Exploration, News, Projects, Shale, Technical

Shale resource development potential: the Australian context

By Navinda De Silva, Stefaan Simons and Paul Stevens, University College London (UCL), Australia

The current low oil price environment is proving to be a considerable challenge to the development of a shale industry in Australia. Here, we take a look at some of the factors that will need to fall into place to see a shale revolution kick off in Australia.

shutterstock_132251666(1)The outlook for shale resource development in regions other than the US has substantially downgraded over the last two years due to the drastic decline of oil prices.

In an Australian context, there was the hype of developing seven new LNG plants and the prompt need for more gas, with New South Wales projected to run out of gas by 2017.

Also, many manufacturing industries highlighted the potential for the rapid increase in gas prices to export parity levels, with the expiration of a majority of long­term contracts in 2017 leading to challenges for those in manufacturing, as these industries have to compete with the demand for LNG from international gas markets including premium Asian markets.

Since the Fukushima disaster in Japan in 2011, there has been a strong demand for Australian natural gas resources with the long­term contracts based on the oil­-linked gas prices.

This anticipated gas demand has led to increased interest in all natural gas resources, including onshore shale resource development as a potential resource to fulfil the demand for more gas – simultaneously leading to lower development costs.

With seven proposed LNG plants, Australia was touted as the most probable country to develop shale gas resources.

However, since the second quarter of 2014, oil prices have substantially declined, from around $110 per crude oil barrel to around $30 per crude oil barrel in January 2016 (at the time of printing, crude oil prices had risen back above $40 per barrel).

Further, shale resource development is associated with the added costs of hydraulic fracturing, high drilling costs and technical challenges due to low permeability.

This has substantially hindered the positive outlook of high­cost oil and gas resources development plans in regions other than the US.

Traditionally, Australian long­term LNG contracts are associated with the Asian markets, and are based on oil­linked prices. Therefore, only cheaper resources will be exploited in the short to medium term, given that Australian LNG resources are already among the highest cost­based LNG resources.

As described by Stevens et al in 2013, Australian shale resource development is challenging due to geology, environmental concerns, social licence to operate, service capacity limitations, environmental regulations and pipeline access concerns.

Policy based solutions have been suggested to address the above challenges and encourage shale resource development in Australia.

However, slow progress has been noted for all the above elements.

Table 1 shows the comparison of Australian context compared to the US context of a shale revolution. Since 2013, progress has mainly been in terms of setting up a voluntary trading platform to trade excess pipeline capacity.

Thus, the Wallumbilla hub in Queensland has been set up to voluntarily trade excess pipeline capacities, enabling the use of unused pipeline capacity. This contributes to the development of a wholesale gas market by simplification of transactions.

This will increase third party access to gas pipelines in other states, though a common carriage policy is not implemented in other states aside from Victoria. The common carriage access policy will become an important consideration to encourage shale resource development activity.

Another notable development is the establishment of public disclosure legislation in Western Australia, to regulate the disclosure of all chemicals used in oil and gas development activities.

Characteristics US AUS
Favourable geology Yes ?
Lots of drill core data to help identify “sweet
spots”
Yes No
Weak environmental regulation for fraccing Yes Depends on the state
Tax credits + intangible drilling cost expensing Yes No
Property rights to the landowner Yes No
Pipeline access very easy – large network + common carriage Yes Depends on the state
Dynamic and competitive service industry Yes No
Population familiar with oil and gas operations Yes Depends on the basin
Licensing large areas with vague work programs Yes Depends on the state
Significant government investment in basic R&D Yes No
Much of the shale gas has high liquids content Yes No
Higher gas prices and demand Yes No
Investment in infrastructure Yes No

The decline in oil and gas development activity following the collapse in oil prices has led to decreased interest in developing a large scale service industry with high economies of scale.

The establishment of a competitive service industry will need to be underpinned by an increased demand for services such as hydraulic fracturing and directional drilling.

In South Australia, the exit of Chevron from shale resource development in April 2015 has decreased the potential establishment of a competitive service industry for hydraulic fracturing activities.

In the US there is a well­-established service industry, with the increased activity of shale resource development, leading to lower costs associated with hydraulic fracturing and directional drilling.

Also, the limited establishment of local value chains to produce proppants and guar gum necessary for Australian shale resource development is not encouraging.

Diminishing interest in the development of shale resources has not encouraged the funding of shale resource based data acquisition including 3D seismic databanks.

Thus, respective state governments have encouraged industry-­based funding and collaborations to discover sweet spots for shale resource development.

In South Australia, the state government encourages collaborations among the stakeholders through the establishment of roundtable discussions on oil and gas.

Knowledge sharing of existing understanding of oil and gas activities is not common among the operators developing shale gas, as the industry is still in its infancy and the specific technologies need to be developed offering a competitive edge.

Since 2013, public disclosure is mandatory for all the unconventional gas development activities in Western Australia. Currently, there is a moratorium on fraccing in Victoria. Other states are also considering stringent controls on chemicals used for stimulation, while encouraging public disclosure.

Thus, there are ongoing debates regarding the regulatory mechanisms to evaluate best practice mechanisms.

However, implementation of a nationally harmonised regulatory system for hydraulic fracturing based on state­-based developments is a complex issue, due to the respective state regulations and public acceptance of hydraulic fracturing.

Therefore, this is an ongoing debate, although probably less intensive due to the low interest in oil and gas development using hydraulic fracturing implemented on new wells. In terms of the service companies, Halliburton voluntarily publishes the chemicals used in hydraulic fracturing in Australia on its website.

A number of parties will need to come together to kick off an Australian shale industry.

A number of parties will need to come together to kick off an Australian shale industry.

In the US, shale resource development became competitive and low cost due to increased activity and technological progress. The increased activity has led to better coordination among the developers, simultaneously developing stronger service industries.

The Marcellus Shale Coalition is one example where all stakeholders involved have benefited during the shale resource development process.

This helps to develop constructive relationships among stakeholders, leading to more efficient development of resources. In an Australian context, there are no notable joint activities of shale resource development.

The main activity would have been the joint venture of Chevron and Beach Energy to develop onshore shale resources in the Cooper Basin of South Australia. However, the subsequent exit of Chevron hindered those prospects.

Shale resource development is challenged by the public, due to environmental concerns associated with the developments implemented without sufficient safety checks. Knowledge sharing and collaboration with the public is important for long­term stability of the industry.

Local communities need to be well informed and involved in the process to secure the social licence to operate in the long term. This will also require direct local benefits such as employment opportunities and funding of local facilities.

In the US, private mineral ownership has led to the encouragement of shale resource development among communities.

The absence of private mineral rights has discouraged the acceptance of shale resource developments in regions outside the US, as evidenced by the lack of public acceptance for shale resource development potential in Europe, Australia, Argentina and China.

Therefore, it is important to work directly with the local communities, offering employment opportunities, training and other incentives to gain the acceptance towards shale operations.

The long­term planning and collaboration of stakeholders will be vital for the success for the industry and to develop resources efficiently and effectively.

Overall, in an Australian context, shale resource development activities have been put on hold due to low oil prices and other associated challenges.

Therefore, the implementation of suggested changes reflecting US shale resource development to suit the Australian context will become important in the medium to long term. US shale resource development was more than 25 years in the making.

This is an important reflection that needs to be inbuilt into the planning of shale resource development in other regions, to expedite the commercial development plans as soon as the markets become more appealing for high­-cost oil and gas developments.

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