The next stage of the shale boom is underway. . .overseas.
While U.S. producers are going gangbusters—shale oil and gas production are way up year over year—the rest of the world is getting its collective act together.
Where’s the next Bakken or Eagle Ford? It's time to think globally. . . .
According to the U.S. Energy Information Administration (EIA), the rest of the world is littered with "technically recoverable" shale. Concentrating on shale gas, for many import-heavy countries there's huge incentive to get production underway. After all, importing liquefied natural gas (LNG) from the Middle East or piping gas from the likes of Russia isn't high on anyone’s list. It’s only a matter of time before swaths of the “trapped” shale gas start making a mark.
How much gas is hiding underground? According to the U.S. EIA, a lot!
Using the Advanced Resources International (ARI) estimate for U.S. shale reserves, the U.S. has 1.16 quadrillion (with a Q) cubic feet of recoverable resource. At current consumption levels that represents nearly 40 years' worth of shale gas (not counting our remaining conventional resources.)
However that huge resource only represents 14% of the world's recoverable shale gas. There are massive deposits located in China, Argentina, Algeria, Australia and Russia. The way I see it, it's not "if" this shale gas will be produced, but rather "when."
Demand for clean-burning natural gas is one the rise. Indeed, when it comes to this abundant resource we're quite literally talking about the energy of the future.
Asia, Europe, South America and even the Middle East are poised to ramp up natural gas demand. Besides being an abundant fuel of choice, natural gas is also much cleaner burning than coal. It's only a matter of time before the climate-change crowd starts backing this bridge fossil fuel.
Add these two trends together (abundant underground supply, burgeoning demand) and you’ll see there's a huge pressure gradient at work—that is, the incentive for countries outside of North America to develop shale is getting higher by the day.
The mainstream is starting to ramp up the coverage, too. Yesterday several stories hit the airwaves about some of the most promising non-U.S. shale plays. Let's separate the wheat from the chaff.
In no particular order Russia, China and the UK have the capability (and underground assets) to become the next game-changing shale players. Here’s why. . .
We’ll start with the most shocking front-runner: the UK.
"Hey Matt, the UK isn’t even on the top 10 list for recoverable resources," you say. Well, that’s true! But, sometimes the demand/need for gas can boost an opportunity to the forefront. That’s precisely the case with the UK.
As it stands the United Kingdom is a net importer of natural gas, which has been the case for the past 8 years or so. That said, the 26 trillion cubic feet (tcf) of recoverable gas that lays under the soil in Northern England could be a crucial part to balancing the nat gas trade deficit. When you do the math that 26 trillion—all else held equal—could make the UK "import free" for an additional 17 years.
And this week the politicos showed their aggressive hand…
According to the Wall Street Journal, "U.K. Prime Minister David Cameron said on Monday that local authorities that allow shale-gas development to go ahead will be able to keep the entirety of business taxes they collect from shale gas sites, up from the current 50%. This commitment will be directly funded by the government, the prime minister’s office said in a statement. "
Tax benefits, to the tune of $2.8 million per well? That could get things kick-started in short order. Keep an eye out, here.
Next on the hit parade is a no-brainer in the case of future shale development, China.
As you can see on the table above, China is #1 or #2 on the list of recoverable shale reserves (depending on what estimate you use for the US). Either way, China is in the "quadrillion" club, which means the natural gas under their soil is an absolute game changer.
What’s more, the gas isn’t in some far off "middle of nowhere" deposit. As of the latest U.S. EIA estimates, much of the gas lies in the Sichuan Basin, smack dab in the middle of the country.
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Once China cracks the code on this massive shale find, you better believe producers, service companies and pipeline players are all going to play a role. With China's net imports of natural gas skyrocketing in the past few—from a trade balance in 2006 to current net imports of nearly a trillion cubic feet—you better believe the Chinese will be making moves towards shale production.
The last country we'll highlight shouldn’t come as a surprise, either. After all the Russians are just as strategic as the Chinese, and they've got plenty of shale gas to go around!
“Russia alone has the technology, infrastructure, water and political will to be the next revolutionary shale venue—not to mention a lot of sparsely-populated space in which to drill without public backlash,” Oil Price reports.
The other factor that will add to Russia’s soon-to-boom shale gas is the country's abundant shale OIL reserves. With more shale oil production on the docket from the state-owned Rosneft, you can expect to see more "byproduct" shale gas production. A trend very similar to what we saw here in the U.S.—with booming Eagle Ford oil, the natural gas started to flow as well.
Once an economic model is figured out, expect to see a blast of production from Russia.
There are several "runners up" awards to hand out here, too. . .
Canada - The only reason I didn’t mention Canada in the top-three was that the country already very closely resembles the U.S. shale boom. Massive resources, established resource laws and an able and willing workforce make Canada the natural extension to what’s happening in the U.S. That said, the opportunities
Mexico - Above I asked where the next Bakken or Eagle Ford will be found. Well, clearly since the Eagle Ford formation runs past our southern border, the easy answer is Mexico! If Mexico’s plan to open its energy markets to outside investment holds true, it's only a matter of time before the big players from the U.S. start jumping over the Rio Grande. When that happens, this black horse in the shale game will gallop ahead.
Argentina - Over the past five years Argentina went from being a natural gas exporter to a natural gas importer. You better believe that Argentina’s government wants nothing more than to tap the massive shale gas reserves hiding below much of the southern part of the country. Behind only China and the U.S., Argentina has massive recoverable resources, and upside in this shale game.
Australia - If it wasn't for Australia’s conventional and offshore natural gas production I think the country would have much more incentive to crack the shale code beneath its resource-rich soil. Australia has the gas and the know-how, but unlike the U.S. Australia is (and has been) a very strong exporter of natural gas. Keep an eye on this player, but wait for incentive or a mother lode-type deposit for this shale game to kick into high-gear.
Getting an outside opinion on the global shale race, our resident geologist, Byron King, has this to say: "In many other locales around the world, governments want to promote development, and especially repeat U.S. success in fracking. For example, there are large areas of Russia, China, the Middle East and Argentina that look promising in terms of geology and shale deposits, etc."
But "just" good geology is not enough. Outside of the U.S., most other nations lack the legal environment—let alone the oil service industry and equipment—to make fracking for shale oil and gas worth the cost.
Consider this metric. In 2012 in the U.S. and Canada, the energy industry drilled over 6,000 wells for unconventional oil. Outside North America, fewer than 100 unconventional wells poked the earth in 2012. So the rest of the world has much catching up to do.
Indeed, the key behind the U.S. 's success in shale was the free market, plain and simple.
Property rights, resource rights, transparency in the law, tax breaks for energy producers, lack of early government intervention, tons of private seed capital and a willing and able workforce. Without that, and bountiful underground assets, this boom wouldn't been a bust.
Will other countries be able to replicate the exact same run? Of course not. But we’re in the early innings of the global shale gas game, and as the players take the field there will surely be some investable action.
Although the production numbers may not come fast and furious, there will be a lot of long-term opportunities flashing across our screen in the coming years. The global shale game is underway!
Keep your boots muddy,
Matt Insley
Daily Reckoning
