Deloitte: Shale gas won't sideline LNG, conventional supplies

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, May 20 -- Natural gas from previously inaccessible shale formations has changed the global supply outlook. Development and production of these supplies won’t necessary make conventional or LNG uncompetitive, experts indicated during the Deloitte 2011 Energy Conference’s opening day on May 19.

Attendees also were urged not to get caught up in euphoria over shale gas’s supply potential. Much more is involved than simply recovering it, said Marc S. Lipschultz, global head of energy and infrastructure at Kohlberg, Kravis, Roberts & Co. “Public perceptions absolutely are the front-end problem of this industry,” he observed, adding that it’s the industry’s responsibility to work with all stakeholders to assure that shale gas’s considerable potential is realized.

Rainer Seele, chairman of Wintershall Holding GMBH, said the German firm would continue to develop Russian gas supplies with OAO Gazprom and examine shale gas opportunities in Argentina. “Russia has abundant resources, export capacity, and competitive prices which will continue to make it a strong supplier of gas to Europe,” he said.

“I do not expect large-scale gas production in Europe this decade,” Seele continued. “The resources are less than in the US, the population density is greater, and the drilling and production costs are higher.” Others at the conference weren’t ready to dismiss Europe’s shale gas potential. Individual countries’ policies range from a moratorium in France to strong interest in Poland and elsewhere, they told OGJ.

US producers might find it very profitable to liquefy and export gas in the next decade, but not for much longer because overseas shale resources could still be developed, observed Gary Adams, vice-chairman of Deloitte’s US oil and gas practice. “Companies which operate in shale plays will need to be super-efficient,” he said during a press conference. “The ones which are focused only on gas will need to be lean and mean. Otherwise, they’ll be acquired or merged.”

Private financing’s role
Depressed US prices are hurting many producers’ cash flow, Lipschultz said. “Private financing can help bridge the gap and allow production from leases which otherwise might be deferred or formation of joint ventures to consolidate resources to improve economics,” he said. “The challenges we face will need to be solved by people sitting together to solve problems. You have spent your careers developing skills to produce oil and gas. We’ve spent ours learning how to mobilize capital and deploy it to maximize financial returns.”

Adams said Deloitte is preparing a North American gas market study, which it plans to release this summer. It examines economics under three scenarios: a base case in which demand and government policies return to pre-2008 recession patterns, a case in which climate change concerns lead governments to adopt carbon control policies, and a new “wastewater worry” scenario under which governments adopt stringent regulations in response to drinking water supply contamination concerns.

Preliminary indications are that US gas production costs would increase most under the carbon concern scenario, which could revive LNG imports, Adams told reporters. “As worldwide LNG production doubles in the next decade, more could be available to the US, which would help keep domestic prices down,” he said. Terminal owners may want to think twice before spending millions of dollars dismantling gasification systems for LNG imports and replacing them with liquefaction units for exports, added Joe Stanislaw, Deloitte’s independent senior advisor for energy and sustainability.

Seele said while Wintershall’s partnership with Gazprom continues to provide Germany with economically competitive supplies, he also supports the European Union’s strategy of building southern pipelines although geography poses significant construction challenges. “Market changes pose new challenges,” he observed. “The ability to maintain equal partnerships with the right technological investments will be the recipe for success.”

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