Senior Partner & Managing Director, Vice Chairman, Energy Practice
Where to Focus Commercial Resources
In the late 1990s, rapid advances in horizontal drilling and hydraulic-fracturing technologies unleashed large-scale commercial production of shale gas in the U.S.1 By 2005, with the development of the Barnett Basin in Texas and the production bonanza that followed, the shale gas revolution was in full swing. Today, shale gas accounts for nearly 35 percent of total U.S. natural-gas production, compared with only 2 percent ten years ago, and it is on course to reach 45 percent in six to eight years. As a result—and depending on whether the government approves natural-gas exports—the U.S. could go from being one of the world’s largest gas importers to one of its largest exporters. Two licenses have been granted so far for liquid-natural-gas export terminals (Sabine Pass, Louisiana, and Freeport, Texas), with at least 15 other applications in the queue.
At the same time, the race has begun to explore and develop shale gas resources elsewhere in the world. The prize—abundant, low-cost natural gas—is likely to be an order of magnitude greater than the resources available in North America. This second revolution in shale gas development will have a significant impact on the global gas industry and ripple effects in many related sectors.
It is also clear that while the technology is mature, there are important challenges—and uncertainties—regarding the geology, economics, regulation, and social acceptability of shale gas development. In order for operators and investors to know whether, where, and when to focus resources, they must systematically assess each region and the specific challenges it poses to resource development.
Shale gas and shale oil are hydrocarbon molecules trapped in layers of rock (shale), each of which possesses unique attributes; for example, not all shale layers contain exploitable hydrocarbons. Shale gas is referred to as an “unconventional resource” because its geological parameters are different from those of conventional oil and gas reservoirs, with important implications for development.
Conventional and unconventional resources differ from one another in four main ways. (See Exhibit 1 below.)
The need for operating models geared to efficient large-scale drilling explains why it was smaller, independent oil-and-gas companies that spearheaded early shale-gas development in North America, and why these companies continue to operate more efficiently than the major oil-and-gas companies, which tend to be handicapped by slower decision making and more rigid organizations—resulting in higher operating costs. Eight years after the start of the shale gas revolution, the vast majority of the companies operating profitable dry-gas plays (development opportunities in which hydrocarbons mainly take the form of gas rather than liquid) are still independents.
But the majors are now adapting the business models of their independent counterparts, whose advantage in developing unconventional plays is likely to diminish. Since 2006, the majors and the national oil companies have spent more than $120 billion on acquisitions of independent shale-gas producers.
A key challenge for operators and investors is determining where to explore for shale gas basins and what “good” shale is. There are six key exploration parameters:
Once exploration has started, there are seven core parameters for assessing the commercial potential of a shale gas basin:
Until recently, shale gas development was almost entirely a North American phenomenon. According to the latest U.S. Energy Information Administration (EIA) shale-gas study, the U.S. and Canada hold 16 percent of the technically recoverable shale-gas reserves.2 However, BCG research shows that at the end of 2012, about 110,000 shale-gas wells had been drilled in the U.S. and Canada, compared with fewer than 200 wells in the rest of the world. At that point, North American shale production (oil and gas) stood at about 6.2 million barrels of oil equivalent per day, accounting for 99.9 percent of global shale production.
Although it is clear that large shale resources exist in locations outside of North America, the question is the amount that is recoverable. EIA’s 2013 study, which is the new reference in the industry, estimates the technically recoverable shale-gas resources around the globe at about 7,299 trillion cubic feet (Tcf), of which approximately 1,150 Tcf are in North America. The extent of uncertainty is becoming clear as national institutes of geology release their estimates. For example, while the EIA study estimates Poland’s technically recoverable shale-gas resources at 148 Tcf, in 2012, the Polish Geological Institute estimated the country’s resources at only 12 to 27 Tcf.
In BCG’s view, it is too early in the exploration stage to provide a high-quality estimate of resources outside of North America. More wells need to be drilled, more data need to be analyzed, and more time is needed to understand the source rocks and build detailed reservoir models.
The EIA study proved that large shale resources exist outside of North America and, in particular, in countries that are currently importing gas or have very limited conventional gas reserves. We believe that a second shale-gas revolution will occur in the next four to six years that will have a significant impact on global prices of gas and liquid natural gas, on gas trade flows, and—in some regions—on the price of oil. It is therefore critical that industry players assess the potential impact of shale gas development on their existing operations and determine how best to seize the opportunity that it presents.
According to BCG’s research, six countries are clearly in the lead in the exploration for shale gas: Argentina, Poland, Ukraine, China, Australia, and South Africa. (See Exhibit 2 below.) These countries started their exploration efforts at about the same time, but each faces unique challenges that will affect the pace at which production occurs.This is exemplified by the experiences of the top-three leading countries:
Some traditional oil- and gas-exporting countries, including Saudi Arabia, Russia, Brazil, Colombia, and Algeria, are starting to explore for shale and represent a second group of countries where development could take off. In addition to the uncertainty surrounding the commercial viability of these countries’ shale-gas reserves, however, their existing conventional resources could weaken the incentive to develop unconventional resources such as shale.
Beyond its direct impact on oil and gas markets, shale gas development outside of North America will have a significant positive economic impact on a number of related sectors. And these businesses represent attractive investment opportunities. There are four core services that are critical to shale gas development. Without any one of them, there can be no production from a given well.
A second group of less essential sectors will also be important to the industry’s expansion.
Shale gas is a complex resource to develop, and operators have far less experience with it than they do with conventional oil and gas. Not all shales are commercially viable, and in many regions, geological, commercial, and regulatory challenges will prevent the relatively rapid, large-scale development that is occurring in North America.
But vast shale-gas resources are known to exist outside of North America, and development over the next four to six years promises to have a dramatic impact on the global gas and related industries. These are still early days in what is likely to be a long race in a rapidly changing environment. To be successful in focusing their resources, operators and investors must continue to critically assess each region in terms of its changing geological, commercial, and regulatory challenges. Complementing this highly structured and granular view should be the ability to respond rapidly to opportunities as they arise.