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IPC ’14: Developed services industry makes US shale wave unique

04.01.2014  |  Ben DuBose,  Hydrocarbon Processing, 

Dr. Kenneth B. Medlock III, the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics at Rice University, said the main risk to global shale development is economics.

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By BEN DuBOSE
Online Editor

SAN ANTONIO, Texas -- The success of the US shale revolution is unlikely to serve as a template for shale development around the world because of unique services and infrastructure in the country, a speaker said on Monday at the International Petrochemical Conference.

Dr. Kenneth B. Medlock III, the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics at Rice University, said the main risk to global shale development is economics and whether projects would be profitable.

“When you look at how developed the upstream energy industry is in the US, in terms of services at the well site, you have to compare it to other parts of the world which are nowhere near as developed,” said Medlock, who spoke in Monday’s panel session on global shale development. “That raises costs.”

In a hypothetical comparison, Medlock said a well in the Haynesville Shale in Louisiana would cost 2.5-to-3 times more to drill in Poland.

“Access to things that make it possible to drill wells is not the same,” Medlock said. “There’s much less developed infrastructure. That will limit the pace of entry in those places, so you get a much slower development.”

Medlock noted that among all global rig activity in the upstream, 80% is currently found in the US and Canada.

“What we have here is a very richly developed upstream services industry to provide services for rig activity,” he said. “This is a really important point.”

Another huge selling point for US shale development is resource access.

“The US is unique,” said Medlock. “Here, producers can negotiate directly with land owners for mineral rights and acreage acquisition. That’s big. They get something. Outside the US, mineral rights are mostly owned by the state, so there is much less incentive to work together.”

One exception to the rule is Australia, where land owners are compensated for their cooperation, he explained.

“There’s not a large population but they do have plenty of resources,” said Medlock. “But the trouble is they still don’t have well-developed infrastructure. There are only two wells capable of horizontal drilling in Australia. That’s a problem.”

Even with that drawback, Medlock lists Australia as tied with Argentina for the most high shale potential (outside of the US) over the short-term.

Positive factors for Australia are that resource developers can pay land owners for access along with the ability to trade capacity rights. However, the nation’s onshore service industry is underdeveloped, Medlock warned, and costs are expected to be 2-to-3 times higher than the US.

In Argentina, the service industry is better developed than in Australia and the shale resource potential is similarly very large. But costs are still estimated to be approximately twice as high as the US, and the political risk is projected as very high, Medlock said.

Looking around the rest of the world, Medlock cited a medium outlook for China over the near-term, but “high” over the long-term.

“There’s a large resource potential limited by weak infrastructure now, but the potential for a continental, hub-based market is high,” he said.

With an underdeveloped service industry, costs are seen as about 3 times higher than in the US.

In Europe, the overall outlook is low, owing to an underdeveloped onshore services industry and the ‘green’ movement serving as a major impediment, Medlock explained. The lone exception is the UK, which has a “medium” outlook. Costs there are seen to be 2-to-3 times higher than in the US.

The wild card in the mix could be Mexico, where significant resource potential exists and the proximity to US shale plays could help with regards to services.
However, concerns over security are keeping many top companies away.

“The first reported kidnapping of an oilfield services worker occurred about 3 weeks ago,” Medlock said. “Companies see the resource jewel, but they balk at the hazard pay.”

Another potential pitfall for development is an increase in environmentally-mandated policies and changing regulations in developing countries, such as the aforementioned China.

“Once you have a roof over your head and clothes on your back, you start to think less about that one extra dollar,” Medlock said. “As incomes rise, you start to see more environmentally-mandated policies. That’s where we’re going in China right now, moving away from an export-oriented model to one that is more service oriented and more environmentally-conscious.

“As we look down the next 30 years, that’s the next major transition that we’re going to see unfold before our eyes,’ he added.

As a result, even though a substantial number of shale resources have been identified or assessed in China, the manner in which regulatory and institutional features evolve will be very important.

In the meantime, the US is in the pole position with regards to shale development, and it appears likely to hold that spot for quite a while.

“Resources are a necessary condition for shale development, but they are not sufficient,” said Medlock. “As you look out around the world, you realize the US is unique for a lot of reasons.”



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SANKAR MITRA
04.17.2014

The reasoning by the author seems logical. The areas are remote and without proper infrastructural facilities the actual work cannot be undertaken. from this point of view US stands at the most advantageous position. However this situation will provide enormous international business opportunities.

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