Waking the resource giants

DOUG NESTER, COO, KOGAS Akkas B.V.

During periods of significant change, some things always seem to remain constant. For me, 2012 was a year of change professionally. Those who follow my editorials know that for the last several years, I have provided viewpoints from the position of an independent operator in the Gulf of Mexico. This year, I had an opportunity to once again venture back into the international arena, where I am running operations in Iraq for KOGAS, the Korean Gas Company. Therefore, I will now begin providing some insight from the UAE on issues that challenge operators in the Middle East.

Even with this dramatic shift in geographic focus, it is interesting to note that many of the issues I discussed last year concerning the impact of unconventional reserves still dominate many headlines in the Mid-East. In my 2011 editorial, I cautioned about the possible coming of an X-Box shale gas economy, which just like the games, is based on a perceived, infinite supply of fuel. Such an inexhaustible fuel supply would, in turn, result in long-term downward pressure on pricing for natural gas. Perhaps the suppressed 2012 average gas pricing, ranging from $2.00 to $3.50/Mcf, suggests that we are, indeed, entering into this X-Box mind set.

With unconventional resources now gaining momentum in many Middle Eastern countries, the perception of gas becoming a sustainable resource may in fact, become more of a reality. While rich in liquid hydrocarbons, many Middle Eastern countries have insufficient conventional gas reserves to support their internal electrical power generation and industrial expansion needs. In Saudi Arabia, alone, only 25% of conventional gas is free from sulphur, and 55% of its gas production is associated with oil output. In addition, a large proportion of this associated gas in Saudi and many other Middle Eastern countries is used for reinjection to enhance liquid recovery. Also, gas is still often being flared or vented as an oil production by-product. It is estimated that the Middle East, as a whole, burns off about 27 Bcm of gas per year. This is a staggering number, considering that there remains a gas shortage for power generation and industrial use in this same region.

Perhaps the country in the greatest need of power generation today is Iraq. With a strong incentive to grow oil production to support its post-war reconstruction, Iraq is ranked among the world’s top five flaring countries, according to the World Bank. Iraq has, however, made flare reduction a priority and, as such, recently signed an agreement with Shell to capture associated gas from some of its southern oil fields, to provide fuel for power stations and petrochemicals.

Waking the sleeping giant. To meet growing energy needs throughout the Middle East, countries are now looking toward unconventional resources as a way to source their increasing demand for natural gas. Talk about waking the proverbial sleeping giant! Although many projects are just now starting, it is hard to imagine that a region with some of the most prolific source rocks in the world will also not result in some of the most significant unconventional reserves. To my north, Turkey is already being considered as having shale gas reserve potential that may rival some of the plays in North America. In addition to many smaller companies, Shell and Exxon have both entered into deals in 2012 to confirm if this is true.

To the south, Baker Hughes is estimating that Saudi Arabia has the world’s fifth-largest shale gas deposits, at about 645 Tcf. Saudi Aramco is now planning to fast-track development of its shale gas resources, nearly seven years ahead of what was previously announced. Further south in North Africa, companies, including Shell, Exxon, ENI and Dana, have been reported to be in discussion to explore for shale gas in Algeria. And here in the UAE, the Abu Dhabi National Oil Company is actively testing whether hydraulic fracturing can open up new unconventional gas supplies.

Iraqi resources. Positioned in the middle of this flurry of regional activity is Iraq. In just the last few years, Iraq has once again demonstrated its abilities to be a dominant world supplier of oil. Less than one year after the final pullout of U.S. troops, Iraqi oil production of approximately 3 MMbpd has now surpassed Iran as OPEC’s second-largest producer. The International Energy Agency (IEA) forecasts that this production volume will double to 6 MMbopd by 2020. In addition to vast quantities of associated gas, Iraq is also blessed with a large potential of untapped gas reserves in its Western Desert area. These gas volumes occur as both conventional non-associated gas fields and also as an untold volume of shale gas. KOGAS is the only company with active field operations in the Western desert. In addition to developing a major non-associated gas field, we also have the opportunity to evaluate the true potential of the same shale section that is being developed to the north in Turkey and to the south in Saudi Arabia. What makes this shale opportunity even more appealing is that this highly prospective section is normally pressured and located at attractive drilling depths.

Recent projects in shale and other unconventional reservoirs throughout the Mid-East demonstrate clearly that the resource play continues to expand. While resulting increases in gas availability will cause commodity prices to decline or at least stay suppressed, the cost to develop these resources will likely remain high. Adding to the cost problem in the Mid-East is the limited availability of water for hydraulic fracturing. In addition, much of the Mid-East does not have the infrastructure available to develop unconventional resources.

As a result, developing these reserves in the Middle East will be much more expensive than other international shales. Even if development costs reach $8 to $10/Mcf or more, it is still economic for these oil-exporting countries to subsidize the use of gas as a preferred fuel type. This can be sizable, as wholesale gas prices for much of the region are reported by IEA to be below $1/million Btu. Thus, the market may be flushed with potentially more gas volumes from the Middle East than had previously been estimated.

While this is yet to be seen, what we do know is that a sleeping giant is being awakened. What started as a U.S. phenomenon is ready to be repeated all over the world. While this is yet to be seen, what we do know is that a sleeping giant is being awakened. What started as a U.S. phenomenon is ready to be repeated all over the world. With additional, potential giants like China also stirring, the perception of a sustainable fuel supply becomes ever more one of reality. Therefore, for those that have built an expertise in the development of these unconventional resources, get your passports and visas in order, as I believe you will all be in high demand.