Approaching unconventionals

“Shale gas in this region has a completely different meaning than development of shale gas in Argentina for example, or in other parts of the world.

In this region, the development of unconventional gas is mainly to meet increasing domestic demand and to displace, in some cases, the import of gas, like in the UAE, Kuwait, or Oman. and in other cases, like Saudi, to actually displace the usage of oil for domestic purposes,” explains Ada Perniceni, principal, Middle East at global analyst firm AT Kearney.

Burning oil
Saudi Arabia currently generates almost half of its electricity burning oil, both heavy crude and diesel, and the loss of revenue from the oil being burned for internal energy generation, instead of sold, is massive.

The cost of shale oil or gas, is higher than exploring conventional reserves, however, when you look at the cost of using oil for power and water generation it is prohibitively expensive, it is oil that is lost at $90 or $100 a barrel.

“When you look really at the overall dynamics of how oil is used in this region for power generation vs export and how shale oil and gas can help free up oil that is currently used for power generation, then it become very economical.

I would say it makes a lot of sense to explore shale gas in the Middle East to free up oil used in power plants and that oil will be exported at a much higher value addition to the country.

I believe that the major challenge is water and how water will be brought to these sites for fracking and basically releasing gas from the ground,” explains Yiannis Bessiris, Middle East sales manager, Advanced Solutions, at Honeywell Process Solutions.

The UAE are following a different strategy; they are not burning oil, but are a net importer of gas, despite having large gas resources. The UAE is also planning additional investments to increase its capacity to import additional gas to meet internal demand, according to AT Kearney.

“If we look at the GCC, what we see is that there is a sharp increase in the demand for gas, and domestic resources are not enough to meet that increase. That is true for all the countries with the only exception of Qatar of course.

The good news for the GCC countries is actually that there are shale resources in this part of the world. Preliminary estimates tell us that approximately 700 trillion cubic feet should be present in the region in terms of unconventional gas, we are not talking only about shale, but in generally unconventional which includes tight gas,” states AT Kearney’s Perniceni.

700 trillion cubic feet is a large quantity of gas and is larger than what the US currently has in unconventional form, which is approximately 550 trillion cubic feet. Seven-hundred cubic feet is more than enough to address domestic energy demands and most of these resources are estimated to be a concentrated in Saudi Arabia, which also happens to be the biggest country, and the most populous one, with the biggest growth in demand for gas and the biggest shortfall.

“Saudi is expecting shale gas to contribute substantially to their gas needs, but for the time being I think being still in the early exploratory stage it is still too early to really tell what the impact is going to be. Even though I think everyone is very, very positive,” says Perniceni.

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The water problem
One of the major problems with accessing shale gas reserves through fracking across the Middle East region, is the massive volumes of fresh water needed to frack that just are not available in these desert regions, and while there are methods being investigated that use less water, they are still very much in the research phase and may not be able to be used at the depths required here in the region.

“The major challenge here is water; fracking utilising water may not be applicable here in the region, and so they may have to find a technology that works. The US has a lot of cheap water, so we have no catalyst to drive innovation around replacement of water,” explains Chris Faulkner, CEO, Breitling Energy Companies.

“The use of water, the flow back of water and the disposal of that water and the amount we use in the US has not hindered our progress, but the Middle East is very poor with water and you have to use fresh water not salt water, so you cannot just suck it our of the sea.”
According to AT Kearney, there are large technological advances that need to be made in the fracking space before it becomes a reality in the region.

One of those technological advances may involve the use of desalination to provide the 1.9 billion litres of water, that is needed to frack the average well. While desalination is expensive, according to Breitling Energy, it is a possibility.

“You can use desalinated water, but you have to do it in very large quantities, each one of these wells, at the rate we are doing them, take 2.3 billion litres of water per well. That is for 30 frack stages, which no one here will do for a while, but at the end of the day these are very expensive processes without any of those things added in.

For us, we have been able to reduce the drilling time form 90 days to 27 days for wells that are 3,000 metres down and 3000 metres sideways with large frack stages, but still that has driven the cost down, but it is still in the $50 range, and the tar sands in Canada it is almost $80 to get a barrel of oil out of the ground. Desalination will add another $20 a barrel so that won’t necessarily work,” explains Breitling Energy Groups’ Chris Faulkner.

Honeywell says that the amount of energy needed to desalinate water makes the cost of extracting gas too high.

“If you use oil to desalinate water, then the same water is used for gas to be used for powering energy plants, it will be very expensive. I don’t seriously see the economic justification for this, but I think some kind of innovation will come up to resolve this water issue, either using salty water located in different areas in the region, or other techniques to get this shale oil and gas out,” Bessiris states.

While air fracking can be used in shallower fields, this is also a non-starter for the Middle East region because most of the unconventional assets are deep.

“I don’t think air fracking works here because of how deep the unconventional oil and gas is. So no, it has to be currently water, people have used gel propane and other types of additives, but right now water is predominant,” says Faulkner.

Reserve uncertainty
According to AT Kearney another issue is that there is currently a lot of uncertainty around the geology or the type of reservoirs that are present in the Middle East, in the GCC in particular because the appraisal has just started, so there are a few appraisal wells, but very little data to compare it to.

“There is still a lot of uncertainty about the gas which is technically recoverable, the technology needs some fine tuning and some evolution in particular related to the use of water.

The infrastructure is also not there yet. The areas where shale gas is, in particular in Saudi Arabia, are not areas where there is at the moment a developed infrastructure, so you need to build the infrastructure to be able to take the gas from there to the gas plants and be able to use it,” explains Perniceni.

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Expense of non-conventional
Non-conventional oil and gas are very, very expensive to produce, and the Middle East region is used to lifting oil out of the ground at around $20 to $25 a barrel, according to Breitling Energy, whereas in the US it costs about $50 to $55 per barrel to bring oil out of the ground.

“Fracking wells decline very rapidly and are very, very expensive, they are completely opposite to conventional thinking in the Middle East. It is interesting today that there is more negatives than positives still around unconventionals and fracking because it is very early days.

I think this is going to be very like China and the development of unconventionals is not going to happen at the rate it happened in the US. I think the challenges that the Middle East has is the cost of break even price of oil has gone up substantially, the oil price has to remain high.

Iraq and Iran are big elephants in the room. Iran could start an oil price war, Saudi has to make some decisions and they cant afford to produce cheap oil,” states Faulkner.

The cost of fracking in the US, which has been taking advantage of unconventionals for around 20 years now, is now 55% to 60% of the total cost of drilling, testing and completing the well.

The majority of the expenses are related to the fracking of the wells, the drilling is cheaper than the completion part, according to Breitling Energy Group.

“It will be double the cost of the US to do it here, it will come down to match the US’ costs once the larger service sector gets in place and there is more competitiveness. There were 80 rigs in Abu Dhabi two years ago, there are 200 now because they are looking to replace the conventional assets they are using. In the US there are 1750 rigs with a massive competitive infrastructure.

I suppose things will have to start happening here if they are going to compete, but at the end of the day the numbers have to work but it is expensive oil. The costs will come does, sure, but not in the near term I think we are still 10 years away from any major unconventional production if at all in the region,” states Faulkner.

Where are we with unconventionals in the GCC?
There is currently one unconventional development in the region which is more advanced that the others; the tight gas development in Oman, which is a project being worked on by BP, one they have been working on for over 10 years, according to AT Kearney.

“The facility is not in production yet. There is a pending agreement between BP and Oman to go ahead, but what we can expect is probably to see the tight gas from Oman first followed by that we can expect some shale gas out of Saudi Arabia. Saudi Arabia’s plan is actually to start producing in 2016, and they are extremely committed to that and extremely aggressive.

We don’t know exactly if they will achieve the 2016 milestone, but most likely some shale gas will come out of the ground in Saudi sometime around 2016/2017,” explains Perniceni.

According to Breitling Energy, Algeria is huge for fracking, there is some underway in the UAE, but the extent of resources is very unknown, and there is a huge drive to extract unconventional gas in Saudi Arabia, but again, Breitling Energy says that noone really knows how big those reserves actually are.

“Algeria I think has a great asset that is not very deep, they have a lot of infrastructure, they can pipe gas to Europe and that would be a big deal for them. There is a lot of concern that those assets in Algeria and investment in those countries is going to be slow and difficult given the difficulties of those local areas because companies are fearful to go in there, just like Iraq,” says Faulkner.

The unconventional assets in Dubai are very, very deep underground, and the government is not going to allow drilling in certain areas of Dubai.

“People here look at it to say, they already subsidise gas, it is cheaper than bottled water. The rulers have to keep a balance with people, they have to look at things from a certain vantage point and I think unconventional assets are a great idea here, but I don’t know if people are giving it the real time table that it is going to require,” states Faulkner.

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Asset decline saviour
According to Breitling Energy, the regional industry hopes that the development of shale gas in the Middle East will be the conventional asset decline saviour, as it was in the US, but there is just not an area currently in the Middle East that will be able to establish commercial production. In 2003, according to Breitling, Saudi needed $20-25 to pay its bills and that number is now above $80.

“What’s going to happen if Saudi have to turn to expensive oil, that is a game changer, Saudi cannot make enough money on that to pay their bills, so what is really going to happen?”

Advancements in the Shale Oil and Natural Gas Space
By Adriano Gentilucci, Commercial Director, Middle East & Africa, Dow Oil, Gas & Mining

Shale oil and natural gas exploration and development has become a high priority in many regions to help meet growing global energy demand, which is expected to rise over 50% by 2035. Consequently, it is essential to understand the effect of shale oil and natural gas extraction in the Middle East region.

Global Trends and Regional Challenges
The increase in global energy consumption remains a significant challenge. As the price of oil continues to rise, oil dependent nations are looking for ways to meet domestic needs by diversifying their energy production and output to include a variety of unconventional and alternative sources, including shale gas and oil.

However, the Middle East region, home to 40% of the world›s proven conventional natural gas reserves, is in a different position than countries like the United States. While conventional natural gas reserves in North America have been well documented and developed, reserves in the Middle East are still in early stages of development.

Advances in Oil and Gas Production and Processing Technology
As unconventional natural gas reserves are discovered and developed, there are number of challenges associated, including:
• Long, complex horizontal drilling
• Smaller scale gas production
• Large quantities of fracturing flowback and formation water that must be treated before recycle, reuse or discharge
• Extracting contaminants to bring the gas to market