Unconventional Gas Market Appraisal Chris Bryceland June 2013
Agenda Headline facts Fundamentals of unconventional gas Global resources Selected markets Economic impacts Supply chain opportunities Conclusions
Headline Facts Shale gas has increased from 8% of US gas production in 2007 to 30% in 2011, and is forecast to rise to 250% of 2011 levels by 2035 In the US, upstream capital investment in unconventional gas in 2012 was estimated to be $87 billion, resulting in value added of $121 billion US investment has supported nearly a million jobs and capital investment of almost $3 trillion is forecast from 2012 to 2035 Other countries have started to exploit their resources (e.g. Canada and Australia) or are on the pathway to develop these resources (e.g. UK and Poland)
Implications of Headline Facts The role of Scottish Enterprise (SE) and Scottish Development International (SDI) is to identify and exploit opportunities for economic growth by supporting Scottish companies to compete, help to build globally competitive sectors, attract new investment and create a world-class business environment Provision of direct and indirect support services to the unconventional gas sector in the UK and overseas represents a potentially significant opportunity for Scottish supply chain businesses
Fundamentals of Unconventional Gas Two forms considered : Shale Gas Coal Bed Methane (CBM) Unconventional refers to gas that has not previously been deemed economically or technically suitable for recovery although in the case of Shale Gas and CBM this term is becoming increasingly redundant as unconventional gas is now a key part of the US gas market The product is methane (CH 4 ), exactly the same as natural gas
Fundamentals: Shale Gas Gas is contained within the shale formation at low density Gas migrates to the natural fractures in the shale Main elements: Vertical well Horizontal well along the shale Fracking to open fractures Fracking fluid to hold open fractures Production wells need to cover a large volume of shale to recover significant quantities of gas
Fundamentals: Shale Gas Gas production falls rapidly as the gas at fractures is finite Requires re-fracturing to increase production OR Requires large numbers of wells to be drilled to increase production
Fundamentals: Coalbed Methane Methane is present within coal seams Water pressure in coal beds causes methane to be adsorbed onto the grain surfaces of the coal To produce CBM the water must be drawn off first, lowering the pressure so that the methane will desorb from the coal and then flow to the well bore Coal stores six or seven times as much gas as a conventional natural gas reservoir of equal rock volume due to the large internal surface area of coal Much coal is accessible at shallow depths, making well drilling and completion less expensive than shale gas Exploration costs are also low since methane occurs in coal deposits, and the location of coal resources are generally well known
Global Resource Shale gas reserves more widespread than conventional gas reserves Offers countries with no history of hydrocarbons production the opportunity to develop indigenous resources with security of supply and energy cost benefits
Estimates of technically recoverable shale gas Some key markets have limited experience of licensing and regulating hydrocarbon extraction Adds to above ground risks in some markets
Factors that drive markets Scale of resource Accessibility of resource Security of supply benefits Long distance gas pipelines Skilled oil and gas workforce Supporting infrastructure Stable regulatory system Privately owned mineral rights Socio-Political acceptance The amount of recoverable gas The cost of physically accessing the gas A key driver for Government and regulators Improving access to markets for gas production Required across all stages of project development Roads, Water, Pipelines, etc. For permits to develop and operate as well as fiscal incentives Was a key factor in the US but rights generally owned by government in other markets An important influence on planning and regulator
Markets Studied: USA The US is the largest and most established unconventional gas market. In the short term lower gas prices are reducing development, however lower gas prices will only be sustained if on-going investment maintains volumes of gas production. It should be noted that significant development of liquid hydrocarbons within large shale plays is currently taking place across the US. An equilibrium is likely to be reached, where the pace of new development is appropriate for the price of gas. If this occurs at low levels of market development, the scope for Scottish suppliers will be reduced, as local experienced supply chain will be less stretched. If the pace of development remains high, or the supply chain is stretched by addressing the shale oil market, there will be greater opportunities for Scottish suppliers.
Impacts in the USA CBM already well developed Shale gas has seen rapid growth and significant continued growth predicted for several decades
Impacts on gas prices in the US Reduction in US gas price compared to other markets Unique set of circumstances in US US imports of gas High US gas prices Improved production techniques Private mineral rights Relaxation of regulation Tax breaks Comparison of traded prices for natural gas in $/Mmbtu: 1994 to 2011
Markets Studied: Canada Canadian service and production market is currently very closely linked to the US market Companies entering the Canadian market have to compete with companies from the US; it is possible to enter the Canadian market via the US Rapid developments of shale gas and shale oil in the US may lead to reduced demand for imported hydrocarbons, weakening developments in Canada Canada may develop export infrastructure on the West coast aimed at supplying Asian markets; this would require new infrastructure, pipelines, storage, gas terminals etc. Harsh natural conditions offer a space for specialist services (e.g. related to environmental protection and new development methods)
Markets Studied: China China already has established and growing CBM developments Given the importance and prevalence of coal in China, it is no surprise that CBM has been exploited and offers on-going opportunities Development of shale gas is at a much earlier stage, though it appears to be in partnership with incoming international firms, providing opportunities for experienced shale developers (and their supply chain) to develop business there
Markets Studied: Australia A number of factors suggest that the potential for unconventional gas is strong in Australia scale of resource low density of population and development encouragement from state agencies Development of gas transport infrastructure is limited Initial growth may be limited to plays that have access to pipelines State government and agencies encouraging inward investment and supply chain offers
Markets Studied: United Kingdom UK does not have the highest reserves, however the existing regulatory framework for oil and gas development is in place and supports extensive conventional oil and gas investment Recent developments announced to encourage shale gas development Tax incentives such as shale gas field allowance would extend the ringfence expenditure supplement from six to ten years for shale gas projects Technical planning guidance on shale gas by July 2013 to provide clarity around planning for shale gas Proposals to ensure that local communities will benefit from shale gas projects in their area These developments make the UK a promising opportunity for growth
Markets Studied: Poland After initial investment, shale gas developments appear to be stalling Government approach to regulation and the dominance of PGNiG makes it less likely that the market will pick up in the near future Market for gas services dominated by Exalo Drilling, a very large subsidiary of the state-controlled monopoly PGNiG Exalo has over 50 land rigs leaving very little space for other players, apart from: Specialist services, which are not available on the local market Specialist equipment and products Market opportunity in Poland is small and limited to specialist providers; likely to remain small for some time to come
Markets Studied: Germany As Germany works towards its renewable energy future, it does not want to lose out on the current international trend in development of unconventional hydrocarbons in terms of opportunities for technology development, export of specialist services and equipment Likely to be a number of developments in Germany focused on becoming a test bed for technology development and some production Unlikely that the market for products and services in Germany will grow at a high rate German companies likely to expand their offer for products and services to international unconventional hydrocarbons markets (specialist technologies, products, etc.)
Economic Impact Assessment Understanding the economic impacts, signposts to the areas of greatest job and value creation and hence company level opportunities Economic data is US based as this the only main market which has seen significant development thus far Several US studies conducted US level State level Shale play level
US Wide Impact A study by IHS in October 2012 assessed the economic impacts of unconventional oil and gas on the US economy Covered unconventional oil, tight gas and shale gas Headline findings for shale gas only were Upstream capital investment of $87 billion in 2012 Employment of over 900 thousand in 2012 $121 billion of value added in 2012 Projected capital expenditure of almost $3.0 trillion in unconventional gas activity between 2012 and 2035
US Wide Impact: Conclusions Two sectors dominate the capital expenditure and value added Mining Manufacturing Further analysis of IHS reports shows the specific sub-sectors which have the greatest growth potential
US Manufacturing Sector: Value added Three sub-sectors account for a total of 77% of the added value: Machinery Manufacturing (30%) Metal related (25%) Chemical, plastic, rubber and non-metallic mineral Manufacturing (22%) Drill rig systems Gas compressors Diesel and gas generators Frack pumps primary and secondary processes that produce the components for the machinery needed Chemicals for hydraulic fracturing Chemicals for treating produced water Drilling mud Hydraulic hoses and couplings Cement
US Economic Impact: Conclusions For the US market this strongly suggests that the direct opportunities are in the mining and manufacturing elements, for example: Drilling rigs, fracking and associated equipment - Scottish companies will require inventory of equipment in the US to provide the drilling services, consumables and equipment Manufacture of equipment - includes the capital equipment (drilling rigs, frack trucks, frack pumps, mud pumps, well heads etc.) and the consumables (drill mud, tubulars, etc. ) The indirect impacts are greatest in the service sector - Moving experienced professional staff around the world is already a common element of the oil & gas service industry The labour opportunities are also greatest in the service sector - As many Scottish oil and gas workers operate as one person businesses, this is a potential opportunity for these individuals
UK Economic Impact Using US analysis and transposing this to UK Using capex and well numbers for the UK s Bowland Shale A mid scenario development of 400 wells drilled over a period of 9 years A capex requirement of 10.5 million per well Estimated value added of 7.7 billion
Supply Chain - Key Points Many elements of the unconventional gas supply chain are also part of the conventional oil & gas supply chain Unconventional sector has important differences Cost base, lower margins, high capex for the total recoverable resource Service levels that are required for economic success in the unconventional gas market The global market for specialist equipment and services is the main prize for Scottish suppliers: however, the development of unconventional gas in Scotland would also provide additional opportunities for local providers of non-specialist goods and services
Supply Chain Map Four stages in the lifetime of unconventional gas systems: Exploration Development Production Decommissioning Map sets out the main elements of each stage
Market includes existing and new opportunities
Supply chain conclusions The early stage development markets have the greatest need for innovation or adaptation of existing supply chain offers Scottish companies wishing early market share will need to invest now to match the short and medium term exploration and development opportunities These earlier stage opportunities may have higher barriers to entry as they may require companies to demonstrate prior experience in the unconventional gas sector There will be established competition in the exploration and development phases, albeit predominantly US based
Supply Chain Gap Analysis - opportunities for Scottish suppliers Seismic survey Challenging due to absence of prior expertise Reservoir analysis Promising opportunity Environmental impact assessment Promising opportunity Drilling rig manufacture Possible niche opportunity Drilling rig sub-systems/components Promising opportunity Drilling components Promising opportunity Drilling rig hire Possible opportunity Well systems Promising opportunity Hydraulic fracturing systems Possible opportunity Proppant Challenging due to established global market Gas clean up and distribution Promising opportunity
Conclusions Key is to understand the potential for future growth in the US, Europe and globally and to monitor developments closely Different drivers, regulations and economics in each market; position of each country subject to change as policy and practice evolves Signs of slowing in development of unconventional gas in the US as price of natural gas has fallen to levels that make the business case for some unconventional gas developments uneconomic Indications that shale gas drilling in Poland has not shown the promised levels of resource expected The UK putting in place some of the steps to remove regulatory uncertainty over the pathway for unconventional gas in the UK Early signs of changes in German policy towards unconventional gas
Conclusions Global market will be dominated by the US in short term US market factors are unique, but there is potential for growth in UK, Australia and other markets Scottish companies have acquired businesses in the US to break into the dominant market Specialist Scottish suppliers have received orders for Australia and other markets Scottish Enterprise/SDI considering options to support export potential Sourcing market intelligence for companies Use of GlobalScot network Lead/support targeted trade missions Innovation support for relevant new technologies