Wood Mackenzie Cautions Commercial Viability of UK Shale Gas Remains to Be Proven

Recent announcements by the UK Government concerning shale gas, including establishing the ‘Office of Unconventional Gas and Oil’ and new fiscal incentives are not enough to ensure the development of UK shale gas says Wood Mackenzie.

The independent research company stresses that the commercial viability of the UK’s shale resources is yet to be proven and the key determinant will be the quality of the subsurface and well performance.

In its new report ‘UK Shale Gas – fiscal incentives unlikely to be enough’ Wood Mackenzie concludes that a commercially viable UK shale gas development will only be possible if the subsurface is as good as the very best shale plays in North America. Wood Mackenzie’s economic assessment shows that due to higher costs in the UK, average performing plays would need gas prices in excess of US$9 per thousand cubic feet (mcf) to break even.

Niall Rowantree, Unconventional Play Analyst for Wood Mackenzie says; “Recent announcements on fiscal incentives and allowing fracture stimulation, by both the UK Chancellor and Energy Secretary, are intended to re-start exploration. However, despite this regulatory support, the main determinant for a successful development remains well performance.

“Until many, many more wells are drilled, fracture stimulated and flow-tested, it is not possible to accurately predict the ultimate recoverable volume of shale gas in the UK and therefore any estimates of the ultimate impact on UK gas supply are premature. In the US, tens to hundreds of wells have been required to determine whether a play is commercially viable or not.”

Wood Mackenzie estimates that the UK’s dependency on gas imports in the 2020 to 2025 timeframe will grow to 60-85%, 50 to 75 billion cubic metres per annum. Delivering this magnitude of indigenous shale gas resource in this timeframe will require a world class resource and a few thousand wells, something that is both improbable and unpractical. “Consequently, we think it is unlikely that shale gas production from the UK alone will have a material impact on the UK’s gas price dynamics to 2025,” offers Yvonne Telford, UK Upstream Research Analyst for Wood Mackenzie.

The report outlines four significant barriers which need to be addressed in order to develop the UK’s shale gas resource. Rowantree explains; “The most important first hurdle is overcoming what we see as being two linked issues: addressing the public’s concerns about the safe practice of hydraulic fracturing; and the lack of incentives for communities to permit drilling in their area. While lifting the drilling moratorium is positive, in that exploration and appraisal drilling can re-commence, it is probably not enough to satisfy a sceptical public.”

A second issue critical for successful development is attracting a variety of companies, Rowantree continues; “In North America, the most successful plays have a cross section of companies involved and active acreage turnover. A variety of participants means greater variety in drilling and completion techniques and a higher probability of the play’s subsurface being successfully ‘decoded’. So a key signpost for the ultimate materiality of the UK shale gas industry will be whether a variety of companies with the means and the expertise to drill wells wins acreage when the 14th Onshore Licensing Round is announced or through M&A.”

Thirdly Wood Mackenzie says the UK’s onshore supply chain will need to grow to ensure that wells can be drilled affordably, quickly and safely; “Building the supply chain and a large enough skilled workforce will take time and confidence from the service sector that enough wells are going to be drilled and stimulated to justify hiring and training staff. A clear and simple regulatory regime and a commitment by companies to drill wells will encourage service companies to build capacity, but this will take time and capacity will start to grow only once a commercial development looks likely,” says Telford.

And lastly on the regulatory side, there is a laborious step by step permitting process with multiple agencies involved: “Operators need to gain approval from landowners, local authority planning officers, the Environment Agencies, the Health and Safety Executive and DECC. Most successful plays in the US have a transparent and efficient regulatory regime with rapid permitting for wells and a well-trained and properly staffed regulator. For example, in the Barnett shale play in Texas, at peak development large operators were drilling close to 500 wells per annum. We’ve seen developments in more laborious regulatory environments, like Poland, progressing at a much slower pace,” Rowantree asserts.

Rowantree sums up; “It is a positive sign for industry that the government has signalled its intention to improve conditions for shale gas exploration. In Wood Mackenzie’s view the necessary next steps are: Creating a transparent, streamlined regulatory system that satisfies both a concerned public and operators; carrying out further work on the Strategic Environmental Assessment (SEA), necessary for the 14th Onshore Licensing Round, and enabling a wider range of operators to become involved in assessing the potential of the shales; and designing a fiscal system that makes future investment worthwhile.”

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LNG World News Staff, December 20, 2012