Dar & Company

Emerging International Shale Gas:  Poland and China Lead
(First published on www.SeekingAlpha.com on January 14, 2011)

The shale natural gas industry continues to commit talent and technology to multiple emerging shale plays beyond the now traditional domains of the US, Canada and Australia. Shale gas resources are so globally dispersed and potentially so large that a majority of the world's nations are candidates for study and eventual development.

In Europe, Poland has the clear lead, and in Asia it is China. Eastern Europe and Turkey are ahead of Western Europe, and India is about 3 to 5 years behind China. In Latin America, Argentina has decided to be the exploration leader (Exxon-Mobil (XOM) has been granted 2 blocks in the Neuquén Basin, which has substantial shale and tight sands natural gas potential according to Repsol YPF (REP), the Argentine company), while in Africa (via Sasol (SSL)), Morocco and Tunisia have evinced the greatest interest. Russia, Brazil and very likely the Middle East have tremendous shale gas resources, but the conventional gas opportunities there are so vast that there is no pressing strategic reason to explore, much less develop shale gas.

It takes the right combination of technology, entrepreneurial acumen, business practices, access to physical infrastructure, mineral ownership rights and laws, regulatory system and network of many field service companies to turn the resource into reserves and then commercial production. Only in the US can an emerging play go from declination to production in a year. It takes longer in Canada and Australia and will take much longer everywhere else because the right combination does not exist and will have to be fashioned. This is why Poland and China are of such interest to the rest of the world: their models may have more to offer Asia, Africa, Europe and Latin America than the US model.

The pressure on China to develop all of its natural gas resources and not only shale is large and immediate. While natural gas use per capita is declining in the US, it is growing rapidly in China and India. In the US, natural gas use is projected (by the US government) to be virtually stagnant over the next 20 years; it is forecast to at least double in China (over the next 10 years) and India over the next 5 years (according to their government agencies).

Currently natural gas accounts for less than 5% of primary energy use in China and 10% in India compared with the global average of 24%. China wants to sharply increase the share of natural gas in domestic consumption over the next 3 decades (quadrupling use over the next 20 years). By the end of this decade primary energy consumption in China may well exceed that in the US. In China, demand for space heating, auto fuel, petrochemicals and fertilizer is propelling gas use.

The Chinese claim that their shale natural gas resource base is over 1,000 trillion cubic feet (Tcf) even though systematic exploration for shale gas is in its infancy. The Chinese know that rapid development requires access to American technology, talent, operating experience and business practices. The two ways to obtain this are by investing in US and Canadian shale projects and leading companies (as do the Europeans, Indians and Africans as evinced by investments, alliances and partnerships involving, for example, Statoil (STO), Reliance Industries and Sasol) and by inducing foreign, chiefly, American companies to invest in Chinese shale (as well as tight sands and coal bed methane) exploration and production.

Later, of course, the Chinese will use their experience to invest in and control shale gas projects in several countries and compete with the very companies that taught and mentored them. The Chinese government has a goal of producing about half to a trillion cubic feet per year from shale gas reserves within ten years. BP (BP), Chevron (CVX) and Statoil are reportedly interested in investing in Chinese shale as are a few very large American independents. Shell (RDS.A) has an alliance with PetroChina (PTR) to develop the Fushun shale gas block in Sichuan province. China, of course, wants to nurture domestic skills and investment in shale. In November, 2010, China announced a licensing round for shale set aside for domestic companies. China will allow foreign companies to jointly bid with Chinese national oil companies on 6 shale play auctions in 2011.

India is proceeding at a much slower pace. Schlumberger (SLB) just completed the drilling of that country's first shale gas well in the Damodar Valley, under contract to the Oil and Natural Gas Commission. Schlumberger will drill 3 more wells as part of a seven stage pilot project in West Bengal and Jamarkand. Schlumberger estimates that India's shale gas resource base is 600 to 2,000 Tcf, which would make it comparable to or notably bigger than the estimate for China. However, Indi is even less explored for shale gas than China. Commercial production in India is perhaps 5 to 7 years away.

Poland is estimated to have a high quality resource shale resource base of 40 to 90 Tcf. It has attracted drilling commitment from Exxon-Mobil, Chevron, Conoco-Phillips (COP), Marathon (MRO) and several small independents.

FX Energy (FXEN) is drilling 3 wells at present in partnership with the Polish Oil and Gas Company. LNG Energy (LNGYF.PK) also spudded its first shale gas well in early January 2011. LNG Energy is using the same contractor, crews and equipment that a Conoco-Phillips/ Lane Energy joint venture used to drill 2 shale gas wells, not far from the LNG Energy well. Talisman Energy (TLM) plans to drill its first shale gas well in August 2011 followed by two more with the third well completion scheduled for January 2012. The Talisman well locations are close to those of LNG Energy, the Conoco-Phillips joint venture and PGNiG, Poland's dominant gas distributor.

Based on the E&P success in China, Poland and later India, several more countries in Asia, Africa, and Eastern Europe are likely to accelerate current licensing and exploration activities or start soliciting interest from foreign oil and gas companies to explore for shale gas. By the end of this decade shale natural gas production could be a commercial business in almost a dozen nations.