Geopolitics of Shale Gas Konstantin SimonovKonstantin Simonov WarsawWarsaw December, 1December, 1 20102010
  • 2. National Energy Security Fund 2006-2008:2006-2008: FFavourableavourable Environment for the Shale GasEnvironment for the Shale Gas BoomBoom • Firstly, an upsurge and prolonged growth in prices for conventional energyFirstly, an upsurge and prolonged growth in prices for conventional energy resources, i.e. oil and gas, occurred at that time. This radically improvedresources, i.e. oil and gas, occurred at that time. This radically improved the economics of shale projects which are notable for high operating coststhe economics of shale projects which are notable for high operating costs and a constantly high cost of production.and a constantly high cost of production. • Secondly, specifics of enterprise culture in the US led to a rapid andSecondly, specifics of enterprise culture in the US led to a rapid and massive inflow of investment in exploration and development of shalemassive inflow of investment in exploration and development of shale deposits. These projects were historically implemented by quite a few smalldeposits. These projects were historically implemented by quite a few small companies that competed with each other fiercely, but were not pressed bycompanies that competed with each other fiercely, but were not pressed by major corporations which evinced no interest in shale (for a while).major corporations which evinced no interest in shale (for a while). • Thirdly, rules were simplified to keep records of proved gas reservesThirdly, rules were simplified to keep records of proved gas reserves contained in solid rock.contained in solid rock. • Fourthly, horizontal drilling and hydraulic fracturing technologies forFourthly, horizontal drilling and hydraulic fracturing technologies for improving efficiency of wells in shale deposits which American serviceimproving efficiency of wells in shale deposits which American service companies successfully polished up in oil projects came in really handy.companies successfully polished up in oil projects came in really handy. • Fifthly, strained international politics regarding access to conventionalFifthly, strained international politics regarding access to conventional hydrocarbon reserves for Western companies, the so-called resourcehydrocarbon reserves for Western companies, the so-called resource nationalism of the main oil and gas countries, also played a role.nationalism of the main oil and gas countries, also played a role. Development of an internal production source was welcomed andDevelopment of an internal production source was welcomed and encouraged (it did not go as far as direct government subsidies and openencouraged (it did not go as far as direct government subsidies and open protectionism though, but the economics of the projects proved goodprotectionism though, but the economics of the projects proved good enough even without that in conditions of high gas prices).enough even without that in conditions of high gas prices).
  • 3. National Energy Security Fund 2010-2011?2010-2011? • Almost nothing has been left from the favourableAlmost nothing has been left from the favourable environment though. Gas prices successfully collapsedenvironment though. Gas prices successfully collapsed in the US, destroying the economic basis for expensivein the US, destroying the economic basis for expensive shale gas production.shale gas production. • Besides, the global economic and financial crisisBesides, the global economic and financial crisis occurred which undermined not only stable growth inoccurred which undermined not only stable growth in demand for gas from the economy, but also worseneddemand for gas from the economy, but also worsened the financial situation in terms of the availability ofthe financial situation in terms of the availability of loans and inflow of investment.loans and inflow of investment. • This process did not lead to a sharp collapse though,This process did not lead to a sharp collapse though, because of a business inertia and publicity whichbecause of a business inertia and publicity which caused major corporations to take an interest in shalecaused major corporations to take an interest in shale projects during crisis and start investing in themprojects during crisis and start investing in them ..
  • 4. National Energy Security Fund The Future of AmericanThe Future of American RevolutionRevolution • SShale boom in USA should be interpreted nothale boom in USA should be interpreted not only as growth in production, but also a rapidonly as growth in production, but also a rapid change of investment activity in the explorationchange of investment activity in the exploration and commercial production of shales.and commercial production of shales. • Considering the extensive nature of the shaleConsidering the extensive nature of the shale boom (the main role in the upswing was playedboom (the main role in the upswing was played not by a significant improvement in thenot by a significant improvement in the efficiency of drilling but its quantitativeefficiency of drilling but its quantitative indicators), the maintenance of the scope ofindicators), the maintenance of the scope of drilling operations and accordingly, investmentdrilling operations and accordingly, investment therein is critical not only to increasetherein is critical not only to increase production, but also to retain what has beenproduction, but also to retain what has been achieved.achieved.
  • 5. National Energy Security Fund The Future of AmericanThe Future of American RevolutionRevolution • Almost three times lower gas prices in 2009 ledAlmost three times lower gas prices in 2009 led to a significant decline in the number of wells into a significant decline in the number of wells in service. After several years of growth (theservice. After several years of growth (the number of development gas wells annuallynumber of development gas wells annually drilled in the US from 16,500 in 2002 almostdrilled in the US from 16,500 in 2002 almost doubled in 2008) an even more headlongdoubled in 2008) an even more headlong collapse followed. Just 17,700 wells were drilledcollapse followed. Just 17,700 wells were drilled last year.last year. • The annual number of shale wells in the sameThe annual number of shale wells in the same period (from 2002 to 2008) increased fromperiod (from 2002 to 2008) increased from several dozen to 5,000-6,000. Their share in theseveral dozen to 5,000-6,000. Their share in the year before the crisis amounted to 17-20% ofyear before the crisis amounted to 17-20% of the total number, whereas the share of shalethe total number, whereas the share of shale gas in dry gas production was no more thangas in dry gas production was no more than 10%.10%.
  • 6. National Energy Security Fund Comparison of Initial Conditions forComparison of Initial Conditions for Shale Gas Production in EU andShale Gas Production in EU and ChinaChina Parameter EU China Reserves Considerable, but distributed irregularly, which creates political problems of a higher role of “shale” countries Considerable Technology No, but may be received from the US No, but there is a high potential for industrial espionage Counting on development of production technologies in Australia Investment Government investment is limited by economic crisis and European currency troubles Substantial investment resources. More profitable to invest in shale gas than US government bonds Water for hydraulic fracturing Major problem Major problem Territory Too densely populated, few areas available for drilling Vast sparsely populated territories Environment Serious limitations Environmental concerns are thought to be a limitation on the right to development, environmental issues are ignored
  • 7. National Energy Security Fund Who Shale Gas CanWho Shale Gas Can Help Russia?Help Russia? Two main issuesTwo main issues • PricePrice • Image of Natural GasImage of Natural Gas Europe is thinking that shale gas willEurope is thinking that shale gas will result in cheap gas. But if you want toresult in cheap gas. But if you want to begin the production you must havebegin the production you must have very high prices on gas. And also youvery high prices on gas. And also you mustmust rehabilitaterehabilitate natural gas!natural gas!
  • 8. National Energy Security Fund Birthday of Shale GasBirthday of Shale Gas RevolutionRevolution Henry Hub One-month Gas Futures Prices, $/Mmbtu Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1994 2.35 2.36 2.11 2.11 1.94 2.08 1.96 1.69 1.62 1.72 1.77 1.70 1995 1.43 1.44 1.53 1.66 1.71 1.63 1.49 1.56 1.67 1.79 1.96 2.46 1996 2.48 2.46 2.35 2.31 2.28 2.54 2.52 2.05 1.93 2.48 3.02 3.65 1997 3.07 2.07 1.90 2.01 2.25 2.16 2.13 2.46 2.87 3.24 3.09 2.41 1998 2.10 2.26 2.25 2.47 2.16 2.17 2.15 1.86 2.04 2.20 2.32 1.93 1999 1.83 1.76 1.80 2.15 2.27 2.35 2.31 2.80 2.64 2.88 2.55 2.42 2000 2.39 2.61 2.83 3.03 3.60 4.30 3.97 4.46 5.13 5.08 5.74 8.62 2001 7.83 5.68 5.19 5.19 4.24 3.78 3.17 2.94 2.21 2.62 2.79 2.69 2002 2.19 2.26 3.02 3.41 3.56 3.26 2.94 3.09 3.57 4.09 4.04 4.84 2003 5.38 6.66 5.79 5.36 5.93 5.93 5.03 4.98 4.67 4.99 4.83 6.47 2004 6.27 5.36 5.54 5.77 6.40 6.33 6.06 5.47 5.22 7.37 7.61 6.83 2005 6.19 6.20 7.05 7.15 6.49 7.21 7.58 9.43 12.11 13.45 11.70 13.43 2006 9.14 7.52 6.98 7.26 6.37 6.39 6.22 6.99 5.22 6.63 8.00 7.16 2007 6.78 7.55 7.22 7.63 7.82 7.50 6.40 6.14 6.19 7.22 7.78 7.18 2008 7.99 8.64 9.62 10.29 11.38 12.78 11.07 8.30 7.49 6.73 6.70 5.79 2009 5.07 4.38 4.00 3.56 3.93 3.94 3.55 3.31 3.46 4.78 4.63 5.34 2010 5.60 5.22 4.30 4.09 Source: EIA
  • 9. National Energy Security Fund PricePrice • To plan investment there is a need forTo plan investment there is a need for guarantees of sales of expensive gas,guarantees of sales of expensive gas, otherwise investment in exploration andotherwise investment in exploration and preparation of deposits will never pay back.preparation of deposits will never pay back. • Meanwhile, spot prices in Europe are muchMeanwhile, spot prices in Europe are much lower than that level today, and thelower than that level today, and the Europeans would like to maintain it (andEuropeans would like to maintain it (and decrease prices under long-term contractsdecrease prices under long-term contracts to the same level), and not vice versa.to the same level), and not vice versa.
  • 10. National Energy Security Fund PricePrice
  • 11. National Energy Security Fund The Image of GasThe Image of Gas • Shale gas is the same methane, and its image as aShale gas is the same methane, and its image as a green fuel of the future has been consciously andgreen fuel of the future has been consciously and purposefully destroyed in Europe. Reversing thispurposefully destroyed in Europe. Reversing this process will be difficult, for one thing, and ideologicallyprocess will be difficult, for one thing, and ideologically dangerous, for another.dangerous, for another. • After all, if gas is rehabilitated, this will have an effectAfter all, if gas is rehabilitated, this will have an effect on the capabilities of gas suppliers to Europe. It will beon the capabilities of gas suppliers to Europe. It will be difficult to win compete with Russian natural gas whichdifficult to win compete with Russian natural gas which costs $60-70 per 1,000 cubic metres (net of the 30%costs $60-70 per 1,000 cubic metres (net of the 30% export duty) to produce and deliver to the Europeanexport duty) to produce and deliver to the European market. Export will be cost-effective even at $130-150market. Export will be cost-effective even at $130-150 per 1,000 cubic metres depending on the transportper 1,000 cubic metres depending on the transport distance inside the EU.distance inside the EU.
  • 12. National Energy Security Fund Political ReasonsPolitical Reasons • Scared with the resource nationalism ofScared with the resource nationalism of supplying countries (primarily Russia), gassupplying countries (primarily Russia), gas wars with transit providers in the last fewwars with transit providers in the last few years, and problems with finding new sourcesyears, and problems with finding new sources for natural gas supplies, the EU will befor natural gas supplies, the EU will be clutching at straws and try to use anythingclutching at straws and try to use anything that bears even a minimum resemblance to athat bears even a minimum resemblance to a method of improving its energy security.method of improving its energy security. • Shale gas will not be an exception from thisShale gas will not be an exception from this rule. The Europeans have shown already thatrule. The Europeans have shown already that they are not too concerned about economicsthey are not too concerned about economics when alternative sources are concernedwhen alternative sources are concerned
  • 13. National Energy Security Fund Main European ProblemsMain European Problems • Shale gas production techniques whichShale gas production techniques which are not very environmentally friendlyare not very environmentally friendly place an extremely serious socio-place an extremely serious socio- political limitation on rapid developmentpolitical limitation on rapid development of shale production in densely-of shale production in densely- populated Europe.populated Europe. • The technology requires substantialThe technology requires substantial quantities of water, about 23 millionquantities of water, about 23 million litres of water per well (inclusive oflitres of water per well (inclusive of hydraulic fracturing). This condition ishydraulic fracturing). This condition is almost impossible to satisfy in Europe.almost impossible to satisfy in Europe.
  • 14. National Energy Security Fund Main European ProblemsMain European Problems • There are just 74 drilling rigs operating inThere are just 74 drilling rigs operating in Europe, 12 times fewer than in the US nowEurope, 12 times fewer than in the US now and 15-20 times than in 2005-08 when theand 15-20 times than in 2005-08 when the shale boom was happening.shale boom was happening. • It will take many years and much investmentIt will take many years and much investment to accumulate the hardware required for ato accumulate the hardware required for a breakthrough.breakthrough. • Furthermore, to import rigs from outside theFurthermore, to import rigs from outside the EU, European standardisation and certificationEU, European standardisation and certification rules will have to be amended, which is evenrules will have to be amended, which is even more difficult to do.more difficult to do.
  • 15. National Energy Security Fund Main European ProblemsMain European Problems • The experience of Barnett which shale gasThe experience of Barnett which shale gas hunters in Europe consider a benchmarkhunters in Europe consider a benchmark shows that maintaining stable production of 1shows that maintaining stable production of 1 billion cubic metres requires drilling at least ofbillion cubic metres requires drilling at least of 200 successful wells during the first year.200 successful wells during the first year. • And a minimum of 150 are to be drilled eachAnd a minimum of 150 are to be drilled each following year. The result is by no meansfollowing year. The result is by no means guaranteed (shales are poorly studied inguaranteed (shales are poorly studied in Europe). The cost of each well in the EU willEurope). The cost of each well in the EU will be more expensive than in the US, at least $5-be more expensive than in the US, at least $5- 7 million, not to mention a deficit of drilling7 million, not to mention a deficit of drilling rigsrigs
  • 16. National Energy Security Fund Main European ProblemsMain European Problems • With no infrastructure, a deficit of equipment,With no infrastructure, a deficit of equipment, and a high cost of meeting environmentaland a high cost of meeting environmental standards, shale gas production in Europe willstandards, shale gas production in Europe will obviously be much more expensive than in theobviously be much more expensive than in the US. And even there net operating costs of gasUS. And even there net operating costs of gas extraction are never below $70 per 1,000extraction are never below $70 per 1,000 cubic metres.cubic metres. • Even according to the most optimisticEven according to the most optimistic estimates, if prices are lower than $350, shaleestimates, if prices are lower than $350, shale projects in the EU are set to be unprofitable.projects in the EU are set to be unprofitable.
  • 17. National Energy Security Fund Shale Gas in ChinaShale Gas in China • Gas consumption in China has grown by 250% in the last ten yearsGas consumption in China has grown by 250% in the last ten years to 87 billion cubic metres in 2009. Up until 2008, Beijing satisfiedto 87 billion cubic metres in 2009. Up until 2008, Beijing satisfied gas requirements through internal production from fields in thegas requirements through internal production from fields in the northwest of the country.northwest of the country. • However, it has been two years now that the internal reservesHowever, it has been two years now that the internal reserves cannot meet the demand, making China purchase 4.5 billion cubiccannot meet the demand, making China purchase 4.5 billion cubic metres of liquefied natural gas at global prices. Moreover, themetres of liquefied natural gas at global prices. Moreover, the unwillingness of the Chinese to change their gas pricing approachesunwillingness of the Chinese to change their gas pricing approaches (the cost of gas inside the country is tightly regulated by the(the cost of gas inside the country is tightly regulated by the government) and limited import opportunities lead to growth ingovernment) and limited import opportunities lead to growth in demand for gas being artificially restrained. In particular, Chinesedemand for gas being artificially restrained. In particular, Chinese experts calculate that the gas market was to exceed 100 billionexperts calculate that the gas market was to exceed 100 billion cubic metres last year.cubic metres last year. • Prospective estimates of demand for gas in China are nonethelessProspective estimates of demand for gas in China are nonetheless not impressive. Beijing has voiced ambitious plans for growth in gasnot impressive. Beijing has voiced ambitious plans for growth in gas consumption to 300 billion cubic metres by 2020. The increase willconsumption to 300 billion cubic metres by 2020. The increase will amount to 10-20% per annum even in crisis times. Import isamount to 10-20% per annum even in crisis times. Import is expected to rise at even faster rates.expected to rise at even faster rates.
  • 18. National Energy Security Fund Production and ConsumptionProduction and Consumption of Gas in Chinaof Gas in China 0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 100,0 2000y 2001y 2002y 2003y 2004y 2005y 2006y 2007y 2008y 2009y Consuption (bcm) Production (bcm)
  • 19. National Energy Security Fund Shale Gas in ChinaShale Gas in China • Expensive development of shales and the poorly studiedExpensive development of shales and the poorly studied potential of deposits in Chinese territory in combination withpotential of deposits in Chinese territory in combination with a deficit of water (for massive use o f hydraulic fracturing)a deficit of water (for massive use o f hydraulic fracturing) are all limiting factors.are all limiting factors. • Just like the fact that Beijing has, to all appearances, chosenJust like the fact that Beijing has, to all appearances, chosen another unconventional gas priority: making a second majoranother unconventional gas priority: making a second major attempt at developing coalbed methane production based onattempt at developing coalbed methane production based on new technologies. The more so because the US hasnew technologies. The more so because the US has managed after 20 years of development to increase coalbedmanaged after 20 years of development to increase coalbed output from zero to 60 billion cubic metres in 2008. This isoutput from zero to 60 billion cubic metres in 2008. This is comparable with shale production, and the only difference iscomparable with shale production, and the only difference is that growth here was gradual, without the fits and starts thatthat growth here was gradual, without the fits and starts that took place in shale. Therefore, it did not attract so muchtook place in shale. Therefore, it did not attract so much public attention, eitherpublic attention, either
  • 20. National Energy Security Fund China’s CBM ResourcesChina’s CBM Resources Source: Oil&Gas JournalSource: Oil&Gas Journal
  • 21. National Energy Security Fund Shale Gas in ChinaShale Gas in China • China’s experience in developing coal seams has ratherChina’s experience in developing coal seams has rather been unsuccessful to date. Access to Western technologybeen unsuccessful to date. Access to Western technology has been closed. Despite 200 billion cubic metres ofhas been closed. Despite 200 billion cubic metres of proven reserves, only 7% of 150 drilled wells haveproven reserves, only 7% of 150 drilled wells have demonstrated commercial productivity. These figures givedemonstrated commercial productivity. These figures give an idea of both the risks if the situation is repeated andan idea of both the risks if the situation is repeated and the reserves for improving drilling performance. Anthe reserves for improving drilling performance. An increase in the number of cost-effective wells will enableincrease in the number of cost-effective wells will enable a significant rise in production in the medium term.a significant rise in production in the medium term. • For a breakthrough China is ready to invest not only inFor a breakthrough China is ready to invest not only in foreign technology, but also assets, Australian in the firstforeign technology, but also assets, Australian in the first instance, to achieve an even greater synergy. Firstly,instance, to achieve an even greater synergy. Firstly, Australia has achieved good economic indicators inAustralia has achieved good economic indicators in coalbed development and even implements projects forcoalbed development and even implements projects for liquefying thus produced gas. Secondly, the People’sliquefying thus produced gas. Secondly, the People’s Republic buys this LNG, so by taking part in productionRepublic buys this LNG, so by taking part in production projects it kills two birds with one stone (shares profits atprojects it kills two birds with one stone (shares profits at the initial stage of the chain and gains access to thethe initial stage of the chain and gains access to the technology).technology).
  • 22. National Energy Security Fund Shale Gas in ChinaShale Gas in China • Royal Dutch Shell and PetroChina in spring made a jointRoyal Dutch Shell and PetroChina in spring made a joint offer of $2.96 billion for the Australian company Arrowoffer of $2.96 billion for the Australian company Arrow Energy which extracts coalbed gas. The offer implies aEnergy which extracts coalbed gas. The offer implies a 28% premium on the price at the close of trade. In the28% premium on the price at the close of trade. In the course of bargaining, the buyers had to raise their offer tocourse of bargaining, the buyers had to raise their offer to $3.2 billion. Shell already held 30% of the shares of$3.2 billion. Shell already held 30% of the shares of Arrow, so the entire deal looks “taking the ChineseArrow, so the entire deal looks “taking the Chinese company to the high technological society” in exchangecompany to the high technological society” in exchange for preferences in the Chinese market. In return, thefor preferences in the Chinese market. In return, the English-Dutch company entered into a production sharingEnglish-Dutch company entered into a production sharing agreement with CNPC with reference to shale gasagreement with CNPC with reference to shale gas deposits in the Sichuan province.deposits in the Sichuan province. • Systematic research of the country’s shale potential willSystematic research of the country’s shale potential will probably be carried out alongside accelerated coal-bedprobably be carried out alongside accelerated coal-bed gas development, especially if one remembers that angas development, especially if one remembers that an entire group of Chinese scientists last autumn came toentire group of Chinese scientists last autumn came to Oklahoma to get familiar with the technology and otherOklahoma to get familiar with the technology and other details of shale development on the spotdetails of shale development on the spot
  • 23. National Energy Security Fund SummarySummary • Only 2010-2011 canOnly 2010-2011 can explain the real potentialexplain the real potential of shale gasof shale gas • Shale gas production inShale gas production in Europe has a lot ofEurope has a lot of limitationslimitations • The main problem isThe main problem is price. You need theprice. You need the period of expensive gasperiod of expensive gas to begging the realto begging the real productionsproductions • Shale gas can be used asShale gas can be used as argumentargument in negotiationsin negotiations aboit long term contractsaboit long term contracts
  • 24. National Energy Security Fund Thank you!Thank you! www.energystate.ruwww.energystate.ru

×