Shale gas rush

Those who remember Jack London’s Klondike Gold Rush blockbuster series will know what I’m talking about. They unearthed gold by sheer accident, unlike in California’s Gold Rush. Then, in 1853 Levi Strauss started making denim pants to gain international recognition as the producer of jeans. His material has since been regarded as the most resistant daily wear available. At the time they used indigo as the most enduring dye. The first pair of jeans sold for $1.46. Its big pockets could accommodate a gold nugget or a Colt six-shooter, a very handy thing at the time. Now we are experiencing a shale-gas-gold-rush (some even call it a shale gas revolution).

Gas fields have been monopolized by a limited number of countries, which has turned this energy resource into a sort of energy weapons. This, along with soaring gas prices has forced consumers to search for an alternative, moving in a variety of directions, primarily seeking alternative energy sources, including solar batteries, windmills, and so on. Although the European, US, Canadian, and Australian governments are encouraging the usage of alternate energy sources, the latter have so far been far behind conventional sources. Shale gas, coal bed methane, appears to be the sole competitor.

Chesapeake Energy was the first to start extracting shale gas using progressive technologies. In fact, the process was a technological breakthrough. Instead of drilling countless vertical bores, they drilled just one, with horizontal ones branching of at great depth, reaching up to 2-3 thousand meters, pumping down a sand-water-chemicals mix. This hydraulic shock ruins the walls of gas pockets, releasing the gas which is gathered and pumped up through that vertical bore. This technique allows to extract gas in densely populated areas as it requires minimal surface infrastructure. So far, the US is the sole owner of this technology, which means that applying it anywhere else in the world requires using only US equipment.

According to the latest estimates, the United States has over 56.6 trillion cubic meters of shale gas, enough for more than a hundred years’ consumption. Russia’s LN gas deposits total 43.3 trillion m3. In 2007, US shale gas output amounted to 34 billion m3; in 2008, it was 57 billion m3. 80 m3 were extracted in the first half of 2009. Gas produced by unconventional sources, as a part of the US total, will increase from 50 percent in 2008 to 60 percent in 2030. Experts predict US shale gas output will increase three, maybe four times in next 10-20 years. In 2008, it provided about 10 percent of all US gas output, whereas all nonconventional gas sources, including recycled mine-pit methane, covered about half of the output.

Canada took up large scale shale gas extraction right after the United States (e.g., Horn River and Montney). National Energy Board experts predict that shale and solid source gas output will reach 200 billion m3 a year.

Shale gas extraction substantially changes the distribution of gas resources, primarily because the shale deposits appeared to be placed on a more “planned” basis. They are present even in countries denying the conventional gas fields, like Poland where considerable shale deposits have been discovered. The newly discovered fields are so important that Wood Mackenzie expects them to increase EU gas resources by 47 percent.

This is enough for Poland to meet all its gas requirements – at the moment the country has to import 72 percent of its gas consumption. Also, considerable gas fields have been discovered on the Baltic coast. The first test drillings have revealed tangible deposits. Europe has a great deal of shale deposits, ranging from Hungary to Poland, and from France to Great Britain.

The People’s Republic of China is also very interested in shale gas extraction. Morten Frisch, the senior partner of Morten Frisch Consulting, says that if the Chinese succeed in using their gas deposits the same way the American have been using theirs, this will radically change the national energy supply pattern. The PRC’s largest energy company, PetroChina Company, Ltd., estimates the shale gas deposits at 45 trillion m3.

Shale gas extraction also has a large number of opponents, primarily ecologists who are concerned about pumping water, sand, and chemical reagents with a large benzol content into each bore. Many of these believe that this is a sure way to poison groundwater. “Every US housewife has heard about shale gas, but perhaps not all of them are aware of the threat that such gas extraction poses to the drinking water resources,” says Gazprom’s Vice President Aleksandr Medvedev. US experts, however, believe that this concern is ungrounded. Shale deposits are much deeper than the fresh water ones. John Curtis of Colorado School of Mines, the leading US geological research center, says that at such depth water is largely in the form of a caustic brine which is no good for consumption.

There are enough skeptics in Russia. They claim shale gas extraction doesn’t pay off and is actually unnecessary. As for its high cost, reality defies this opinion, which is widespread in Russia. Gazprom is selling gas at $250 per 1,000 m3, while it costs slightly over a hundred dollars in the United States. The usage of new extraction techniques has resulted in further lowering the cost of gas and utility bills.

Another problem is the low debit of a shale gas well. It requires continuous drilling, passing through new horizontal wells, with gas extraction being incomplete. However, these technological problems can be solved. For example, they are extracting gas from wells that were closed at one time, but which still contain oil. Modern technologies can draw out what was previously impossible to extract or too expensive. Huge investments are being made into shale gas extraction. Naturally, this process is being constantly upgraded, the result being an increasing gas extraction rate and falling production costs. Measures will be taken to enhance its environmental safety, which is especially important in Europe due to its rigid environmental legislation. Halliburton (US) has started applying an ultrasound technique to improve oil recovery.

All criticism notwithstanding, it is clear that shale gas extraction will continue to expand. This spells a cardinal redistribution of the gas market and, consequently, all energy sources. Incidentally, the monopolist gas suppliers’ desire to boost gas prices stimulates the active evolution of extraction technologies that were previously considered unprofitable. Here the political factor is as important as the business one, in some cases even more so.

Of course, it would be erroneous to promise consumers that they will shortly be able to rid themselves of gas pipelines. The European gas market demand will keep increasing and meeting it by using just LN gas appears impossible in the foreseeable future. There is, however, an established and convincing fact: gas prices won’t increase the way they did in 2007-08. Already in 2009 gas spot prices dropped to $120 per 1,000 m3. Experts note that shale gas is setting a $200-250 maximum price per 1,000 m3.

Almost 40 years ago, several Arab countries tried to blackmail the US by raising oil prices. Washington responded by establishing an oil exchange, so that now, despite all the disadvantages of speculations, there is one big advantage: no government can order market prices to be changed in any way. The same applies to LN gas as the most important line of this business.

After the US stopped importing gas, gas supplies were directed to other regions, above all to Europe. This allowed to form a spot gas market exchange which is competing with the Russian one, keeping the prices under control, and lowering them of late. In 2009, Gazprom lost $22 billion worth of revenues in Europe alone, compared to 2008.

For Russia and Central Asian countries an increase in shale and LN gas output is bad news. For other countries this means a worse stand when negotiating gas prices with China. Russia is faced with the same problem, with gas pipeline construction projects involving Central Asia, Pakistan, and India being delayed.

Liquefied gas exchange makes any submerged gas pipeline projects absurd. Moscow believes that the pipelines in the north and south will handle all gas supplies to Europe when under full payload. Meanwhile, the cost of gas transportation will increase many times over. The cost of building submerged pipelines, particularly the structural elements, will surpass the depreciation charges twofold. To make up for the contractor’s disbursements, the Russian state made the submerged pipelines previously built by Gazprom tax-exempt. Within seven years of operating the Blue Stream, Russia’s federal budget lost $3.8 billion, whereas the Yamal-Europe surface pipeline produced $14.5 billion worth of tax deductions. In other words, changes in the structure of gas supplies on the world market will make gas pipelines less competitive, and will expand the market’s LN gas niche.

The energy market’s geopolitics is changing as the ways and means of supplying gas are diversifying on an increasing scale. Previously the main problems of the gas sector were divergences with transit countries, in terms of transit and pipeline domestic consumption prices. Now that the key European consumers have gas supply alternatives, with spot LN gas supplies being able to directly influence contractual terms and prices, these geopolitical relations have become more complicated.

I mean freedom of the seas, gas tankers’ freedom of passage in the international and territorial waters, exploitation of special terminals, and the rules of shelf shale gas extraction.

In view of all this, gas transit to Eastern Europe and Germany through Ukraine remains the most economic and safe option, and it will remain so for the foreseeable future. Bypasses for Russian gas/oil supplies in the south or north are purely political possibilities, while reflect badly on Gazprom’s competitive capacity on the European market. There is also the possibility of a sudden drop of gas prices several years from now. Then the two newly built gas pipelines will risk idling, along with billions of dollars’ worth of losses.

Whereas Russia appears to have purposefully ignored the shale gas “gold rush,” Ukraine hasn’t noticed it, period, even though this phenomenon can cardinally change the very structure of the Ukrainian economy, possibly its entire geopolitics as a transit country. It is necessary to realize that the increasing shale and LN gas output rate will damage Ukraine as well. Its importance as a transit country will dramatically fall, although this won’t happen overnight, so we still have time to take advantage of the changing situation. Under these circumstances, the pitched struggle of our ranking officials in the energy sphere for lowering Russia’s gas prices appears questionable, considering that Ukraine has large shale deposits, the Black and Azov Sea shelf with its gas fields, reserves in the Poltava and Kharkiv oblasts, and the possibility of LN gas supplies. There are investors prepared and willing to finance the Odesa terminal. Before gas starts being supplied from the Caspian region, it can be received from Algeria and the Persian Gulf. Its cost won’t exceed $180-200 per 1,000 m3. Russia will have to lower its gas prices, otherwise it will be faced with a fall in European consumption. So what this struggle is all about, considering that we keep lagging behind in nuclear power engineering?

US and UK sources point to Ukraine’s considerable shale gas deposits, although there are no precise statistics or accurate geological and technological studies. Therefore, it is necessary to concentrate on a quick search for investors for our gas industry rather than on the humiliating talks with Moscow. There is no use in taking rash decisions without having an effective strategy that can provide for all technological revolution contingencies and geopolitical scenarios.

In Europe and the United States, the revolution in the gas sector has caused a great deal of excitement, both in business and political quarters. They are pinning big hopes on reviving their economy and ridding themselves of gas blackmail that previously dictated gas prices and threatened to freeze Europe to death every winter. Chesapeake Energy’s CEO Aubrey Mc.Clendon says this was like an intrusion from high above; the oil prices soared precisely when we were fighting to overcome our economic problems, being worried about global warming, with the threats to our national security remaining high. Then one day we woke up to discover that we had enough natural gas around us. Ukraine also has enough of it, but instead of taking advantage of this natural wealth and using it to develop our economy, we are trying hard to talk our haughty neighbor into giving us crumbs from his table. When will we get sick and tired of this?