Tag Archives: shale gas

Energy Self-Sufficiency v. Environmental Costs: Argentina

Lake Huechulaufquen, Neuquén basin in southwest Argentina. image from wikipedia

Despite the precipitous fall in global oil prices (from 110 dollars in 2014 to under 50 dollars in 2015), Argentina has continued to follow its strategy of producing unconventional shale oil, although in the short term there could be problems attracting the foreign investment needed to exploit the Vaca Muerta shale deposit,  Argentina’s energy trade deficit climbed to almost seven billion dollars in 2014, partly due to the decline in the country’s conventional oil reserves.

Eliminating that deficit depends on the development of Vaca Muerta, a major shale oil and gas deposit in the Neuquén basin in southwest Argentina. At least 10 billion dollars a year in investment are needed over the next few years to tap into this source of energy…

“In the short term, it would be best to import, rather than exploit the shale resources,” Víctor Bronstein, the director of the Centre of Studies on Energy, Policy and Society, told IPS.“But taking a more strategic view, investment in and development of these resources must be kept up, since oil prices are going to start climbing again in the near future and we have to have the capacity to produce our own resources when that happens,” he added.  That is how President Cristina Fernández saw things, he said, when she set a domestic price of 72 dollars a barrel – “40 percent above its international value” – among other production incentives that were adopted to shore up Vaca Muerta.

According to the state oil company Yacimientos Petrolíferos Fiscales (YPF), Vaca Muerta multiplied Argentina’s oil reserves by a factor of 10 and its gas reserves by a factor of 40, which will enable this country not only to be self-sufficient in energy but also to become a net exporter of oil and gas. YPF has been assigned 12,000 of the 30,000 sq km of the shale oil and gas deposit in the province of Neuquén.

The company admits that to exploit the deposit, it will need to partner with transnational corporations capable of providing capital. It has already done so with the U.S.-based Chevron in the Loma Campana deposit, where it had projected a price of 80 dollars a barrel this year….YPF has also signed agreements for the joint exploitation of shale deposits with Malaysia’s Petronas and Dow Chemical of the United States, while other transnational corporations have announced their intention to invest in Vaca Muerta.

Excerpts from Fabiana Frayssinet, Plunging Oil Prices Won’t Kill Vaca Muerta, PS, Apr. 10, 2015

Economics and Environmental Impact of Oil Shale Production

oil shale combustion. Image from wikipedia

[A] second shale revolution is in prospect, in which cleaner and more efficient ways are being found to squeeze the oil and gas out of the stone. The Jordanian government said on June 12th that it had reached agreement with Enefit, an Estonian company, and its partners on a $2.1 billion contract to build a 540MW shale-fuelled power station. Frustratingly for Jordan, as it eyes its rich, oil-drenched Gulf neighbours, the country sits on the world’s fifth-largest oil-shale reserves but has to import 97% of its energy needs.

In Australia, Queensland Energy Resources, another oil-shale company, has just applied for permission to upgrade its demonstration plant to a commercial scale. Production is expected to start in 2018. Questerre Energy, a Canadian company, also said recently that it would start work on a commercial demonstration project, in Utah in the United States.

In all these projects, the shale is “cooked” cheaply, cleanly and productively in oxygen-free retorts to separate much of the oil and gas. In Enefit’s process the remaining solid is burned to raise steam, which drives a generator. So the process produces electricity, natural gas (a big plus in Estonia, a country otherwise dependent on Russian supplies) and synthetic crude, which can be used to make diesel and aviation fuel. The leftover ash can be used to make cement. Enefit’s chief executive, Sandor Liive, says his plants, the first of which started production in December 2012, should be profitable so long as oil prices stay above $75 a barrel (North Sea Brent oil was around $113 this week).

Although the new methods of exploiting the rock are cleaner than old ones, environmentalists still have plenty to worry about. Oil shale varies hugely in quality. Estonia’s is clean, Jordan’s has a high sulphur content, Utah’s is laden with arsenic. Like opencast coal mining, digging up oil shale scars the landscape. Enefit has solved that in green-minded Estonia, by landscaping and replacing the topsoil. Other countries may be less choosy.

Some of the world’s biggest energy firms have also experimented with mining and processing oil shale, only to give up, after finding that it took so much energy that the sums did not add up. However, Shell says it is making progress with a new method it is trying, also in Jordan, in which the shale is heated underground with an electric current to extract the oil.

These rival technologies have yet to prove their reliability at large scale—and they are far from cheap. Mr Liive reckons it will cost $100m to get a pilot project going in Utah (where his firm has bought a disused oil-shale mine), and another $300m to reach a commercial scale. A fall in the oil price could doom the industry, as happened in the 1980s when a lot of shale mines went out of business…America this week loosened its ban on crude exports. If the second shale revolution succeeds, it will have a lot more oil to sell.

Oil shale: Flaming rocks, Economist, June  28, 2014, at 58

Gas as a Tool of Foreign Policy: Gazprom

Gazprom_headquarters, Moscow. image from wikipedia

The good times for Gazprom once seemed like they would never end. The world’s largest natural-gas producer, founded out of the old Soviet gas ministry, enjoyed sky-high gas prices for years. The gas flowed along pipelines into Europe; the profits flowed back. Gazprom began work on a $1.9 billion headquarters in St Petersburg and acted as a bottomless wallet for Russia’s rulers. Whatever problems it encountered, it could “drown with money”, as Natalia Volchkova of the New Economic School in Moscow puts it.  All this is now under threat. Its ageing gasfields are in decline. Thanks to America’s shale boom, gas is more plentiful on the world market. Gazprom’s European customers are realising that they have other choices. The prices it can charge are falling, and with them the firm’s prospects.

Years of easy money have made Gazprom fat and slow. It dominates its domestic market, producing 75% of Russia’s gas. It enjoys a monopoly over exports of the stuff. Until recently, it had a tight grip on western Europe, where it supplies around 25% of gas. It retains an even tighter grip on former Soviet-bloc countries in eastern Europe. For a long time, this insulated Gazprom from shifts in global gas markets.

Gazprom is not a normal company. It serves two masters. As a firm that issues shares to outside investors, it should in theory strive to maximise profits in the long run. But since it is majority-owned by the Russian state, it pursues political goals, too.  In practice, it serves one master more assiduously than the other. As President Vladimir Putin consolidated his power in the early 2000s, he built Gazprom into a main instrument of Russia’s new state capitalism. He appointed allies to top positions. He used Gazprom as a tool of foreign policy, for example by cutting off gas supplies to Georgia, Ukraine, Belarus and Moldova during political rows.  Gazprom’s deep pockets have helped Mr Putin at home, too. It sells gas cheaply in Russia, so that the poor do not freeze in winter. Oddly for an energy company, it has bought television stations and newspapers, all of which are now friendly to the Kremlin. Mikhail Krutikhin of RusEnergy, a consultancy, says, “Gazprom has one manager: Putin.”

With friends in high places, Gazprom has enjoyed low taxes and privileged access to gasfields. But its costs are startlingly high…And some projects favoured by Mr Putin are of questionable economic value. For example, he is dead set on building a $21-billion South Stream pipeline between southern Russia and Austria via eastern Europe. This project has political appeal because it would bypass troublesome Ukraine as the main transit route for gas to Europe. But given weak prices and demand, it is “commercial idiocy”, says Mr Krutikhin. The opening in 2011 of Nord Stream, an offshore pipeline to Germany, was a diplomatic coup for Mr Putin, but it is still running far below capacity….

Gas on the spot market is often much cheaper than Russian gas delivered under long-term contracts… Because so many of its customers are tied to contracts, the full effects of the global gas glut on Gazprom’s bottom line will not be felt straight away….   The final threat to Gazprom’s old way of doing business is legal. An antitrust probe launched by the European Commission alleges that Gazprom is using its dominant position in central and eastern Europe to restrict competition and hike prices. If it loses the case, it could face a fine of up to $14 billion and lose the mighty lever of being able to charge some European countries more than others.  An adverse ruling might also threaten its strategy of trying to dominate the European gas market by owning both the supplies and the means of distributing them. Gazprom has quietly bought gas pipelines and storage facilities. It has tried to strike deals whereby it lends money to impoverished European utilities in order to secure their custom. If this strategy stops working, Gazprom will no longer be such a potent foreign-policy tool for the Kremlin….

Gazprom’s future may involve more robust competition even at home. Two domestic rivals have emerged: Novatek, a gas producer part owned by Gennady Timchenko, an old acquaintance of Mr Putin’s, and Rosneft, a state-owned oil firm led by Mr Putin’s trusted adviser, Igor Sechin. Put together, non-Gazprom firms now account for a quarter of all Russian gas production….

The other way to get gas to Asia would be via pipeline. The obvious destination is China, which sits on Russia’s doorstep and is potentially the world’s biggest market for gas. The two countries have haggled unsuccessfully for a decade. In February they revealed they had agreed to everything related to pipeline exports apart from the price. China has signed up to import gas from Central Asia, Australia, the Middle East and west Africa; almost everywhere, in fact, except Russia. China refuses to pay Asian prices; Gazprom won’t budge.

Gazprom: Russia’s wounded giant, Economist, Mar. 30, 2013, at 69

Fracking in Europe: prohibited

horizontal drilling

Shale gas and oil are propelling America to energy self-sufficiency and giving its economy a handy boost. Europe’s shale-gas deposits are said almost to match those across the Atlantic..

The mismatch between the hope and reality for European shale gas was neatly summarised by a deal sealed on January 24th that will allow Shell to probe Ukraine for unconventional gas. Ukrainian politicians talked of a $10 billion investment. Shell took a more cautious line. The firm certainly hopes to find plenty of gas in eastern Ukraine. But it will first do some seismic testing and sink 15 test wells. If the results are disappointing it could, like ExxonMobil in Poland, walk away.

It is too early to tell whether Europe’s shale beds will really prove as bountiful as America’s. Only a handful of test wells have been sunk. Exxon may have quit Poland, the country where exploration has gone furthest, but other firms are having more joy. Determining which countries might enjoy a bonanza of cheap gas is highly speculative, a recent report by Deutsche Bank points out: many things are in flux, including extraction technologies and production rates.

Adding to the guesswork is a host of problems “above ground”, particularly in western Europe. With the exception of Britain, which recently lifted a moratorium on test drilling, progress is slow. The French are implacably opposed to shale gas. French environmentalists have taken a particular dislike to “fracking”, the technique for releasing gas from rock beds that uses a cocktail of chemicals, sand and high-pressure water. François Hollande, France’s president, has promised that a fracking ban, imposed by his predecessor, would last for his entire five-year term.The Netherlands and Luxembourg have also suspended drilling for shale gas. Attempts to do the same in Germany were defeated in parliament in December. But North Rhine-Westphalia, the country’s most promising region for shale gas, suspended fracking last September pending research on the risks involved. In Austria the cost of complying with environmental regulations makes shale gas uneconomic.

Farther east, public disapproval is not as fierce, although the Czech Republic recently introduced a moratorium, Bulgaria has one in place and Romania only recently lifted its ban. Shale gas offers the promise of jobs and revenues. Even more important, it could mitigate the heavy reliance on gas imports from Russia. Indeed, the country signalled its disapproval—and boosted its reputation as an energy bully—as soon as the deal between Shell and Ukraine was signed. It sent its neighbour a bill for $7 billion for unused gas, arguing that Ukraine is contractually obliged to pay for it.

Oil companies will send people and equipment where the ride is easiest and the deals are tastiest, which explains why drilling rigs are scarce in Europe. Nearly 1,200 of them scoot around America’s shale beds; in Poland they number only half a dozen.

Excerpt, Unconventional gas in Europe: Frack to the future, Economist, Feb. 2, 2013, at 53

Fracking in the European Union

Poland may have western Europe’s largest reserves of shale gas. A dozen global gas-exploration companies have promised to drill as many as 120 test wells over the next few years to find out. The prize could be trillions of cubic metres of gas. It is “a huge and expensive gamble”, says Tomasz Maj, the head of Polish operations for Talisman Energy, one of the exploration firms….But the extraction of shale gas is controversial. It requires fracking: blasting fissures in subterranean rock and pumping in water and sand, and occasionally nasty chemicals, to force out the gas. France won’t do it. There is local resistance in the Netherlands. Yet other countries’ qualms may make fracking more attractive for Poland. If others won’t frack, they will probably buy Polish gas.

European energy policy is in turmoil. Germany decided last month to abandon nuclear energy. A referendum in Italy on June 12th also said “no thanks” to nuclear power. Reliable sources of energy are inadequate to meet future demand. Poland sees an opportunity.  “We’ll never be an oil state, but we could become a Norway,” says Andrzej Kozlowski of PKN Orlen, an oil company in which the government has a 28% stake. The Polish government is keen to attract firms with experience of fracking in North America, such as ExxonMobil and ConocoPhillips. It has awarded nearly 90 concessions so far. These are cheap, and production royalties will be low. But firms will be penalised if they fail to drill the promised test wells…Fracking is a completely new industry for Poland, so the government is anxious to get the rules right. Taxes must be low enough to encourage investment, but high enough to raise revenues. Getting neutral advice on the environmental risks is not easy. Fracking can damage the water table, disrupt communities and even cause earthquakes. (In Britain on May 31st Cuadrilla Resources said it was halting a fracking operation near Blackpool, pending investigation of two small earth tremors which it may have triggered.)

The French government imposed a moratorium on fracking on May 11th. In Britain, by contrast, a parliamentary committee was friendly to fracking. EU law allows member states to exploit their natural resources as they see fit, but subject to minimum environmental standards. The European Commission is due to roll out its long-term energy strategy in November, which could affect fracking. But Poland, whose six-month presidency of the European Council begins in July, is in a good position to influence what it says. On June 21st Poland was the only EU member to vote against a proposed tightening of carbon-emissions targets for 2020.

Energy in Poland:Fracking heaven,Ecomomist, June 25, 2011, at 79