Shale gas: Opportunities and challenges for the Americas

Rig drilling for Anadarko in Eagle Ford.
Photo courtesy of Anadarko

Steve Estes, KPMG US Wayne Chodzicki, KPMG in CanadaNéstor García, KPMG in Argentina

Shale gas has the potential to turn the world's energy industry on its head. It's abundant. It's cheap. It burns cleaner than fossil fuels. And it's being found almost everywhere.

But for shale gas to become the game-changer that some analysts predict, the industry has to surmount tremendous reputational and regulatory hurdles. And there are no guarantees that natural gas prices will ever rise high enough to make the high costs, financial risk, and extended development periods worth the returns. Even still, with the prospects of substantial profits and stable, secure supplies, players at the national and industry levels are placing their bets.

US transforming from importer to exporter?

In the United States, companies have unlocked access to rich shale gas reserves and there is tremendous activity as the country ramps up for full-scale production. Shale gas is in the midst of a boom across the country, with existing reserves being put into full production in Pennsylvania, Louisiana, and Texas, and with new reserves being discovered, recently, for the Marcellus, Eagle Ford, and Utica reserves.

The United States mostly relies on oil, gas, and coal—which are less expensive and more abundant. Renewable energy technologies, such as solar, wind, geothermal, and biomass power generation, are gaining traction, but are not yet viable at a utility scale level to play a significant role in the country's energy mix in the near future.

Therefore, shale gas production has the potential to transform the energy market in the United States and beyond. The United States has traditionally relied on imports, primarily from Canada, for its natural gas needs. The size of US shale plays and the recent investments in developing them could make the United States self-sufficient.

In 2008, the country imported 13% of its natural gas supply. That figure is expected to drop to nearly 1% by 2035. There are signs that the United States is poised to become a significant player in the global natural gas market. The United States has been working to repurpose some natural gas processing and conversion facilities, originally designed for imports, to handle exports of shale gas in the form of LNG.

The speed and scale of US shale gas development is straining the resources of potential producers, requiring them to quickly boost their manpower and technological capabilities. The average age of US oil patch workers is rising, and the pool of workers with the right middle management skills is shrinking. Specialized equipment for drilling, processing, and transporting shale gas is in short supply. Companies are wrestling with growth and struggling to continue to meet internal business needs. Keeping up with the volume of activity is straining their internal systems and processes. Other issues include procurement and strategic sourcing issues, reorganizing capital spending, and tax planning. More regulation is expected that will require more disclosure related to environmental impacts in general and water issues in particular.

As with all energy sources, shale gas in the United States is receiving strong focus from NGOs (non-governmental organizations) and government agencies, and such opposition can delay the permitting and production schedule.

For example, many states such as New York, Texas, and Pennsylvania, which have sizable plays near populated centers, are poised to potentially impose additional state-level regulation regarding water and air emissions on existing and new operations. In addition, the US EPA has been petitioned by environmental groups to regulate disclosure of chemicals used in hydraulic fracturing and is also in the process of drafting regulations for additional regulation of air emissions.

It is expected that the trend of new regulations and disclosure requirements will continue with respect to water usage and fracking chemicals, in addition to air emissions – specifically volatile organic compounds (VOC) emissions.

The risk remains that an issue in one company within a shale play quickly becomes the issue of the entire shale play due to the degree of NGO attention in these shale play geographies.

However, US producers can take steps to manage public perceptions and potential reputational harm by proactively educating local officials and working with community groups to understand and mitigate concerns where possible. These companies can also help maintain a positive image by adopting transparent corporate sustainability reporting processes, proactive operational practices, and strong stakeholder engagement processes.

Despite these concerns, US energy companies are moving full steam ahead to develop domestic shale gas capabilities. Some of these companies are also looking beyond their borders to invest in countries such as China and Argentina, which have sizable shale gas reserves but largely undeveloped production capabilities.

Canada – slower off the mark

Canada is the world's third-largest producer of natural gas, with an average annual production of 6.4 trillion cubic feet. Canada has traditionally been known to possess significant conventional gas reserves, and the country was a key supplier of natural gas to the United States for decades until the recent shale boom in the country. Canada now trails the United States in developing its nascent shale gas resources. But with conventional natural gas sources in decline, Canada's industry is turning to unconventional sources, including shale gas.

While large-scale commercial production of shale gas in Canada has not yet started, many companies are now exploring for and developing shale gas resources in Alberta, British Columbia, Quebec, and New Brunswick. According to Canada's National Energy Board, development of shale gas, and other unconventional resources, will help ensure supplies of natural gas are available to the growing North American natural gas market for many decades. The NEB predicts that shale gas will likely help the country meet its domestic requirements for natural gas "far into the 21st century."

Early drilling at Quebec's Utica shale reserve shows promise. Preliminary estimates suggest the reserve could hold more than 20 trillion cubic feet of recoverable gas. Producers are proceeding with caution, but if estimates are correct, shale gas development in eastern Canada could tilt the balance of production away from the western provinces. Quebec now has next to no infrastructure to support extensive production, but the province's proximity to the Ontario and northeastern US markets make it well situated to exploit its shale gas deposits.

Canada currently exports about 50% of the natural gas it produces, but it lacks the processing facilities to liquefy and ship liquefied natural gas (LNG) beyond North America. With US production rising, Canada will need to develop other markets for its excess natural gas supplies, and there are signs that the industry is preparing to invest in the necessary infrastructure.

In October 2011, the NEB issued the first long-term license to export LNG, clearing the way for a proposed $5 billion project to develop an LNG export terminal in northwestern British Columbia at Kitimat. This terminal would allow Canada to export LNG to Japan, South Korea, and China, allowing Canadian producers to enter markets beyond the United States for the first time.

With their rising energy demands and higher natural gas prices, the rapidly developing countries of Asia could present strong prospective markets for Canadian LNG. In 2010, for example, Japan's LNG prices averaged USD$10.91 per million British thermal units (MMBtu), compared to Canada's natural gas price average of USD$3.69/MMBTU. However, Canada can expect to face fierce competition in the region if Australia and China also boost production to serve the Asian market.

Argentina – looking for a rise

Preliminary exploration in South America suggests that sizable shale gas deposits lie beneath several countries including Argentina, Brazil, Colombia, and others. In fact, shale reserves in Brazil are estimated to be the second biggest in the region after the United States, but there has been little interest or investment in exploring this resource. Argentina is the only South American country that seems set to embark on full-scale shale gas production, primarily in the Neuquén Basin.

Deposits in Argentina are projected to be so big that development will be very important to the country's economy. Although some shale gas wells have already been developed, Argentine producers will need to conduct more drilling and hydraulic fracturing to develop its shale gas reserves.

In a 2011 survey of oil and gas executives conducted by KPMG in Argentina, most respondents said they expect shale gas production to occur within three to five years. As in other parts of the world, most shale gas projects in Argentina are being undertaken as joint ventures, including large global energy entities.

Argentine politicians appear to support shale gas development. Given Argentina's current reliance on expensive natural gas imports from Bolivia and Qatar, Argentina is putting a priority on developing its own sources. In fact, all shale gas projects that come on line will be included in Argentina's Gas Plus framework – a government initiative that allows better selling prices for new offers of this fluid.

While some opposition to fracking technology has been expressed in the media, most reports echo concerns being raised in the United States and local opposition on the ground seems to be minimal.

In our view, the development of shale gas in Argentina will be valuable to the country and occur at reasonable prices. Further, given the Argentine government's willingness to support these projects, we expect that shale gas field development will continue to be allowed.

Conclusion

By offering countries a cheap, carbon-friendly way to help meet their energy needs, shale gas has the potential to displace fossil fuels in selected locations and potentially slow the development of renewable sources. With shale gas deposits being found in areas that previously had no exploitable gas reserves, shale gas production could turn countries that traditionally import natural gas into producers, making them more self-sufficient with domestic supplies. And shale gas deposits are being found in both mature and underdeveloped energy markets, opening the potential to level the playing field when it comes to supply and demand.

About the authors

CLOCKWISE: Steve Estes is a Dallas-based partner in KPMG's US oil and gas advisory practice. Wayne Chodzicki of KPMG Canada is the global head of KPMG's oil and gas practice. Néstor García is the partner in charge of the energy & natural resources practice for KPMG in Argentina. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP.