Thread: China backs shale revolution

China backs shale revolution

Peter Foster, Financial Post
Friday, Feb. 11, 2011

Encana's announcement on Wednesday of a proposed $5.4-billion investment by PetroChina in its shale gas operations confirms the soaring importance of a resource that 10 years ago was hardly on the commercial map.

It also looks like a nice piece of timing, since it came before Encana's revelation Thursday that slumping natural gas prices had continued to hit earnings in the fourth quarter, although this was hardly unexpected.

The market liked the news of the Chinese investment much more than it disliked the earnings dip, and Encana shares put on 4.5% to close at $32.02. PetroChina shares, by contrast, fell on the news, since the Chinese company's purchase price embeds a significant premium to current depressed North American gas prices. One key issue is how long those prices are likely to stay down. Given the huge supply potential of shale gas, that could be quite a while. The commitment certainly seems to confirm China's long-term orientation, because it comes at a time when the North American market is awash with gas, Canadian gas exports to the U.S. continue to slump, and there is no other place for natural gas currently to go. PetroChina's investment is undoubtedly being made with an eye to the planned $3.5-billion project to ship LNG out of Kitimat and link Canadian gas to Asian markets. As such it should be welcome to Ottawa. There is little reason to see why the federal government would raise any objections to the deal.

Nevertheless, Kitimat will continue to attract opposition from environmentalists, who are also making hay with concerns about the pollution potential of shale gas. If they really were concerned about reducing carbon dioxide emissions, they might welcome a surge in natural gas supply and usage, given that it has half the emissions of coal.

Shale gas has a lot in common with the oilsands, both as an "unconventional" resource, and an inviting target for hysteria. Like the oilsands, and unlike conventional oil and gas, it doesn't come to you; you have to go and get it. Conventional petroleum is trapped under enormous pressure in porous rocks beneath an impermeable rock cap. Drilling penetrates the cap and allows the oil and gas to flow under its own pressure. By contrast, oilsands have to be mined, while shale gas has to be accessed by drilling into "tight" rock formations and then opening up fissures via high-pressure hydraulic fracturing, or "fracking." The use of chemicals, and claims that fracking has led to the pollution of groundwater, has stirred controversy. Last year, a movie called Gasland featured flammable tap water as a shale gas by product!

This is not to suggest that fracking does not carry environmental dangers, but these are matters of geology and risk management, not a topic for yet another green morality play. Unfortunately, where radical NGOs go, governments are sure to follow. The U.S. Environmental Protection Agency has leapt eagerly into the fray. The state of New York has declared a moratorium on fracking, and the city of Buffalo has recently declared itself a frac-free zone, even though nobody apparently wants to drill there.

In Canada, the discovery that Quebec has considerable shale gas potential has become entangled with accusations of corruption in the government of Jean Charest. One Quebecer is currently on hunger strike against such corruption, and has thrown in opposition to shale gas for good measure. The Quebec Oil and Gas Association recently hired former Parti Quebecois premier Lucien Bouchard to help lobby for provincial development. M. Bouchard will require all his considerable negotiating skills.

One of the benefits of the Encana operations into which Petro-China is investing is that they are in sparsely populated areas in northeastern B.C. and northwestern Alberta. However, that emphasizes the issues of new infrastructure and new markets.

Advances in fracking and horizontal drilling by North American companies such as Encana have opened up shale gas potential around the world. It has been suggested that PetroChina made this investment partly to gain access to technology, with an eye to its own domestic shale gas potential, but this seems an awfully expensive way to purchase expertise.

Global shale gas potential is already roiling energy geopolitics. ExxonMobil -- which has spent more than $25 billion buying up shale gas assets -- recently projected that natural gas will surpass coal as a global energy source by 2030. The chief economist of the International Energy Agency, Fatih Birol, has suggested that shale gas--with its low emissions and hundreds of years of supply potential -- was about to rain on the government-promoted renewables parade. The EU is clearly suffering from policy inertia. A meeting of EU leaders last week continued to talk of vast new networks to bring uneconomic wind power from the north and uneconomic solar power from the south.

Poland, Germany, France and the U.K. are among European countries with large potential shale gas deposits. Their development could be important in freeing Europe from the threat of disruptions from its main natural gas supplier, Russia, which has already used the "gas weapon."

The shale gas revolution is in its infancy, and technical and environmental issues certainly remain. Still, PetroChina's proposed investment is another strong vote of confidence. One thing the rise of shale gas confirms is that governments are extraordinarily bad at forecasting new technological developments, which arise naturally out of market innovation, not government subsidies.

http://www.financialpost.com/opinion/co ... story.html

The US has large oil shale deposits out west. Think we will join this parade, or will we ignore it and rely on Our Friend Mr. Sun?