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  • Oil in a Week – Shale Oil and Gas: The Industry and the Challenges
    Sun, 15 January 2012
    Walid Khadduri

    Total (France) and Sinopec (China) have recently signed contracts worth $ 4.5 billion with small U.S. oil companies, for the exploration and drilling of shale oil and gas in the Unites States. Each company invested around two billion dollars in return for stakes in shale hydrocarbon production through concessions awarded previously to U.S. companies.

    Total’s agreement will see the establishment of a consortium with two U.S. oil companies, Chesapeake and Intervest Energy, with a value of $ 2.32 billion. Total’s share in this new joint venture is about 25 percent, and it includes exploration in a 2500 square kilometers area in eastern Ohio, a region that does not yet produce oil.

    The two U.S. firms have so far only drilled 13 wells in this vast region. But Total estimates that shale oil production from this area will reach 100 thousand barrels per day by the end of the decade.

    The second agreement, worth $ 2.2 billion, involves Sinopec acquiring a stake in shale gas fields owned by Devon Energy, a small U.S. company, in Colorado, Michigan, Mississippi, Louisiana and Ohio. The agreement centers on drilling around 125 wells over the next two years.

    So what is the significance of these agreements?

    As is known, small and obscure U.S. companies were the first to develop this type of hydrocarbons. However, this has now begun to change following the strides that have been made so far. Thus we see American and foreign mega oil companies now investing billions of dollars to gain entry into this field, in most cases through partnerships with small energy companies, as the latter require large capital to survive and cover their high costs.

    Foreign oil companies are thus prominently interested in obtaining a foothold in this fledgling oil sector, through small companies operating in this field. But in fact, there are different reasons behind this. Some of these companies, like Total, are barred from developing shale oil prospects in France by the French government, due to the environmental damage resulting from the contamination of fresh water aquifers. Nevertheless, they are seeking to conduct prospecting in other European nations, and the United States, in order to benefit from increased production of this type of oil and market it in the future in the huge U.S. market, and also in order to gain more expertise.

    As regards Sinopec, the Chinese firm is also seeking to transfer shale oil and gas technology to oil-hungry China.

    Moreover, foreign companies benefit from agreements with small U.S. companies in concession areas already granted to American companies. In other words, they are saving time by bypassing the lengthy periods of time usually required to obtain new concessions in promising areas.

    The United States is forecasted to produce approximately two million barrels per day of shale oil by the end of this decade. Although this is a significant production volume, it still will not grant the U.S. the coveted energy independence with which it would be able to dispense with its oil imports. This is because of the sheer magnitude of oil consumption levels, predicted to rise further in the future, and the limited output of conventional oil in the U.S. relative to its productive capacity.

    The production of shale gas, meanwhile, accounts for a third of U.S. natural gas output. This gave new weight to the American natural gas industry, where it is now not only possible to move away from importing gas, but also to export liquefied natural gas, for the first time in U.S. history. As the United States shifts from being a significant importer of natural gas to a progressively important exporter of gas, this has left its marks on the global gas trade, especially in terms of gas prices in Europe.

    The shale oil and gas industry in the United States faces several challenges, including production costs, relative to conventional oil. But more importantly, there is the issue of environmental problems resulting from extraction operations, because of the possibility of the leakage of water mixed with chemicals used in the fracturing of shale to extract oil and gas, into fresh water aquifers. In the United States, there are many commissions of inquiry investigating this issue. In addition, the state of New York has passed strict regulations in relation to the exploration of shale oil, which will hinder the development of this industry there. Yet it is clear that exploration and drilling are taking place in full swing, despite environmental concerns.

    Furthermore, voices rose recently to warn against the role of deep rock fracturing in inducing tremors and earthquakes, for example during a science conference in London recently. However, discussions on this issue have come to reach the conclusion that the risk of tremors as a result of drilling decreases if the appropriate and advanced technologies are to be used in the process.

    In the Middle East, it is clear that there are possibilities for shale oil development, although work on this is still in the study phase in the majority of cases, for instance in Saudi Arabia, Oman and Morocco. In Jordan, a memorandum of understanding was signed between the Jordanian Electric Power Company and a Chinese company last November, to build a power plant with a capacity of 900 MW in an area about 100 kilometers south of Amman, which would be operated on locally extracted shale oil. Buts studies are still ongoing with regard to the economic feasibility of the project, before the final go-ahead is given. Meanwhile, there are attempts in Israel to produce large quantities of shale oil by a company managed by a physicist, who was formerly the director of research at a major global oil company. Currently, he is promoting his new company by talking about massive quantities of shale oil that can be extracted in onshore parts of Israel. However, he has yet to carry out any work on the ground, as the new company is still in the process of being formed.

    *. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)

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