Economic Opportunities in Unconventional GasColin McNaughtIndustrial and Power AssociationNetwork Meeting12 June 2013
Introduction• Covers some results from report to Scottish Enterprise on theeconomic opportunities global unconventional gas• Recognises that global opportunities exist and some Scottishcompanies have already moved to exploit these• Unconventional gas is an opportunity and a threat to the oil and gasindustry in Scotland.• So important that potential suppliers of goods and services makeinformed responses about their involvement
Agenda• Where are the opportunities?− Review of selected markets• How big is the opportunity?− Review of economic impacts• What are the specific opportunities?− Supply chain analysis• Conclusions
Global Resource• Shale gas reserves are much more common than conventional gasreserves.• Offers countries with no past in hydrocarbons to develop indigenousresources, with security of supply and energy cost benefits..
Impacts on gas prices in the USComparison of traded prices for natural gas in $/Mmbtu: 1994 to 2011
Factors that drive marketsFactorsScale of resource The amount of recoverable gasAccessibility of resource The cost of physically accessing the gasSecurity of supply benefits A key driver for Government and regulatorsLong distance gas pipelines Access to markets for gas productionSkilled oil and gas workforce Needed across all stages of project developmentSupporting infrastructure Road, Water etc.Stable regulatory system For permits to develop and operate as well as fiscal incentivesPrivately owned mineral rightsWas a key factor in the US, but other markets havegovernment owned rightsSocio-Political acceptance An important influence on planning and regulation
Markets Studied: USA• Largest and most established unconventional gas market.• Short term lower gas prices are reducing development.• But an equilibrium is likely to be reached, where the pace of newdevelopment is appropriate for the price of gas.• If this equilibrium is reached at lower levels of market development,the scope for Scottish suppliers will be much reduced, as the localexperienced supply chain will be less stretched.• However if the pace of development remains high, or the supplychain is stretched by addressing the shale oil or tight gas markets,there will be greater opportunities for Scottish suppliers.
Markets Studied: UK• While the UK does not have the highest reserves, the existingregulatory framework for oil and gas development is in place andsupports extensive conventional oil and gas investment.• Recent developments announced to encourage shale gasdevelopment:− Tax incentives as a shale gas field allowance which would extend the ring-fence expenditure supplement from six to ten years for shale gas projects.− Technical planning guidance on shale gas by July 2013 to provide clarityaround planning for shale gas.− Proposals to ensure that local communities will benefit from shale gasprojects in their area.• The developments make the UK a most promising opportunity forgrowth.
Markets Studied: Poland• After initial investment, shale gas developments appear to bestalling.• Government approach to regulation and role of state ownedcompanies reduces opportunity in Poland.• Market for gas services in Poland is dominated by a very largesubsidiary of the state-controlled monopoly with over 50 land rigs,this leaves very little space for other players, apart from:− Specialist services, which are not available on the local market;− Equipment and products• Market opportunity in Poland is small and specialist, and is likely toremain small for some time to come.
Economic Impact Assessment• Understanding the economic impacts signposts to the areas ofgreatest job and value creation and hence the company levelopportunities.• Economic data is necessarily US based, as this the main marketthus far.• Several US studies conducted:− US level− State level− Shale play level
US Wide Impact• A study by IHS in October 2012 assessed the economic impacts ofunconventional oil and gas on the US economy.• Covered unconventional oil, tight gas and shale gas.• The headline findings for shale gas only were:− Upstream capital investment in 2012 of $87 billion− Lower 48 employment of over 900 thousand in 2012− Valued added of $121 billion in 2012− A projection that capital expenditure of almost $3.0 trillion would be madein unconventional natural gas activity between 2012 and 2035.
US Economic Impact• For the US market this strongly suggests that the directopportunities are in the mining and manufacturing elements, e.g.:− Drilling rigs, fracking and associated equipment. Scottish companiesneed inventory of equipment in the US to provide the drilling services,consumables and equipment.− Manufacture of equipment. This includes the capital equipment (drillingrigs, frack trucks, frack pumps, mud pumps, well heads etc.) and theconsumables (drill mud, tubulars, etc. ).• The indirect impacts are greatest in the service sector. Movingexperienced professional staff around the world is already acommon element of the oil and gas service industry.• The labour opportunities are also greatest in the service sector. Asmany Scottish oil and gas workers operate as one personbusinesses, this is a potential opportunity for these individuals.
UK Economic Impact• Using US analysis and transposing this to UK• Using capex and well numbers for the UK’s Bowland Shale− A mid scenario of well development of 400 wells drilled over a period of9 years.− A capex of £10.5 million per well• Estimated value added of £7.7 billion• Expectation that estimates of UK shale resources will increase withnew BGS data, may increase economic impact
Supply Chain• Many elements of the unconventional gas supply chain are also partof the conventional supply chain.• Unconventional sector has important differences:− Cost base, margins lower, with high capex for the total recoverableresource− and service levels that are required for economic success in theunconventional gas market.• The global market for specialist equipment and services is the mainprize for Scottish suppliers• Development of unconventional gas in UK may also provideadditional opportunities for local providers of non-specialist goodsand services.
Supply ChainThe early stage development markets have the greatest need forinnovation or adaptation of existing supply chain offers. Hence:− Scottish companies wishing early market share will need to invest now tomatch the short and medium term exploration and developmentopportunities.− These earlier stage opportunities may have higher barriers to entry as theymay need prior experience in the unconventional gas sector. There will beestablished competition in the exploration and development phases, albeitpredominantly US based.
Conclusions• Short term market will be dominated by the US• US market factors are unique, but there is potential growth in UK,Australia and other markets• Scottish companies have acquired businesses in the US to breakinto the dominant market• Specialist Scottish suppliers have orders for Australia and othermarkets• Scottish Enterprise now considering options to support exportpotential.