Financieele Dagblad: Shell is fully committed to oil and gas from shale

Printed below is an English translation of an article published by the Dutch equivalent of the Financial Times, Financieele Dagblad under the headline “Shell is fully committed to oil and gas from shale“.

By Bert van Dijk • Energy Editor

Shale gas and shale oil may then have a negative sound in Europe and hardly play a role, governments in the US, Canada, China and Argentina do see a lot of it. Shell hopes to benefit from this favorable investment climate in the coming years, especially now that the company has drastically reduced the costs of extracting shale gas and oil in recent years.

‘A hidden gem in the portfolio’. For example, an UBS investment bank analyst described Shell shale activities at the beginning of last year in the so-called Permian basin in the United States. Shell CEO Ben van Beurden could agree: ‘I think your observation is correct.’

Not always a success

On Monday, Van Beurden repeated once again emphatically in the British business newspaper Financial Times that he expects a lot from Shell shale concessions in the US, Canada and Argentina. Depending on the development of oil prices over a number of years, Shell will continue to invest in shale ‘because we really want to grow this activity quickly’.

In the past, Shell has not always had great success with its shale activities. For example, in 2013 the oil and gas multinational wrote off $ 2.1 billion on the value of a number of shale gas fields in the US and Canada. But according to Van Beurden, Shell has already reduced the costs to such an extent that the extraction of shale gas and oil, even at oil prices far below the current level, is profitable.

Drilling from Canada in Argentina

Shell therefore thinks that it can now compete very well with the specialized American shale farmers. ‘We have learned to be just as flexible as the smaller companies. Moreover, we can apply the knowledge we have gained here all over the world, for example in the extraction of shale gas in Argentina. That advantage of scale does not have a smaller oil company, “said Greg Guidry, the Shell director who is responsible for the shale activities of the multinational from the office in Houston, at the end of last year against the FD.

For example, in Argentina, Shell controls remote drilling from a control center in Calgary, Canada. “After drilling eleven wells in Argentina, we were already at the same cost per well as after drilling forty wells in the Duvernay field in Canada,” said Andrew Brown, head of Shells oil and gas production operations last year in a conference call with analysts. ‘We have the expertise to do things that are difficult to copy.’

Shell expects to be able to realize a free cash flow for its shale activities of $ 1 billion to $ 2 billion per year in 2020 through such cost savings.

Shorter production cycle

The fact that Shell wants to work even more emphatically on the highly competitive market for shale also has to do with a lack of alternatives. ‘Where else should new oil come from for them at the beginning of the next decade?’, Jilles van den Beukel, geophysicist and independent oil and gas expert, wondered. ‘If you compare the options for new oil worldwide that are accessible to Western companies at attractive conditions, shale oil in the US will have relatively low costs, comparable with, for example, the deep sea in Brazil.’

The extraction of shale gas and oil also has a much shorter production cycle than, for example, deep-sea oil. That reduces the risks of major setbacks. The exploration for and production of oil in the deep sea, such as off the coast of Brazil or in the Gulf of Mexico, takes years of exploration and construction of production platforms, but once the oil is pumped up, it provides a high and predictable cash flow for many years.

Ask for oil in the longer term

‘With relatively large uncertainty about the long-term demand for oil, companies become more cautious with projects with a very long duration. There is also a trend within the industry for shorter-term projects, ‘says Van den Beukel.

‘We would like to have both activities (deep sea and shale, red.) In our portfolio,’ said Van Beurden early last year. ‘Actually, we both need them. They are complementary. ”

Argentina

Apart from the economic rationale, climate also plays a role. ‘If you are very worried about climate and achieving a peak demand for oil, you may prefer to invest in something with a payback period of two years instead of twenty years, according to Van den Beukel.

The shale activities of Shell are mainly concentrated in the US, Canada and Argentina. The latter country is hoping to develop into a region just as important for shale as the Permian basin in Texas and New Mexico, the largest shale area in the US. It is mainly Vaca Muerta, a region in Patagonia where large quantities of oil and gas in rocks are trapped deep underground.

BP indicated earlier in an interview with Bloomberg that he would rather invest in Vaca Muerta than in the Permian, because the price-quality ratio is better. For ExxonMobil, the area is one of the nine key areas for the business in the Western Hemisphere. And so also for Shell, which announced last year that it invested $ 300 million in a project in the Argentine region.

What is shale?

Shale gas and oil is also called unconventional, because it can not be retrieved relatively easily in the traditional way by drilling a well, as is done in the Groningen field. Because the gas is trapped in porous layers, it is easier to retrieve.

Shale gas is gas that, unlike conventional gas, has formed into hard rock (shale) and is released by breaking up the rocks – often horizontally – through bores. This process is called ‘fracking’. A mixture of liquids (water and chemicals) and sand is brought into the well under high pressure to break up the rock, after which the released gas can be brought up.

Fracking often happens a few kilometers underground, under drinking water reservoirs. Steel casings of pipes should prevent drinking water from being contaminated. From one drilling location up to fifty or more shale wells can be beaten.

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