Challenges remain in exporting North America’s shale experience

D. NATHAN MEEHAN, Senior Executive Advisor, Baker Hughes Incorporated

How well will the North American shale experience be able to be exported? Globally, there are massive resources; however, the challenges exceed those faced by U.S. and Canadian operators, and service companies. Even in North America, there has been a substantial transition from a decade of land grabs, cheap money, adding capacity and “playing the numbers,” to a decade of driving efficiencies and applying science.

North American shales developed rapidly. Readily available, risk-seeking capital, and dozens of aggressive operators and service companies, developed the necessary technology, drilling thousands of wells and commercializing previously uneconomic resources. Major oil companies and NOCs followed, bringing massive capital and technical resources. Multiple, parallel activities, no doubt, resulted in some inefficiencies; however, new approaches in multiple plays were developed simultaneously. The following challenges will also face international operators, who will not share that “first decade.”

Availability of leases (land access). Individuals or corporations privately own the vast majority of U.S. mineral resources. Lease terms and conditions are entirely negotiable. Risk-seeking firms can obtain acreage blocks that generate value or fail quickly. Larger firms can accumulate meaningful blocks of acreage, production and reserves. Outside of Canada and the U.S., mineral rights are generally owned by the state. One or more central agencies set the terms and conditions. In many cases, development occurs by, or in conjunction with, state-owned enterprises. Buying, selling or trading acreage often requires state consent.

Operability: Difficult terrain and other conditions. Much of the U.S. shale acreage is on relatively flat farmland or rolling hills. International shale resources are often in mountainous terrain, densely populated cities or deserts. Additional costs associated with such drilling can be large and will require advances in pad drilling.

Service company capabilities. North American service companies have collaborated with operators and developed most of the technology unique to unconventionals. Most wells in the U.S. and Canada are hydraulically fractured; this is untrue for much of the world. The majority of U.S. wells drilled are horizontal; this is also untrue for most countries. The bulk of service company capabilities overseas, particularly in local firms, must add technical expertise to handle widespread shale exploitation. 

Well costs per unit of production, and product prices, are two key economic drivers. One lesson learned repeatedly is that lowering costs requires lots of wells. In a play’s early stages, it is more important to know what to do and where to do it.

Lack of numerous risk-seeking firms. As key technologies for commercializing shale were proven, hundreds of firms appeared. These firms drilled leases promptly, permitting them to high-grade play potential. There were many failures. 

IOCs and NOCs hold substantially larger acreage positions and are less willing to drill large numbers of unsuccessful wells. They are more likely to apply substantial G&G in early efforts. The commercial development of shales has yet to be proven without drilling many unsuccessful wells.

Environmentally acceptable practices/social issues. Most international shales are in areas with little available water or in areas of high water demand. Technology advances have enabled the use of saline and high-TDS (total dissolved solids) water from deeper sources, as well as recycled water. 

Noise abatement, truck traffic impact, pipeline construction, and other environmental issues, must all be addressed. Large-scale shale developments with hundreds or thousands of wells require significant surface use. Densely populated areas may require landowner compensation, other than just the land value. Carefully planned, multiple (12 to 36 wells) surface pads can minimize the shale development footprint.

Inadequate well productivity/resources. Some attractive North American plays have failed to generate commercial reserves. Abundant hydrocarbons don’t guarantee well productivity or reserves warrant development. This may be a real “show stopper.” There is no substitute for well drilling to evaluate this risk.

Access to risk capital.  Risk-seeking capital is fickle. Different risk tolerance levels for international development are unlikely to be problematic. 

Low gas prices/achieving economic thresholds. Low natural gas prices depress unconventional activity. International prices vary substantially but must be considerably higher than current North American prices. 

Infrastructure challenges, including pipelines. North America has abundant pipelines. However, significant liquid volumes from the Bakken play are transported by rail. Efforts are underway to export U.S. natural gas. Export options are more important for Canada.

Countries with shale resources vary in their need for pipelines and export capacity. Middle Eastern countries and Chinese shale participants are likely to use incremental gas production domestically, while Russian tight oil/shale volumes will result in incremental export capacity.

Well stimulation technology is not optimized for local stress conditions. This concern is localized to the Sichuan basin, with high pore pressures and minimum horizontal compressive stresses approaching the vertical stress. This may create undesirable fracture complexities. Proper geomechanical models are necessary to address the issue.

Data availability (basin), both G&G and production. Log and production data are generally public information in the U.S. and Canada. International rules vary; however, there is limited data sharing among operators. Few well or production logs become public record. The only way to address the lack of data from immature plays is acquisition and drilling.