High hopes for shale

A big rise in production of shale gas in the US - offering plentiful supplies of low-priced ethane as a petrochemical feedstock - has boosted growth in the country's chemicals sector.

With abundant reserves of the natural gas locked in shale - a fine-grained sedimentary rock - evident around the world, there are hopes that in the longer term production of the gas can similarly stimulate chemical output in many other countries. However, analysts are warning that the shale gas boom in the US is already beginning to falter.

Boost for chemicals

The American Chemistry Council (ACC), the US trade association for chemical producers, is expecting a gradual improvement in production this year with a stronger recovery in 2013. Shale gas is expected to play a key role in the industry's revival after the recession.

Shale gas is an abundant source of ethane - an important feedstock in petrochemical manufacture. The surge in availability of US shale gas, whose production rose 15-fold between 2000 and 2010, from 2% of the country's natural gas output to 27%, is providing unparalleled opportunities for chemical manufacturers, according to the ACC.

'Natural gas is a game changer for chemical manufacturers,' says Cal Dooley, ACC president and chief executive. 'Access to untapped sources of domestically  produced natural gas is one of the most important domestic energy developments in 50 years.'

A supply of over 420 million m3 of shale gas per year is providing plentiful ethane, as well as the other natural gas liquids (NGLs) propane and butane, for petrochemical producers. It is also helping to drive down the chemical industry's energy costs because the shale gas bonanza is slashing natural gas prices. These have dropped from $12-13 (approximately £8) per million British thermal units in 2008 to around $2.50 at the end of 2011, aided to some extent by an exceptionally mild winter.

US leads the way

The US is well ahead of other countries in exploiting its shale gas resources, having already put in place much of the infrastructure necessary for its production and distribution. Above all it has developed the technology - known as hydraulic fracturing, or fracking - for opening up the fissures in shale rock for releasing the gas.

The rest of the world is closely watching to see how the newly established shale gas sector in the US develops, while making efforts to look for gas reserves in their own countries.

Canada is one of the few nations outside the US already producing and marketing its own shale gas, albeit in relatively small quantities. In Europe, Poland has been the most active in the search for shale gas with 20 to 30 exploration wells due to be drilled there in 2011-12.

The Chinese government is already preparing for commercial scale production within a few years. A joint venture between CNPC (China National Petroleum Corporation) and oil major Shell invested more than $400 million last year in shale gas projects in the country.

Guesstimations

Nonetheless, some natural gas experts are urging caution when gauging the prospects for shale gas globally, owing to the possibility that many of the estimates of gas reserves might be inaccurate.

Also, the ultimate production costs could be higher than expected, particularly because of the probable need for measures to curb the environmental impact of shale gas schemes, especially in regions such as Europe.

The US government's Energy Information Administration (EIA) calculated last year - from a study of 48 shale gas basins in 32 countries - that there were 188 trillion m3 of 'technically recoverable' shale gas resources globally.

Almost 20% (36 trillion m3) of these are in China, making it the country with the biggest reserves. In Europe, Poland is believed to have 5 trillion m3, France 5, Norway 2.4, Ukraine 1.2, Denmark 0.7 and the UK 0.6.

In Africa, the largest reserves are in South Africa with an estimated 13.7 trillion m3, while in South America they are in Argentina with 22 trillion.

In North America, the US had the biggest estimate of 24.4 trillion m3. But the EIA has indicated recently that it would be reducing its estimate to 13.6 trillion m3, in the light of new data from recent shale gas production.

In the report on its global study last year, the EIA had warned that its estimates were 'uncertain given the relatively sparse data that currently exists'.

'When making estimates of recoverable reserves, unconventional gas such as shale gas has to be dealt with differently than conventional gas,' says Ruud Weijermars, senior consultant at Netherlands-based Alboran Energy Strategy Consultants. 'With conventional gas, which usually comprises single reservoirs, only a few exploratory wells are required. With shale gas, a large number of wells are needed because one well can show up a lot of gas while an adjacent one can reveal nothing.'

On the up

Despite reducing its predicion of US reserves, in this year's energy outlook the EIA will be anticipating that shale gas will account for 49% of US natural gas production in 2035 - a figure 2% higher than the projection in last year's outlook.

The ACC estimated in a report last year that as a result of an expected 25% increase in supplies of ethane - coming from rising shale gas production - $16.2 billion of private investment would be made over several years in plant and equipment for manufacturing petrochemicals.

Already substantial new investments are being made, or planned, by chemical producers in the US, including the first new crackers - for converting ethane to ethene (also known as ethylene) - to be built in the country since 2001.

US chemical producer Chevron Phillips is planning to construct a 1.5 million tonne-a-year ethane cracker at its Cedar Bayou site in Texas. The site will also have two new polyethylene units - to make use of some of the ethene produced - with 500,000 tonnes-a-year capacity each.

One of the most significant projects could be plans by Shell for a large-scale ethane cracker in Appalachia in the northeastern US, using feedstocks from the Marcellus Shale area. Again, polyethylene and other derivative units would be built. If the scheme goes ahead it could establish a new petrochemicals hub in and around Pennsylvania, New York state and West Virginia.

'Pennsylvania is one of the world's largest markets for polyethylene,' explained Ben van Beurden, Shell Chemicals' executive vice president, at a recent press briefing in Amsterdam, the Netherlands. 'It is logical to have a cracker with advantaged feedstock close to a market of that size.' With the additional help of favourable energy costs and a weaker dollar, US chemical exports went up by almost 11% last year to $189?billion. The ACC expects them to exceed $230?billion by 2014.

'The ratio of oil prices to natural gas in the US has recently been over 35:1 and is very favourable for US competitiveness and exports of petrochemicals, plastics and other derivatives,' says Kevin Swift, the ACC's chief economist.

Price slashing problems

However, there are signs that the advantages US petrochemical producers have gained from the current low level of natural gas prices may be short lived.

'The shale gas sector in the US could be entering a crisis,' says Weijermars. 'Natural gas prices have fallen so sharply that they are well below the breakeven point for shale gas producers.'

Chesapeake Energy, one of the country's leading shale gas producers, revealed in January that it was cutting its drilling activity for dry gas production - which has a low content of ethane and other NGLs - by 50%. Instead, the company intends to focus on production of higher-margin liquid-rich gases and oils from shale.

'We recognise the need to take action now in order to protect value for our shareholders,' says Aubrey McClendon, chief executive at Chesapeake Energy.

In February, US-based credit ratings agency Standard & Poor's adjusted its rating for Chesapeake Energy's financial performance from a stable outlook to a negative one. It said the rating reflected what it called 'the aggressive financial risk profile' adopted by the company as it became responsible for 30% of US natural gas production growth in the last five years.

Other gas producers are following similar strategies. Shell, for example, disclosed in early February that in the US it would be concentrating more on exploiting liquid-rich shales containing high proportions of oil.

'If you don't have a credible liquids story by now (as part of your company's shale strategy), you are likely to be out of business soon,' says Michelle Foss, chief energy economist for the Center for Energy Economics at the University of Texas at Austin in Houston. She estimates that a gas price of $6 per 1000ft3 is required to break even in shale gas production.

Yet some observers believe that the low gas prices will continue because of a lack of sharp cuts in output. 'For many companies (in shale gas), gas is still the only growth option,' says Bob Brackett, senior analyst at Bernstein Research, New York, which is forecasting average gas prices of $3.75 to $5 per 1000ft3 over the next three years.

The shale gas sector in the US also looks likely to be dogged by problems with obtaining precise estimates of reserves of the gas. Incorrect reserve figures can lead to unexpected falls in gas flows, which pushes up production costs.

Environmental concerns

The environmental impact of shale gas production will be another factor which will push up costs. Fracking requires huge quantities of water - 3-5 million gallons per well - which has to be recovered and treated to prevent pollution.

The state of Pennsylvania has been considering imposing a tax - or what it calls a 'local impact fee' - on shale gas production. This tax is being planned because of the environmental, infrastructural and other costs stemming from shale gas production.

At the federal level, there is a risk that the current exemption of shale gas production from the provisions of the federal Safe Drinking Water Act could be lifted - meaning that it would have to comply fully with clean water regulations.

Europe's embryonic shale gas sector faces the prospect of high regulatory costs and hurdles resulting from concerns about the environmental threat from shale gas production. France and Bulgaria have both banned fracking because of perceived environmental hazards.

In China, many of the shale gas reserves are in areas where there are also water shortages.

Ploughing on

The rapid increase in shale gas output in the US shows how quickly it could grow elsewhere, followed swiftly by expansions in local petrochemicals capacity using shale NGLs as feedstocks.

'All the signs are that China is now moving very fast in exploring and testing its shale gas resources for production potential, while the same is starting in India,' says Weijermars. China will want to use shale gas to help reach its target of self-sufficiency in chemicals.

Because of Europe's huge dependence on imported gas, oil giant ExxonMobil, which has been drilling for shale gas in Poland and elsewhere in Eastern Europe, is predicting that by 2040 around 30% of the region's gas supplies will come from shale and other unconventional gas.

But Europe's chemical industry might be more tentative about making investments in new capacity based on shale NGLs - as natural gas prices can be four to six times higher in Europe compared to the US.

Sean Milmo