The Three Great Advantages of UK Shale Gas

worldmpThere are some key questions about shale gas internationally, and for now, the international front often means the UK.  Every country in Europe is awaiting the UK’s decision (on fracking anyway). But geology is the study of planetary resources.  The common idea that somehow the United States is uniquely blessed with the ability to drill for oil is an example of a strange concordance between anti-fracking activists and right wing US Republicans. I have always agreed with Roberto F. Aguilera’s point here:

As indicated in our recent book, The Price of Oil, successful developers around the world could reap benefits similar to those experienced by the US in its progress with unconventional gas. The advantages afforded by the shale revolution in the US have been so strong that its international spread is inevitable. Most of the technology employed is not proprietary and so can be transferred across borders.

 

I don’t pretend to be clairvoyant about UK onshore natural gas, but when I look to the future, I predict what the UK industry will be from 2017 onwards using 2016 data, not 2008’s.

A realistic view of what the UK will look like should not depend on environmental catastrophe predictions of 2010 that never showed up, or the economics and drilling technology of the decade before now either. There are two key questions about UK natural gas. One is the number of wells and one is how much those wells will produce. We won’t find the answers from academics stuck in the past who allegedly support the industry (or it’s sub variant, the academic gravy train) nor the various anti fracking groups who party like it’s 2011. The answers are this year, in the United States.

I’ve already mentioned how the more efficient licensing structure of the UK augurs well for increased and cheaper production in the UK than those who still quote economics based on production profiles of the Barnett Shale of 2008.  Further evidence for optimism comes from the surge in US productivity from 2012 onwards, a tsunami of shale that surprised even optimists like myself. Throw in the three killer advantages of UK shale and I still, yes still, propose that UK shale will surprise to the upside. The Three Advantages are compelling, and simple:  upstream, mid-stream and downstream:

  1. The geological setting of the UK shows underground resources in excess of the Marcellus, as evinced by the huge thicknesses of the Bowland Shale in Lancashire (5000+ feet) and Yorkshire (rumoured to be a mere 3,000 feet). The average thickness of shales in the sweetest spots of the Marcellus is rarely over 300 feet.
  2. The UK has the shortest mid-stream, as measured by drill bit to burner tip, of any world oil and gas province. Infrastructure is abundant, nearby and empty. Pipelines  serve a market of thirty million consumers who have no realistic alternative to home heat and hot water – as even proponents of keep it in the ground concede.
  3. The downstream market is 68 BCM, 38 from declining UK offshore,13 from LNG imports, the rest from the also soon to be declining Norwegian and Dutch offshore. The UK NBP price today is $5 MMBTU, exactly double Henry Hub right now, with at least a $2 basis structurally permanent. The European forward market is also higher during the winter peak, with December over $5.50 today

The Three Great Advantages, combined with zero sovereign risk whoever wins the EU Referendum debate, are starting to attract notice of investors worldwide for another reason. The US has more gas than they could possibly use. If you want to make money in oil and gas today, the smart money is thinking – and looking – outside the US box today just as George Mitchell was peering out twenty years ago.

The UK debate needs to go on from a “we need thousands of wells” narrative antis constantly trumpet. The best place to predict what the US experience provides is the up to date version. Along with the The Three Great Advantages, we have  Grealy’s Law:  Anything over six weeks old in shale gas is ancient history. What does this year tell us?  Luckily we need look no further than the US Energy Information Administration Monthly Drilling Productivity  reports.

drilling prod

The average new rig production from the Marcellus, Utica and Haynesville gas shales is thus 8,039 million cubic feet. That’s only the initial rate, and yes, it declines. Let’s be charitable and say it could be as much as 50%, so we get down to a 4 MMCF after a year. But that’s still a rate, switching to our UK metric system, of 0.041 BCMY, meaning 150 wells would produce half of UK LNG imports, as they would also contribute about $500 million dollars to our tax revenues as opposed to Qatar’s and knock $1 billion off the trade deficit. For those, like us, who want a low carbon world, that evidently also saves a lot of carbon spent freezing, transporting and reheating LNG.

150 wells however, doesn’t mean 150 sites, thanks to multi well drilling from a single pad. The well bore itself is only the diameter of a dinner plate. Imagine a restaurant with one plate per table and that’s what a well pad could hold. There are just slightly less than 150 for example on three well pads in the existing Wytch Farm oil field.  Each well would cost ten million dollars or so after the initial ones, and each further one declines in price as the sunk costs of the initial ones cover later investment.  Individual wells could be paid off in about 40 weeks.

Wells are very expensive. The industry has zero incentive to drill any more of than needed.  It’s only natural people have legitimate fears about the number of them, but it’s illegitimate for protestors to consistently over-exaggerate the number of them too.

Our concern is that it just takes one well to get drilled and then thousands will follow,

Friends of the Earth and Greenpeace are smart, scientific people. They know exactly how small an impact well pads can have on the UK landscape. They too see from the weekly rig count reports that there are less than twenty rigs in Pennsylvania, a state that is currently producing twenty times the UK numbers proposed above. They are equally aware that the US renewables industry is even more successful than the shale industry, and certainly far more so than the UK’s. They are well aware that the methane issue is both open to debate and solvable. They certainly don’t want to point out that both the US EPA and the environmental group NRDC have pathways in place that resolve the issue.  They are also aware that US CO2 levels, and coal production and exports are at twenty years lows.They are deliberately deceiving the public by saying otherwise, and a minimum of two sided research by journalists would show otherwise.

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