As oil companies look to replicate shale success outside US, they face big challenges

Over the past 20 years, the U.S. made unconventional oil drilling more than just economically viable. It shifted the entire global energy picture as America was launched into the top position of oil-producing countries. 

However, production in shale plays will gradually decline over decades, and companies will likely have to look for opportunities to sustain their portfolios. Most of those opportunities will be abroad, but developing those resources won’t be easy. 

America enjoyed the ideal conditions for the development of the technologies – pairing hydraulic fracturing with long lateral horizontal drilling called “fracking” – that allowed producers to extract oil from tight shale formations underground. America had many spots with the right type and scale of geology. The country also had extensive infrastructure and services to support the operations, a facilitating regulatory framework in most states, and enough interest from investors to pay for the capital expenditures. 

But such conditions are going to be much harder to find elsewhere. A new report by Wood Mackenzie shows where the most likely spots will be for the next phase of the American shale. 

Previous attempts saw little success

Unlike conventional drilling, for hydraulic-fractured wells to be profitable, there has to be high well density. They have a short window of peak rate, so there’s a constant need to drill more wells to sustain or grow production. 

Companies have been exploring opportunities abroad, as there are plenty of shale-rich basins for companies to tap, and some have a resource potential that could rival those of the U.S. shale plays. 

So far, however, there've only been two large-scale successes, in Argentina and Saudi Arabia. This isn’t because of a lack of new opportunities for shale development, the Wood Mackenzie report found. It’s largely because there were better opportunities in the Permian Basin of Texas, which offered low-risk, lower-cost acreage. 

Companies had initiated exploration in the early 2010s, which Wood Mackenzie refers to as Global Shale 1.0. The hope was that the success in U.S. unconventional oil could be replicated abroad in China, Columbia, Germany and Poland. However, such efforts ran into cost and regulatory problems. 

Wood Mackenzie estimates that companies spent over $1 billion on shale gas exploration in Poland alone from 2009 to 2015, with no commercial outcome. 

In the early days of America’s so-called “Shale Revolution,” the U.S. oil and gas industry had hundreds of large and small operators willing to bet everything to succeed in a succeed-or-fail gamble to acquire and exploit the best drilling acreage. 

That didn’t really exist in Global Shale 1.0. The companies that tried ran into insurmountable issues. Many wells failed to produce oil economically, and the exploration wells took years to permit and drill. At the same time, the overproduction of oil set the stage for oil prices to crash in 2015 and 2016, and companies slashed their exploration budgets. 

Ranking potential of shale plays abroad

The war in Iran, however, has highlighted the need for alternative sources of oil and gas, and Wood Mackenzie expects that to produce more interest in international shale opportunities. In addition, the risk of resource depletion in the long-run, has U.S. producers looking abroad again. 

Over the past decade, the Vaca Muerta in Argentina was developed, and today produces 1 million barrels of oil per day. Saudi Arabia’s Jafurah shale gas play came online earlier this year. 

Opportunities in Algeria, Australia, Indonesia, Mexico, Turkey and the United Arab Emirates are attracting most of the industry’s interest. The plays in Argentina and Saudi Arabia had the geology and scale, infrastructure and services, regulatory environment and investment momentum. The plays in these other opportunities aren’t as ideal.

The UAE’s infrastructure and services are not quite as strong, but otherwise the opportunities there have a lot of potential. Mexico has a regulatory framework but is weak in the other areas. Turkey has the investment momentum but is weak in other areas. 

Australia has the investment momentum, but is not strong in geology and the regulatory environment. Wood Mackenzie rates its infrastructure and services as “discouraging.” Algeria has the geology, but the report rates its regulatory framework as discouraging. 

Wood Mackenzie ranks the UAE as having the best prospects among the opportunities, followed by Algeria due to its geology. Mexico has proximity to the U.S., allowing for easier equipment imports. Australia, Turkey and Indonesia round out the bottom three. 

The report warns that success in these opportunities is far from certain. Countries hoping to see their own shale revolutions will need to create frameworks conducive to these industries.