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Shale Gas: a Risk Worth Taking

By Herve Wilczynski, Muqsit Ashraf, and Mohammed Saadat


Unconventional gas accounts for half of North American production, with investment exceeding $25 billion a year. Although this has changed the continent’s energy outlook, there may be a bigger prize: nearly 75% of the world’s shale gas resources lie outside the region.

The need of many countries to secure their energy supply — combined with the ambition of successful North America shale gas firms to expand globally — is a growth opportunity, especially for companies that missed out on the first phase of the unconventional gas revolution.

But there are risks. Experiences gained in the U.S. are not directly applicable elsewhere. If developers don’t adopt different approaches to risk in new countries, they may make strategic decisions based on overly optimistic assumptions, or miss out a new long-term play.

There are significant differences between North America’s shale gas sector and the ones drillers will find elsewhere. A number of plays on the U.S. Lower 48 are now viable at gas prices below $5 per MM British thermal units (Btu); and some, such as parts of the Marcellus and Fayetteville, are feasible at sub-$4. New technologies (e.g., sweet-spot modeling and micro seismic) and other efficiencies, such as lean drilling and completion, have driven down costs. A deep and transparent gas hub and an extensive distribution network provide easy markets, while a robust oilfield services sector and mature regulatory and land-access framework have supported development, despite weak gas prices.

Considerable uncertainty

In other parts of the world, things are less certain (see figure 1). Limited subsurface data and complex formations hamper the ability to minimize investment risk and guarantee economics production. So do the slow pace of market deregulation, fledging hubs, and a lack of clarity on future oil-linked gas-supply contracts and price subsidies. Additionally, the services sector and infrastructure are undeveloped, fewer than 50 land rigs are operating across continental Europe, compared with around 2,000 in North America. And the regulatory framework has not been defined in many regions, leaving fragmented and, in some cases, uncertain permitting, environmental, fiscal, and investment policies.



In short, lessons learned in North America won’t necessarily apply elsewhere. Short of a technology breakthrough, or radical changes in local rules or labor cost, drilling and completion (D&C) costs from first wells outside North America are unlikely to fall more than 30–40%. In some U.S. basins, costs have dropped by more than 60%.

There are several ways for a company to control its risks as it searches for shale gas internationally, including:

A multifaceted exploration process. Many operators spend most of their energy addressing subsurface risk before making large investments. But this singular focus often ignores significant considerations that affect the economics of an unconventional project. Yet, research by SBC shows commercial factors and surface attributes, such as gas price and well costs, can make or break an investment with, for example, as small as a 10% variance in these factors impacting project returns in excess of 20 percentage points.

Use an entry strategy that spreads risk. Local conditions dictate the approach. Across Europe the availability of prospective acreage in key formations and the subsurface and commercial profile (pipeline capacity, services sector capability, gas markets) of these plays varies significantly. A joint venture or farm-in can mitigate these risks while providing access to core acreage and the development learning curve. Integration with midstream or downstream players can lower intermediary costs, or guarantee market flexibility and price. Most players are adopting these strategies, such as ExxonMobil with Wintershall in Germany and Shell with CNPC in China. This is different in the U.S. where, until recently, most players developed and operated assets independently.

Keep investment options open throughout the asset life cycle. Unconventional investments look riskier than conventional ones. But they offer myriad options. Investors do not need to commit large capital sums up front — exploration and appraisal often require a commitment in the tens of millions. They do need to monitor local conditions and information and adjust their portfolio accordingly. To enable this, they should identify key signposts — for example, Russia commissioning a new export pipeline, or a large operator withdrawing after field appraisal — that validate/invalidate project assumptions.

Reduce unit cost as a natural hedge — become a flexible producer. Several North American operators have followed a statistical model that focuses narrowly on reducing development costs and the cycle of large numbers of wells. This approach is not appropriate for projects outside the region because of minimal subsurface data, high D&C costs (possibly more than $10 million per well) and tighter economics. Many operators have now adopted a flexible model requiring continuous improvement processes to integrate, in real time, factors such as new subsurface information and technology.

Use technology. It has been decisive in North America’s shale gas revolution and it will be in Europe and Asia too. Well productivity has improved significantly in the past five years and many assets have jumped the hurdle from noncommercial to valuable. Technology will remain a driving force in North America and an enabler elsewhere (see figure 2).



Adapt commercial strategies to regional conditions. Investors need to adjust their risk appetite as they evaluate opportunities. North American players will have to adopt longer-term contacts and take on risk-sharing agreements with service providers; local players in Europe and Asia must use hedging techniques and participate in spot markets. Investors should also participate in local lobbying groups and engage in policy issues.

Entry into the unconventional gas sector is not about committing billions of dollars over many years with high uncertainty over success. It’s about diligence and flexibility, keeping options open, and investing gradually based on factors that influence the asset life cycle. This has implications for an entry strategy and the way a firm values assets, as well as for ownership structure, capital deployment, field operations, and organization. Success hinges on challenging established aspects of the operating model to de-risk what may otherwise be an unattractive bet.

Herve Wilczynski is a Vice President and Head of North America at SBC’s Houston office, where Muqsit Ashraf ( is a Vice President, and Mohammed Saadat is a Manager. We welcome your comments on this article at: .

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