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Nations Struggle To Mimic US Shale Success

Ed Crooks, Financial Times

From Argentina to Britain to China, countries with suitable reserves have been attempting to emulate the shale revolution of the US, even though most lack the conditions that made it possible for that industry to flourish.

Progress so far has been slow, and the fall in oil prices to below $50 per barrel has dealt a further blow to these ambitions. However, there are indications that shale production could be made to work outside the US.

The reason why the shale revolution began in the US was not that it has a uniquely favourable geology. The US has only the world’s second-largest shale oil and fourth-largest shale gas resources, according to reports by the US Energy Information Administration (EIA) in 2013. (And those rankings exclude Middle Eastern countries such as Saudi Arabia, which could have large resource bases but were not assessed by the EIA.)

Instead, the shale industry flourished in the US because of a uniquely favourable ecosystem. Important aspects of this include: mineral rights that gave landowners an incentive to welcome drilling; a long history of exploration that created a deep base of geological knowledge; a network of universities and companies that trained some of the world’s best geologists and engineers; equipment and infrastructure built up through years of investment; and incentives and research support that encouraged the development of unconventional resources for decades.

Above all, though, the US industry succeeded because of its dynamic entrepreneurial business culture. There were countless companies trying different approaches to extract resources from shale at commercially viable rates, before George Mitchell, fracking pioneer, succeeded in the 1990s.

This entrepreneurship was supported by deep and liquid capital markets, so funding was available every step of the way, from the first speculative ideas to the tens of billions of dollars needed to scale up production.

No other country in the world has all these conditions in place. Without such advantages, attempts at shale development outside the US have typically faced much higher costs. A single well outside the US can cost $15m-$25m according to Melissa Stark of consultancy Accenture. That compares with $5m or less in the best US shale areas.

That makes the economics of non-US shale look marginal, even with oil above $100 a barrel. After the fall to $50 and below, developments such as opening new shale areas are likely to be shelved.

“Some players may be able to make it work, but not at oil prices in the $40s,” says Jason Bordoff of Columbia University’s Center on Global Energy Policy. “All higher-cost areas are going to be severely challenged at these prices.”

Shale exploration in Europe was faltering before the oil price decline, and many of its flickers of activity have since been snuffed out. In June, ConocoPhillips became the last large international oil company to pull out of shale in Poland, once seen as one of the most promising European countries.

The UK is another country with potential resources, but progress has been slow, hampered by objections from local authorities and communities. No wells have been fully fracked there since 2011.

Russia has the world’s largest shale oil resources, according to the EIA, and was starting to make progress in the Bazhenov formation in Siberia. However, the brakes have been applied by US sanctions imposed because of the conflict in Ukraine. American companies are prohibited from working with the Russians on shale or other technological developments. But Gazprom, the state-controlled gas and oil group, recently announced plans to begin commercial drilling of the Bazhenov from late 2018.

Ms Stark says that this leaves Argentina, Saudi Arabia and China as the most likely prospects, each with a large resource base and strong national oil companies.

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