Caution Required in Shale Gas Boom

20 July 2011 FDI Team

Background

In an agreement that may signal the beginning of a “shale gas boom” in Australia, Houston-based ConocoPhillips last week agreed to a company farm-in deal with Perth energy junior New Standard Energy (NSE). The $100 million agreement will provide capital for exploration in NSE’s Goldwyer shale gas project in Western Australia’s Canning Basin. Economic opportunities and energy security motivations, however, must be negotiated against potential shortcomings of the emerging industry.

Comment

Shale gas has been heralded as the fossil fuel of the future, with ‘enormous potential’ according to US President Barack Obama, who cites it as one of the few issues that receives bipartisan support in America. US oil and gas majors are actively seeking joint venture opportunities, to satisfy forecast global demand, in Europe, Africa and, in the latest instance, north-west Australia. The investment of ConocoPhillips, responsible for 23 per cent of US gas production, in NSE’s shale project in the Great Sandy Desert, will provide a 75 per cent stake in the project and allow the energy giant the option of becoming the project operator.

Environmental and economic analysts, however, contend that the emerging shale industry has not received the same level of scrutiny as other established fossil fuels and the sector may be inherently flawed.

Hydraulic fracturing, the process used to liberate shale gas, has received considerable criticism and has recently been banned in France, with other European states considering following suit. Further, recent research suggests that shale gas wells fade much faster than previously forecast, requiring increased fracking and, accordingly, increased toxic waste.  

Leaked industry e-mails, published late last month in the New York Times, raise concerns about the economic sustainability of the commodity. Energy executives, industry lawyers, state geologists and market analysts have likened shale gas to a Ponzi scheme, with ‘money pouring in’, even though shale gas remains ‘inherently unprofitable’. Several of the e-mails compare shale to previous financial bubbles, such as housing and technology stocks.

A former Enron employee, who had taken a position at an energy company, wrote in an e-mail regarding shale gas, ‘I wonder when they will start telling people these wells are just not what they thought they were going to be?’ He drew parallels between shale gas companies and the behaviour of executives at Enron.

The newspaper found that less than 20 per cent of the United States’ largest shale formations in Barnett, Texas, Haynesville, East Texas and Louisiana and Fayetteville in Arkansas were productive. The New York Times found that, in a review of 9,000 wells, less than ten per cent had recouped their estimated costs by the time they were seven years old.

The Australian shale gas industry faces even greater obstacles to production. Despite a rising industry consciousness of shale’s potential, demand for equipment remains low and, thus, current costs remain substantial. Citi analysts argue that shale projects would cost three times as much as American projects. Labour costs alone would be 40-50 per cent higher than in the US, due to low unemployment. Australian financial analyst, Greg Peel, argues that the absence of Australian energy companies, such as BHP, Santos and Woodside, reflects industry concern over shale’s long-term sustainability.

Contenders, however, argue that as the industry develops, shale gas economics will advance with increased gas prices and technological developments. At an energy industry conference in April, Steven C. Dixon, Executive Vice President of Chesapeake Energy, argued that ‘shale gas supply is only going to increase’ in response to well performance. Shale gas proponents cite energy companies’ maturing strategies to develop wells that produce additional liquids, like propane and butane, as proof of the sector’s long term future. Profitability of gas, within the Australian context, will be further bolstered by strategies arising from the Carbon Tax, promoting a transition to gas-powered energy and increasing demand for natural gas.

US and European gas markets should serve as a microcosm for the emerging shale industry; ad hoc policy has proven detrimental to the development required for the industry to remain sustainable. If Australia is to capitalise on shale energy, strategic proactive policy is required. Government must manage the expectations of industry and community stakeholders and develop strategy to ascertain the environmental and economic desirability and sustainability of shale gas. 

Liam McHugh

Strategic Analyst

FDI Northern Australia and Energy Security Research Programmes

 

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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