A Challenging Outlook for International Shale



The recent decision by state-owned China National Offshore Oil Corporation (Cnooc) to shelve its shale gas project in Anhui province is the latest sign that the shale revolution that transformed the U.S. energy industry is unlikely to replicate itself in China. The move comes a few months after Chevron abandoned its shale oil ambitions in Poland, joining ExxonMobil, Eni, and a number of other producers in backing away from development projects in the country. Poland and China are far from the only countries with attempted and failed shale development projects, but they contain some of the best shale geologies outside of North America, and the largest and most promising resources in Europe and Asia. In the case of China, the collapse in oil prices is the most significant reason driving Cnooc to abandon the project—shale projects, particularly in their inception, are expensive, and oil prices below $60 per barrel undermine the viability of covering costs for shale development. One of China’s other state-owned oil companies, PetroChina, scaled back on a shale project with Royal Dutch Shell located in Sichuan province last year. The Chinese government has grand ambitions to develop the country’s shale gas formations as a way to both support its manufacturing industry and offset the country’s rampant coal consumption (and the debilitating air pollution that comes with it). Beijing announced only last week that it would close the last of the city’s four major coal-fired power plants by 2016, replacing them all with gas-fired plants. But China’s imports of natural gas have already surged from zero in 2006 to 2 trillion cubic feet per year in 2014, and development of shale gas resources would help offset the import bill and meet climbing natural gas demand. Unfortunately, petroleum geologists have yet to successfully extract natural gas from China’s more promising formations. An additional barrier exists in the fact that almost all of the country’s shale gas formations lie in regions with inadequate water supplies to support fracking operations—visualized in our map below.

Low oil prices only make a difficult situation worse. But for oil companies hoping to replicate the success of the U.S. shale oil and gas boom abroad, challenges occurred long before the oil price collapse began in October. In Europe, the reasons vary, from sanctions in Russia, as well as the conflict between Russia and Ukraine, to a ban in France, a moratorium in Germany, public protests in the United Kingdom, and geological challenges in Poland. Anti-fracking movements and regulations in EU member states contradict recent pushes for greater European energy security, against a backdrop of Russian aggression in Ukraine. Last year, Russia cut off gas supplies to Ukraine for several months due to various disputes surrounding Ukraine’s failure to pay its natural gas bill. In February of this year, Russia’s Gazprom renewed threats to terminate its contracts with Ukraine, and potentially cut off supplies to the rest of Europe in the process. With so many European countries almost entirely dependent on Russian natural gas supplies, there is significant incentive for EU countries to develop domestic resources and sever their reliance on a hostile supplier.

However, although every shale formation is different and presents new challenges for producers, it’s safe to say that geology is really not the only problem. According to EIA, the United States only accounts for about 10 percent of global shale oil and gas reserves. But an enthusiastic industry, as well as ample supporting infrastructure, and extraction-friendly property rights, have enabled the shale bonanza in the United States. In Poland, the cost to drill an exploratory well is nearly twice as high as in the U.S., since industry needs to import the drilling equipment, and Poland’s roads and other infrastructure are not as sophisticated as in the U.S. Furthermore, although the Polish would actively embrace the opportunity to move away from dependence on Russian gas, public opinion is sour on hydraulic fracturing. For example, one well in southeastern Poland was recently blockaded for 400 days by local residents with environmental concerns—although some sources familiar with the situation allege that Russian interests are financially supporting anti-fracking environmental groups. The country’s bureaucracy has also served as a significant deterrent to prospective international investors. Although a few small independent companies are still drilling exploratory shale gas wells in Poland, the major players have abandoned their projects, and the current outlook for the industry is weak at best.

There is one glimmer of hope on the international shale landscape. Argentina, who’s vast Vaca Muerta formation exceeds U.S. shale resources, has producers drooling in spite of a government that presents endless regulatory hurdles and tax obligations on international investors, and has appropriated resources from international companies in the past. Chevron has already invested $2.8 billion in the Vaca Muerta shale, and Malaysia’s state oil company, Petronas, just penned a deal with Argentina’s YPF. Shell and Total have also inked deals in recent months. While significant production volumes have so-far eluded producers at this stage, early wells have yielded promising results.