Maximizing Commercial Potential of Shale Gas

Adelaide Energy Chief Commercial Officer Neil Young announced to delegates at the Shale Gas World Australia 2011 conference in Adelaide that Australia is becoming increasingly recognised for its shale gas potential.

Young’s presentation focused on the Nappamerri Trough, gas markets, maximizing commercial potential and the increased demand for gas storage.

Young began by highlighting two key advantages of the Nappamerri Trough. “The Nappamerri Trough is the most advanced and arguably the best located of the shale plays,” he said. “But there are quite a number of other ones.”

Young said a number of international oil companies and majors had started taking positions. “The space is really warming up,” he said. “I think it’s warming up a lot quicker than coal seam did whereby we saw locals well for a few years before we got internationals coming in.

“I think that has to do with the realization over the last 5-10 years that Australia is a great place to do business if you are an oil and gas company.”

Young noted a number of reasons for this including relatively low sovereign risk, low population density, acceptable geology, and Australia’s proximity to Asia.

Young said the Nappamerri Trough was at the forefront of shale gas exploration in Australia. “Geologically, the area has very thick and carbon rich shales and tight sands,” he said.

“Gas presence has been established through earlier drilling and I think that is a key point.

“If you’ve got existing well control, shale gas is an engineering not an exploration problem. If you haven’t got it then forget about it because it’s just too expensive in my view.”

Young then went into further detail regarding what he saw as the Nappamerri Trough’s advantages for exploration, citing its geology with a 2C resource booking, and its domgas market access. “It’s at the heart of the eastern Australian pipeline system,” he said.

He also pointed out the Nappamerri Trough’s international market access, infrastructure, community acceptance of oil and gas exploration spread over 60 years in the region, the politics, and the mostly desert scrub landscape with its extremely low population density as other advantages.

Turning to the topic of shale gas market dynamics in Australia, Young said the current base gas market demand was growing at 700 PJ per annum and there was a depletion of conventional gas supplies. “The CBM reserves are largely committed to export markets and as evidenced yesterday, very demonstrably, the LNG exporters haven’t got enough gas to fill their planned projects,” he said.

Regarding future gas market possibilities, he noted Australia’s growing liquids deficit – 5PJe per day by 2015 – could mean massive potential new demand if gas substitution occurred, and the low quality coal in South Australia and Victoria highlighting the simplest carbon solution for Australia was to replace with gas.

Young then presented a slide detailing a dynamic competitive analysis. “This really goes to that point I mentioned earlier – people saying, ‘well shale gas is not competitive, its production costs mean it won’t find a home in the Australian market’. I think that analysis is shallow. It’s based upon a fixed view of the world.”

One of the points the analysis then made was that current East Coast gas prices were set by historical costs of conventional gas supply, but such supplies were rapidly depleting whilst demand was increasing.

“Therefore the marginal supply of gas won’t be conventional gas anymore; it will be some form of unconventional gas.”

The analysis also noted that Western Australia showed historical gas prices could increase quickly as demand expanded while traditional supplies declined, and the issue for the Nappamerri Trough shale and tight gas was not its absolute cost, but where it sat on the supply stack.

Young then talked about the lessons from CBM for shale gas in Australia. “I think the most important lesson is that very large resources are highly attractive to the deep-pocketed but opportunity constrained majors like IOCs and NOCs,” he said.

Another lesson was that Australia was still an attractive investment destination, while furthermore, Asia was a world growth hub for the foreseeable future. “Australia is positioned very well to supply that region given its location to the south of Asia,” he said. “The next point CBM demonstrated was that unconventional gas can be exported.”

According to Young, other lessons learned from CBM were current dogmas pricing was irrelevant to acreage, the service sector will follow large resources which will reduce costs over time, and the most profitable role for local companies was to get in early and establish resources.

Young then moved on to the question of how to transmit those lessons into maximizing commercial potential, from the point of view of the small operator. Young said the first thing was obtaining the acreage then funding the exploration. “That’s much trickier in shale gas than it was with CBM,” he said. “Exploration here is expensive.”

He said the next stage was to establish the resource followed by proving commerciality, optimizing an exit path and recycling into the next play.

With another slide, Young posed the question – what could the Nappamerri Trough be worth? The slide highlighted several considerations regarding this question, including that shale assets in North America were often valued on a per acre basis. Young added, “Unconventional acreage doesn’t require structural traps, rather thick blankets of gas bearing formation over large areas.”

Further points were that per acre metrics vary from shale basin to basin, which reflected different levels of maturity, gas condensate mix, pressure, and therefore, production rates. Also, it’s arguable that traditional reserves definitions have not caught up with commercial practice in North American Shale valuations and transactions. The final point on the slide stated that typical deal prices have been US$10k –20k per acre.

Young continued his presentation with a look at shale gas and gas storage. “An increasing share of gas supplies will have to come from unconventional reservoirs of various types be they shales, coal seams or tight sandstones,” he said.

“I’ll make the observation that such reservoirs are inherently less flexible, less amenable to being turned on and off - whether it be traditional high perm reservoirs that existed in the Cooper and Gippsland before. So we combine that supply and increasing lack of flexibility with demand increasing variability then the system has to be balanced.

“The balance has to come from underground gas storage.”

Reported by Simon Trayhorn