02
SHALE GAME Impact of the global shale development on the GCC
SHALE GAME Impact of the global shale development on the GCC
Exploitation of shale deposits in the US has risen quickly and will continue to intensify in the coming years as technology and expertise improve and extraction costs decline. GCC countries must build on their hydrocarbon background to extend their coverage of the chemical value chain and bridge the period until they may be able to tap into their own shale plays.
The US will maintain its competitive advantage in shale gas as a feedstock and energy carrier at least until 2020, in particular when compared to Europe and East Asia. Prices for natural gas in 2013 are (average January–June) USD 4/MMBtu in the US, USD 12/MMBtu in Europe and USD 16/MMBtu in Japan. Due to the high costs for liquefaction and transport of LNG, global arbitrage will reduce these interregional price differences only by a few USD/MMBtu (figure 1). Availability of large volumes of hydrocarbons at low prices drives investments in power production from gas, ethane crackers and chemical plants producing ethylene derivatives, fertilisers and other products that have the “shale gas advantage”. As a conse quence, a number of affected production sites, especially in Europe, are already experiencing declining margins and it is expected that older and less efficient crackers and basic chemicals capacities in Europe will be shut down in the medium term.
Before discussing any implications of the shale boom on GCC countries, it is reasonable to briefly describe global developments in this field. While the US had negligible production rates of shale gas and shale/tight oil as recently as five to ten years ago, production rates from shale in 2012/2013 are impressive (World Energy Outlooks, IEA, Nov 12, 2012):
figure 1
Methane: 170 MMtons/year (≈ 8.5 tcf/year) NGLs: 18.5– 37 MMtons/year (≈ 0.5 –1 MMbbl./day) Shale/tight oil: 95 MMtons/year (≈ 1.9 MMbbl./day)
Development of regional gas prices. Source: World Economic Forum: The New Era of Gas (2011), World Bank commodity price data and forecast (2012), BP Statistical Review of World Energy (06/2011), Stratley analysis.
Among other reasons, significant improvements in drilling, fracking and overall extraction technology have made this boom possible. Learning-curve effects (typical example in Marcellus: decrease of well costs from USD 8 m to USD 4 m within a larger project) will lead to further cost reductions and yield increases, which will ensure that the boom will last beyond the period of picking only the lowest-hanging “unconventionals fruits”. Due to the massive increase in domestic oil and gas production, the US is forecast to become a net LNG exporter by 2020 at the latest, and in the same year will satisfy domestic oil demand to a large degree via its own regional sources. Furthermore, polyethylene exports are expected to nearly double in the period from 2013 to 2020. Other countries pursue exploration activities and production plans for unconventional gas and shale/tight oil to very different degrees. Countries with expected commercial projects for unconventional gas production in the long term include (all figures are estimations for 2020 in tcf/year, with shale gas being a substantial part in most cases) Canada: 3.5 tcf/year, China: 2.8 tcf/year, Australia: 2.1 tcf/year, Europe (all countries): 0.3 tcf/year, Mexico and Argentina: 0.2 tcf/year each. China’s forecasts were more ambitious in the past and were scaled down when it became obvious that developments would not be as fast as initially targeted. Even the current Chinese production target remains uncertain as exploration data is not yet concrete and unfa vourable conditions persist for international companies looking to engage in China. In Europe, shale resources are becoming more and more recognised as a valuable energy and chemical raw material source, most notably in Poland, UK and Ukraine, and those governments have started to revise the thus-far discouraging regulative framework. As fracking is a more emotive topic in Europe than in other regions, projections in Europe are only rough indications until public and political opinions have developed further and more exploration and test data is available. In contrast to the forecasted production figures above, shale gas production in the US is expected to exceed 11 tcf/year by 2020 and hence will dominate global production volumes in shale gas. As the wetness of the basins outside the US is not yet sufficiently known, NGLs and shale/tight oil production projections outside the US remain highly speculative. However, given the time required for exploration and developing the infrastructure to produce, fractionise and transport NGLs from shale and/or tight oil, it is reasonable to state that no region outside the US will reach production rates with a global market impact until 2020 at the earliest.
2
Henry Hub
Europe
Japan LNG import prices
US$/MMBtu 18
Phase of marginal price differentials
16
Shale gas boom in North America
14 12 10 8 6 4 2 0 1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
NOTE Before the shale boom, natural gas prices in North America tended to be oriented to the oil price; LNG = Liquefied natural gas; MMBtu = million Btu. 3
2017
2019
Opportunities for GCC countries in the unconventionals boom Investments in involved companies, plants and other related projects in North America are an obvious option to participate in the US boom. Qatar Petroleum, for example, has acquired exploration and production assets from Suncor Energy together with its partner Centrica. The problem is that the time for bargains in this market is over, thus any investments require careful evaluation. Despite this, there are presumably significant unconventionals opportuni ties in the GCC countries. From both geological analysis and already existing exploration data, it is clear that the likelihood of high concentrations of gas, NGLs and oil in shale formations is highest in areas with abundant conventional resources. Indeed, first estimations of shale resources in the GCC confirm that, with over 700 tcf of shale gas, including supposedly signifi cant amounts of NGLs and shale/tight oil, the regional resource opportunities are tremendous. Resources are only real opportunities if they become reserves (economically extractable) and this is the critical issue. Why should a region historically blessed with one of the world’s largest concentrations of inexpensively accessible conventional oil and gas deposits be interested in extracting morecostly unconventionals?
1 2 3 4
Costs for shale gas production are driven by the geology (especially depth of shale formation), topography, water availability, technology and infrastructure. A significant part of the deposits in the GCC (for example, in the empty quarter) is located in unfavourable desert environments, which is a serious obstacle for profitable well development. Moreover, five to twenty million litres of water per well are currently required and water is scarce. Despite the challenges, there is room for optimism. Due to their large conventional oil and gas sector, GCC countries have oil and gas infrastructure, services and staff that facilitate building up an unconventionals business. In addition, sufficient unconventionals areas are accessible and new concepts are being developed to reduce water requirements through recycling or fracking without water (“dry fracking”). According to our analysis and experiences from other regions, shale gas extraction costs might initially be around USD 15/MMBtu, slightly above the costs in the early US shale boom days. These costs are expected to decrease in the short term to USD 10/MMBtu in favour able locations and might further decrease with progress on the regional and local learning curve.
figure 2
There are four main reasons:
Unconventional gas (mostly shale/tight gas) and unconventional oil (mostly shale/tight oil) areas in GCC countries. As exploration data so far is very limited, only selected and prospective plays are shown.
Deposits of cheaply extractable oil and gas are declining, especially outside Qatar Production rate of associated gas is limited by oil production rate Demand for gas in the region is high and increasing Access to Qatar’s gas surplus is in competition with global demand
Source: GPCA Innovation Survey 2010 Mainly unconventional gas Unconventional oil and gas Not GCC member (Yemen)
These reasons explain why there is a gas shortage among GCC countries (except Qatar), both for methane as an energy carrier and for ethane as a feedstock for regional ethane crackers. Regions with shale gas and shale/tight oil deposits have already been identified, mostly in Saudi Arabia, Oman, Kuwait and UAE (figure 2). Development of unconventionals in the GCC is currently in its infancy. Only a few exploratory measures and test wells have been performed so far. Oman appears to be at the forefront of unconventionals activities with enough test data available to target commercial production by 2017. Saudi Arabia, Kuwait and the UAE have promising indications of largely available technically extractable unconventional resources. The respective oil and gas compa nies partner with international upstream players and are confident of developing technologies in the future that will enable extraction at reasonable costs. All GCC countries except Qatar are expected to drive further exploration and, where technically and economically feasible, shift to largescale testing and production. Assuming that abundant resources lie below the Arabian peninsula, the main success factors for largescale production of unconventionals are supportive politics and regulations, as well as competitive production costs. Due to the long history of the hydrocarbon business, high dependence on energy and downstream feedstock and the lack of strong public opposi tion (unlike, for example, in Europe), GCC governments have a supportive mindset and will presumably handle regulations pragmatically to enable largescale projects. The cost issue is more challenging and certainly deserves a quick analysis of the influencing factors.
4
Jordanian–Iraqi border area (Saudi Arabia) Northern fields (Kuwait) Southern Ghawar/ Rub al Khali Diyab (UAE)
Saudi Arabia Oman GCC countries
5
Block 6 Block 60,61,65
When will GCC countries start to produce unconventionals commercially?
Does the US shale boom threaten the business of chemical players in the GCC?
2020 to 2030 is frequently stated by experts as the timeframe in which unconventionals will be broadly produced commercially in GCC countries. It is important to keep in mind that, while local unconventional gas will not be costcompetitive compared to regional conventional gas in the foreseeable future, it can be costcompetitive compared to imported LNG and hence fill the gas gap in the countries concerned, like Kuwait, Saudi Arabia and UAE (figure 3). Using oil as a substitute for gas, e.g. for energy production in countries with abundant oil, is not reasonable due to the much higher price per MMBtu for oil. If shale resources in GCC countries are wet, as experts assume, the incentive to explore and extract NGLs in addition to methane becomes even more attractive. Firstly, NGLs are priced well above methane and byproduct credits could reduce breakeven costs by up to USD 5/MMBtu. Secondly, ethane would be available as cracker feed. This is very important for cracker operators in Saudi Arabia, who have had difficulties with allocation of sufficient ethane for fullcapacity utilisation in previous years. The current approach to base new cracker projects on moreexpensive mixed feedstock could in the long run be replaced by a trend to use ethane as a predominant feedstock again. Ethane from shale may cost up to USD 700/ton (≈ USD 15/MMBtu) to yield ethylene at similar cost to ethylene from regional naphtha crackers. The quick cost assessment above indicates that if prospective wet basins are found in GCC countries, ethane production costs below USD 700/ton are realistically possible (figure 4). According to recent forecasts, the gas shortage will become more severe in the GCC (except Qatar) in the coming years. This will presumably drive exploration for unconvention als and – if first findings are promising – lead to largescale commercial projects across the GCC closer to 2020 than 2030. Oman even has ambitions to go commercial in the production of unconventionals as early as 2017.
Attendants at recent oil and gas conferences in GCC countries were generally well aware of developments in the US, but diverse opinions on this rather new phenomenon from the US were voiced. Some experts tended to be rather relaxed, seeing their business affected but not ser iously threatened. Others were more alert to the topic and mentioned various risk factors that could have considerable negative effects on GCC countries’ oil, gas and chemical businesses. We believe that there is no need to panic. Taking interdependencies between the US shale boom and other risk factors into account does, however, reveal possible consequences such as growth obstacles and margin squeezes in GCC countries (figure 5).
figure 5 visualisation of how the US shale boom and subsequent risk factors influence GCC gas and oil operations. Gas production refers predominantly to Qatar and oil production to Saudi Arabia, although some effects might also affect other oil- and gas-producing countries in the region. The chart does not contain all possible scenarios, risk factors and path options but rather those paths and consequences that are the focus topics of this article. Source: Stratley Base scenario path: US boom does not impact ethylene production volumes and margins Risk scenario path: US boom and risk factors reduce ethylene production volumes and margins Risk scenario path: Final consequence Expected impact by US shale gas boom on GCC oil and gas exports Not expected risk factors for the GCC, which has a strong focus on Asia as sale market No more exports to NA
Comparison of costs per energy content: oil, LNG imports in the GCC, the resulting shale gas cost window and conventional gas produced in the GCC. By-product credits not considered.
US shale gas boom
Source: Facts Global Energy; Stratley analysis. Cost range Minimum costs Volume limited
20* 15 10
2 3 4
Crude oil LNG import Shale gas cost window Conventional gas
1
2
4
3
Cracking of ethane
** USD/ton
figure 4 Ethylene cash costs in the Middle East for the feedstocks naphtha, conventional ethane and ethane from shale.
1
800 400 0
1
2
3
To be costcompetitive with regional naphtha crackers, crackers using shale ethane have an upper limit of USD 1, 100/ton ethylene costs, corresponding to ≈ USD 700/ton ethane costs
2
3
Naphtha crackers Ethane crackers using shale ethane Ethane crackers using conv. ethane
Oil production Exports of oil
6
7
GCC exports all LNG to Asia
GCC produces LNG as planned
GCC has to reduce LNG exports
GCC reduces gas production
Nonsufficient allocation of ethane
Underutilised cracking of ethane
Volume and margin reduction
Sufficient allocation of ethane
Fully utilised cracking of ethane
Planned profitability
Cracking of naphtha
Source: ICIS; Saudi Gazette; Stratley analysis. 1,200**
Reduced Chinese demand: Growth slowdown Gas supplies from Russia Reduced Japanese demand: Delayed nuclear plant shutdown
Gas production
* USD/MMBtu
5 0
1
More exports to Asia
Tight oil (=light oil) boom in the US
Ethane shortage Associated gas
Export of LNG
figure 3
New cracker projects
New oil production capacities from Iraq and Iran
GCC has to reduce oil exports
Reduced exports to NA
GCC exports all oil as planned
More exports to Asia
GCC has to reduce oil production
Risk factor: LNG exports
Risk factor: oil production
Ethane is commonly a by-product in many gas fields and is consequently extracted at a higher rate if methane production is high. As an example, the ethane feedstock used in the Ras Laffan cracker (Qatar) with a capacity of 1.3 million tons of ethylene per year is extracted from the North Field, one of the world’s largest conventional gas fields. Only five to ten years ago, Qatar had planned to export large amounts of LNG to the US and to eastern Asia, and con structed LNG export terminals as well as large vessels to do so. Then the US shale gas boom started, and the forecasted US methane self-sufficiency by 2020 forced Qatar to change export plans. Qatar’s new plan is to increase export volumes to Asia accordingly, mainly to China and Japan, where demand increases are considered high enough to absorb the additional LNG supplies. While China’s and Japan’s demand extrapolations based on 2013 economic figures might sustain this plan, risk factors remain. China featured impressive economic growth – until recently, when first signs of a fading dynamic hit the headlines (figure 6). The annual GDP growth in the last five years has dropped from values near 10% to less than 8% in 2012 and 2013. This effect might be temporary and does not allow conclusions for future development, because China is large, complex and fea tures a unique political and economic system that is difficult to predict. One risk factor is that mid- to long-term economic development may turn out to be below expectations. Another risk factor is that political decisions limit LNG imports from Qatar – for instance, by import supplier diversification (gas from Far Eastern Russia, LNG from Australia or US), by domestic shale gas production and by driving or even subsidising other forms of energy production. Post-Fukushima Japan has presumably left an energy gap that Qatar might fill by sup plying additional LNG. One of the main risk factors concerning Japan is that Japan might operate its nuclear power plants longer than planned. Furthermore, Japan is actively evaluating methane hydrate extraction off its shores. As yet, commercial production is a distant prospect, but it could become one option of hydrocarbon supply in the future.
Large amounts of gas, especially in Saudi Arabia, are produced as associated gas in oil pro duction. As by-products, ethane and other gases are produced in volumes tightly correlated to the oil volumes produced. This also means that constraints in oil production limit the ethane gas supply. The shale/tight oil boom in the US has reduced, and will further reduce, the demand for light oil imports. Upstream companies in the GCC are well aware of this and argue that, firstly, they can still supply heavy crude to the US (shale/tight oil is mainly light oil) and that, secondly, East Asian demand will grow fast enough to more than compensate the US demand reduction. The degree of the first argument is uncertain, because Canada has abundant heavy crude resources and can, under favourable oil price conditions, at least partly supply the US with cost-competitive heavy crude. Similar to the LNG scenario described above, the second point appears reasonable, but bears risks. For the oil, however, the risks are currently more on the supply than on the demand side. In addition to the revolutionary shale/tight oil production increase in the US, Iraq has increased its oil production from 2.2 MMBbl/day (110 MMtons/year) in 2009 to around 3.3 MMBbl/day (170 MMtons/year) in 2013. The 2013 Iraqi production value is >4% of total global oil production. Forecasts for 2015 range from 4 to 6 MMBbl/day with further expected pro duction increases to 8 –10 MMBbl/day in the medium to long term (figure 7). Furthermore, potential political changes in the wake of the recent elections in Iran might lead to mid- and long-term sanction deregulations and enable Iran to push much larger oil volumes into global markets. Such large additional volumes, which are not balanced with demand dynamics and OPEC guidelines, either drive global oil prices down or require OPEC countries including Saudi Arabia to further limit their production.
figure 6
figure 7
GDP development in China. The value for 2013 is an estimation based on data from the first half of the year.
Projection of the Iraqi oil production 2015 – 2035. The chart is based on figures from the IEA. Source: Iraq Energy Outlook, IEA, 2012.
Source: World Bank; Reuters. MMBbl/day 12%
12
10%
10
8%
8
6%
6
4%
4
2%
2
0%
High case Central scenario
0 2009
2010
2011
2012
2015
2013 (est.)
8
9
2020
2025
2030
2035
GCC Country
Implications for chemical companies
Unconventional resources
Development status
Outlook
Preliminary estimates for possible unconventional gas exist, but figures not yet confirmed
Very early exploratory stage Specific shale or other unconventional gas deposits not yet identified
Bahrain is seeking alterna No projects yet announced tives to meet the increasing domestic consumption Further exploration activities likely
Initial studies indicated commercially viable resources both onshore and offshore in the east Unconventional resources include presumably heavy oil, tight gas, shale gas and shale oil
Kuwait is investigating a KOC is expected to plan to extract shale gas develop shale extraction in from its northern fields the foreseeable future Production of 150–200 mcf/ day estimated to be possible
Kuwait Oil Company (KOC) Technical cooperation contract signed with Shell
Khazzan-Makarem field in Block 61 has estimated 100 –150 tcf of tight gas in place Block 65 has significant potential to contain unconventionals, especially LTO
Drilling in Block 61 started in 2008 and in 2011 BP first delivered tight gas to the gas plant at Saih Rawl Two wells drilled by PDO’s exploration department in the south and north of Block 6 have yielded encouraging results
Estimated 1.2 bcf/day of gas being produced by 2017 in Block 61 with total possible yield of up to 30 tcf of tight gas Efforts in Block 6 now focusing on testing commercial viability Exploration/development investments in Block 60
Petroleum Development Oman (PDO) Oman Oil Company Exploration & Production LLC (OOCEP), subsidiary of Oman Oil Company (OOC) Commercial agreement with BP for Block 61 Occidental Petroleum and Shell involved
Not assessed
No activities
Due to abundant and cheap None conventional gas, exploration and production of uncon ventional gas is not planned
Unconventional gas estimates commonly exceed 600 tcf Deposits in the north-west part of Saudi Arabia near the border with Iraq and Jordan are expected to be shallow The largest identified deposit of shale gas/tight gas is located in Rub al Khali close to the giant Ghawar oil field
Around seven shale gas test wells drilled by Saudi Aramco by 2013 Halliburton and Schlum berger investigating the desert zone in the north-west Saudi Aramco rescheduled its shale gas development programme to seven years ahead of the previous plan, US oil field companies man dated to work on feasibility studies for first production
Due to a severe gas short age in Saudi Arabia and the large shale resources, exploration activities will intensify Problems of water supply for fracking and fixed gas price have to be solved to enable large-scale shale gas production
Halliburton, Baker Hughes and Schlumberger are establishing research centres in Saudi Arabia working on new extracting technologies for unconven tionals
Diyab is an extensive United formation with a substan Arab tial, but so far unquantified, Emirates amount of tight gas
First well tests with fracking by ADNOC were encourag ing with respect to technological feasibility Simulation studies of Diyab formation suggest that commercial production is possible
ADNOC is considering a three- to six-well pilot study specifically targeting Diyab tight gas Commercial production from Diyab is supported, but ulti mately depends on further exploration and test results
Abu Dhabi National Oil Company (ADNOC) Abu Dhabi Company for Onshore Operations (60% owned by ADNOC) Cooperations with BP, ExxonMobil, Royal Dutch Shell, Total, Partex
Bahrain
GCC countries, and most notably Qatar and Saudi Arabia, are differently affected by the gas and oil risk factors described above. These risks have the capability of accelerating the regional ethane shortage, which might lead to or worsen underutilisation of production assets. This may lead to a tendency in the GCC (except Qatar) that for the foreseeable future new crackers may be based also on naphtha. In the light of cheap ethane in the US as well as more naphtha-based ethylene in GCC countries, the cost advantage of these countries’ derivatives will shrink significantly compared to the US. US shale developments have triggered new technology developments (e.g. on-pur pose dehydrogenation of propane) as well as investments in additives and co-monomers capaci ties, which further strengthen the US ethylene downstream position compared to GCC countries. As of today, GCC downstream players hardly felt any serious effects from the shale boom, while Europe has started to bear the heavy burden and will continue to do so; a closure of approximately 10% of total European ethylene capacity is forecasted by industry experts. In the longer term, GCC countries will most likely keep their position as the lowest cost producer – despite a new shale-age market equilibrium, albeit with much less margin differential to the US. One must not forget that in the foreseeable future, GCC downstream players will still have favourable raw material conditions and will most likely be able to manoeuvre their businesses reasonably around shale gas-induced market changes in the US and elsewhere. However, the times of abundant low-hanging fruits and extraordinarily high margins in GCC countries is set to end.
Kuwait
Oman
Qatar Overview of unconventional resources and related exploration and production activities in GCC countries Sources: Arabian Oil & Gas, Arab Times, Bloomberg, BP, Citi Research, EIA, E&P magazine, Gulf Oil & Gas, ICIS, IEA, IEEJ, Index Mundi, Oil Price, Oman Daily Observer, Qatargas, Reuters, Saudi Gazette, Schlumberger, World Bank, World Economic Forum and shale gas-related conferences in China, Europe, GCC countries, USA.
Abbreviations Bbl. = Barrels Btu = British thermal unit GCC = Gulf Cooperation Council LNG = Liquefied natural gas MM = 1 million NGL = Natural-gas liquid tcf = trillion cubic feet NOTE LTO = Light Tight Oil mcf = million cubic feet bcf = billion cubic feet tcf = trillion cubic feet
10
Saudi Arabia
Engaged companies in unconventionals
About Stratley Stratley is a leading consulting firm for the chemical industry with offices in Cologne, Hamburg, Dubai and Shanghai. We work at corporate and business unit level, as well as for in-house functional services. At corpo rate level, we help to develop corporate strategies, to identify new investment options or acquisition targets as well as divestment concepts, carve-outs, etc. Another area is the definition and implementation of companies’ organisations to position them well for the future in dynamic markets. At business unit level, company-specific marketing and sales strategies are one focus area, the definition of successful product portfolios another. Lever aging a company’s innovation potential can be tackled on corporate as well as on business unit levels. Our focus on the chemical industry ensures that we instantly take up new trends such as “Shale Gas” and understand their implications on a wide range of products. With its presence in Dubai, Stratley aims to reach decision makers from the Gulf chemical industry, as well as authorities potentially participating in the region’s development of the chemical sector.
About The Gulf Petrochemicals and Chemicals Association The Gulf Petrochemicals and Chemicals Association (GPCA) is a dedicated and non-profit-making associa tion serving all its members with a variety of data, technical assistance and resources required by the petro chemicals and chemicals industry. The GPCA’s mission is singular and specific in that it intends to support the growth and sustainable development of the petrochemical and chemical industries in the Gulf in partnership with its members and stakeholders and be both a sounding board and a meeting point for debate and dis cussion. It is the first such association to represent the interests of the industry in the Middle East and it has brought a major dimension to its task by creating both a forum for discussion and a place where like-minded people can meet and share concepts and ideas. Since its inception in March 2006, the GPCA has earned an enviable reputation for steering the regional industry towards a whole new level of cooperation and raising the standard in terms of common-ground interests. Additional information is available at www.gpca.org.ae.
authors Oliver Gawad Partner at Stratley, based at the Dubai office o.gawad@stratley.com Dr. Sven Bugarski Senior Consultant at Stratley, based at the Cologne office s.bugarski@stratley.com
All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Gulf Petrochemicals and Chemicals Association or Stratley AG. © 2013 by Gulf Petrochemicals and Chemicals Association and Stratley AG. 12
SHALE GAME Impact of the global shale development on the GCC