REFINERY

A Chinese worker walks past equipment at an oil refinery of the PetroChina Jilin Petrochemical Co. in Jilin, northeast China.

AP file photo

The benefits of horizontal drilling and hydraulic fracking are by no means limited to North American tight shale oil and gas plays. In June 2013, the United States Energy Information Administration (EIA) released a world shale oil and gas reserve assessment that showed 32 countries outside the United States have substantial reserves locked up in 137 different formations - units that can be exploited using Bakken-like technology. In many cases, the report identified as potential oil and gas producers countries that heretofore have had little or just moderate domestic production. China and Australia for example.

China: Immense shale gas reserves

China is the world's second largest energy consumer - only the United States uses more British thermal units than the Chinese. China has the world's fastest growing economy and is the planet's largest energy producer. The country relies on coal for nearly 69 percent of its total energy consumption with oil accounting for 18 percent and natural gas just 4 percent. (China uses more coal than the combined consumption of the rest of the world.)

Until the early 1990s, China was a net oil exporter, which provided the country with a major source of foreign capital. However, the success of its hybrid socialist-capitalist economy has caused a demand reversal. In early 2014, China passed the United States as the world's largest oil importer. The primary driver in China's newfound oil appetite is the rise of a middle class that has abandon their parents' bicycles and motor scooters for Hondas, Toyotas and Buicks.

Anyone connected to international oil exploration and production will be quick to concede that the Chinese are now the chief competitor for reserves in developing countries. Today, China produces about 4 million barrels per day (bpd) at home (about four times North Dakota's Bakken play), but consumes some 6.2 million bpd. The shortfall is made up from imports mostly from Southeast Asia, but increasingly from global sources. Chinese drilling and pipeline investments are scattered from Malaysia to Kazakhstan, Sudan to Iran and from Nigeria to Canada.

EIA's 2013 global assessment placed China third behind Russia and the U.S. in tight shale oil reserves - with 32 billion barrels considered technically recoverable. However, the agency estimates China's shale gas reserves to be an enormous 1.115 quadrillion cubic feet. To put that amount into perspective, China's shale gas reserves equal about 41 years of present U.S. natural gas consumption. It is a tremendous potential clean energy resource for a country with the world's worst air quality.

Where will fracking water come from?

The Chinese government predicts demand for natural gas will triple by 2040. Replacing coal-fired power generation with natural gas will account for most of the increase. With conventional sources unable to meet the demand surge, developers are looking increasingly to the country's tight shale gas deposits. Geologists have identified 47 shale gas basins within the country. However, developing those resources are, for the time being, problematic for two reasons: (1) a lack of technological know-how and (2) a severe shortage of water. While the former can and will be overcome, the latter could be a real deal-killer.

Most of China's shale gas potential lies in formations that are underlain by geologic faults and highly prone to earthquakes. So China has invested billions of dollars in Western exploration and production companies - not so much for earnings potential as for the opportunity to better understand horizontal drilling and hydraulic fracking in areas with complex geology.

In 2010, the China National Offshore Oil Corporation invested $2.1 billion in Oklahoma City-based Chesapeake Energy, the most active American onshore driller. That same year, PetroChina invested $5.4 billion in Canadian horizontal drilling giant Encana. Earlier this year, Halliburton Company announced a partnership with China's SPT Energy to provide field services in the country's planned far western shale gas play. Three other American companies, Baker Hughes, Weatherford and FTS International, have announced similar deals with Chinese drillers.

To date, China has drilled about 100 horizontal wells into a tight shale in the Sichuan Basin, in the country's midsection. China's most promising (and most challenging) reserves, however, lie in the Tarim Basin, an arid region nearly half again bigger than Texas in the country's far west. Chinese geologists have identified 26 oil- and natural gas-bearing structures - some as deep as seven miles.

The World Resources Institute (WRI), a non-profit organization that advocates sustainable resource management, recently announced the Tarim Basin suffers from "extremely high" water stress and cautions developers that not enough water is available for large-scale fracking. (The average Bakken well requires about two million gallons in the fracking process and perhaps twice that amount or more in maintenance over a well's life.) Furthermore, WRI estimates that more than 60 percent of the nation's tight oil and gas reserves are located where water resources are insufficient for Bakken-scale drilling activity. How successfully frackers will compete with municipal, agricultural and other industrial interests for China's scarce water resources remains to be seen.

The next tight shale boom?

Washington, D.C.-based WRI estimates that 38 percent of the world's frackable tight shale is located in areas that are either arid or have high to extremely high water stress. Such is Australia's plight. Australia is the world's driest inhabited continent. Much of the country is desert or semi-arid. Australians consume more water per capita than any other country on earth, making the assignment of water resources critical in much of the country. Nonetheless, many international oil and gas analysts are picking Australia for the next big shale oil boom.

Australia is no stranger to extractive industries. Historically, some of the country's major exports have included: gold, diamonds, iron ore, nickel, uranium and many precious jewels. Australia is the world's second largest coal exporter. In a June 2013 report, the United States Department of Energy estimated Australia's recoverable shale oil reserves to be 17.5 billion barrels - compared to the previous estimate of 1.43 billion barrels from conventional sources. The same report estimated the country's shale gas reserves at 431 Tcf, 10 times previous estimates. (U.S. shale gas reserves are estimated to be 665 Tcf.)

Several sedimentary basins contain most of Australia's shale oil and gas. They include the following: the Canning basin in the northwest, the Georgina and Beetaloo basins in the north and the Cooper basin in the state of South Australia. The Cooper basin is the country's largest on-shore oil and gas producer. Production started in 1963 and has persisted through the present using conventional drilling methods. The basin currently has 160 producing gas fields and 75 producing oil fields and good infrastructure to refineries. So far, Australian tight oil and gas exploration has been conducted by small companies based in Brisbane, Perth and Adelaide.

In early 2013, Linc Energy, a Brisbane-based company, announced that two separate independent studies showed that tight shale in the nearly unpopulated area of South Australia contains almost as much crude oil as Saudi Arabia - no mean statement. The studies estimated oil/gas reserves in the Arckaringa Basin (around the tiny town of Coober Pedy) to be 103 billion barrels of oil equivalent (BOE) and possibly as high as 233 BOE. (Saudi crude oil reserves are estimated to be 263 billion barrels.) Other estimates place the Arckaringa reserves as low as 3 BOE.

Linc Energy is in the process of further evaluating the oil and gas reserves, which are harbored in shale units 3,500 to 5,000 feet deep. Initial exploration indicates the units will respond well to horizontal drilling and hydraulic fracking, however, the geologic complexity of the area could cause the cost per well to be half-again higher than that of a typical Bakken well. (In September 2014, Continental Resources revealed Bakken well costs are now reaching $10 million per well.)

Aside from its water issues, Australia is well positioned to become a major natural gas exporter. The country of 20 million has a relatively low natural gas per capita usage and good pipeline infrastructure including liquefied natural gas (LNG) facilities. Australian government officials estimate that by 2018, the country will export 25 percent of the world's LNG. Having energy-thirsty neighbors like China, Japan, and Indonesia will ensure long-term markets.

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