NATURAL GAS:

U.S. shale-drilling technologies finding new homes abroad

HOUSTON -- The United States is starting to see its shale gas revolution spread around the globe, but drilling technologies that allowed U.S. production to soar are likely to remain a North American phenomenon for some time.

Efforts are under way to export hydraulic fracturing technology that has dramatically increased U.S. gas reserves to Europe, primarily to Poland. The CEO of the French oil giant Total told an industry conference here that his company is interested in European shale gas development, and the Italian oil company Eni SpA is exploring shale gas potential in Latin America.

And China has authorized studies to determine the size and nature of shale gas reserves there. Experts say China's capacity is likely comparable to initial estimates of shale gas reserves in Europe. One estimate puts European unconventional gas potential at around 173 trillion cubic feet of total resources, a figure that rivals North American reserves, though many other experts doubt that either Europe or China enjoy reserves as high as those discovered in the United States.

But both European energy executives and U.S. oil and gas market experts caution that no one should expect the "shale gale" to wash over Europe anytime soon. Pawel Konzal, head of oil and gas industry research at the World Economic Forum, estimates that serious production of shale gas in Europe is still several years away.

"If you look at Europe, certainly we've seen in the last two years a great number of companies, which were traditionally not present in the European market entering, especially in central and Eastern Europe, so Germany, Poland, Hungary, Ukraine, doing preliminary research," Konzal said. Still, "from all the conversations we've had also at the World Economic Forum at the meetings with the industry, we can see that this is still eight to 10 years until the production will start."

China may not see serious shale natural gas developments for a decade or more, Konzal said.

There are myriad reasons for this, but chief among them are worries over the disposal of water used in the fracturing, which is also called fracking. Outside of Poland, shale gas receives mostly negative press in Europe, where the debate has focused on potential water contamination. Experts also point out that European populations are much less familiar with oil and gas drilling than their U.S. contemporaries, adding further hurdles to its widespread adoption.

"We cannot expect in Europe the quick development of shale gas," said Jean-Francois Cirelli, president of the energy firm GDF Suez. "We still have to convince all our stakeholders."

Shale gas is again the No. 1 topic at the annual IHS CERA Week energy conference here this week, as it was at last year's gathering.

Impressed by how quickly the breakthrough in hydrocarbon extraction has overturned international gas markets, speculation is rife over whether other nations have taken notice and are making inroads to spread gas use overseas.

U.S. gas producers are also being peppered with questions on whether they intend to begin exporting some of the U.S. supply as liquefied natural gas (LNG).

Thomas Farrell, CEO at Dominion Resources Inc., confirmed his company is considering investing in a platform for LNG exports from the East Coast, exploiting the abundant Marcellus Shale gas play. Exports could go not only to Europe but also to Asia, via an expanded Panama Canal once upgrade work is complete there.

But Farrell cautioned that talk of the United States becoming a major LNG supplier is just that at this point. "It may turn out that we don't do it at all," he said.

Drifting overseas

Nevertheless, shale gas development is creeping overseas, at least according to announcements made here this week.

Algerian Energy and Mines Minister Youcef Yousif caused a stir yesterday when he announced that his government's geologists have discovered shale gas reserves as large as some of the major U.S. fields and that his firm is moving forward on a pilot production that could see first production by the end of this year.

Yousif said Algeria aims to become the next major shale gas developer and invited Houston's community of energy experts and shale oil and gas field service providers to enter into talks on exploration options.

Some European firms are also eager to jump aboard the shale gas bandwagon.

They are trying to sell shale gas as a cheap and easy way to dramatically cut greenhouse gas emissions in a short period of time, pointing to examples in the U.S. Northeast, where a major transition from oil- and coal-fired generation to natural gas helped the region cut its CO2 emissions by some 33 percent in five years.

"We're going to need a lot of gas as a bridge and as destination fuel," to cut CO2 emissions, said Gertjan Lankhorst, CEO at GasTerra BV. "The U.S. and Europe are well, if not best, placed to combine environmental and economic aspirations."

But there is still a major perception problem to overcome in Europe, executives admit.

"Gas is considered less fashionable than speaking about renewables," said GDF Suez's Cirellli. But he has not totally given up hope. "I'm sure that economically we will win," he said.

There are also said to be regulatory barriers to shale development in many European countries. Yet industry officials consider it a positive that energy policy is still set at the national level and is not dictated to governments by the European Union's bureaucrats in Brussels.

In China, the picture is much murkier.

Unlike in Europe and the United States, gas imports in China are almost entirely devoted to household and industrial use, and not to power generation. And coal is so cheap and abundant there that the government and energy companies have little economic incentive to make the switch.

Some observers hold out hope that China's severe environmental problems will mobilize the government to expand gas's use in power generation, at least for new power projects.

Still, IHS CERA's China experts report that the potential gas resources there lie far from major energy markets, unlike in the United States, where the Marcellus is found just outside the densely populated Northeast. And China has almost no pipeline infrastructure that could accommodate it there, many point out.

Energy firms in Australia are said to be exploring shale gas potential in the western part of their country.

The aim is to add shale reserves to LNG export terminals already being built or expanded to accommodate several offshore gas projects. Australian exports of shale gas to China could pique Beijing's interest in exploring some domestic production.

Aside from Algeria and Australia, industry insiders say Poland is poised to become the first European nation committed to shale gas development there. Media reports of finds that could satisfy Poland's need for 150 years has apparently won the public over, as they remain very wary on their absolute dependence on Russian gas imports to heat their homes.

The shale story has already upended conventional thinking on energy markets in the United States, and it could do the same overseas if production gradually comes online and environmental concerns are alleviated.

Will gas dethrone King Coal?

Stephen Pryor, president of ExxonMobil Chemical Co., says his firm projects that by 2030, natural gas will replace coal as the world's second-largest fuel source, largely through the expansion of shale gas production.

"In the United States, the world's largest gas consumer, unconventional natural gas supplies have driven a 20 percent growth in U.S. gas production over the last five years," Pryor said. He added that cheap and abundant gas reserves are giving U.S. chemical manufacturers a significant cost advantage over their overseas competition, a trend that could increase pressure on governments to pave the way for development of shale reserves outside the United States.

John Rowe, chairman and CEO of the giant electricity supplier Exelon Corp., surprised many here when he advised that his peers give up on developing expensive renewable and nuclear power and focus on natural gas-fired generation instead. Exelon operates the largest number of U.S. nuclear power plants, and Rowe is said to have been a staunch advocate for expanded nuclear generation only a few years ago.

"I have never seen the degree of consistency in supply forecasts that exist for natural gas today," he said.

Several U.S. utility company executives say that, thanks to the shale boom, natural gas can now be got cheaper than coal. And the switch to gas could now be migrating to the Southeast, where several massive coal consuming energy producers are said to now be rethinking earlier plans to refurbish older coal-fired power plants, considering instead retiring those and replacing them with newer combined cycle natural gas fed generation.