The U.S. is seeing a big boom in shale drilling right now, but some companies are looking ahead to international options. Worldwide oil and gas reserves previously inaccessible or too costly to tap are now within reach – and some companies (and their investors) are poised to reap the benefits.
New extraction efficiency
In the past, companies basically drilled straight down into the ground to extract natural gas and oil. Now, new technology and drilling techniques allow them to access more oil and gas from a single well by drilling horizontally, using better drilling fluids, increased hole quality, and a host of other improvements. Schlumberger and National Oilwell Varco (NOV 0.20%) talk extensively about their technologies and how tech boosts their production beyond competitors'; technology is one of the most important assets they have for their shale projects.
Two of the most important efficiencies in shale wells are long horizontal wells, called laterals, and hydraulic stimulation. Horizontal wells keep the well in contact with as much shale material as possible. Hydraulic fracturing, or fracking, shatters that shale and releases trapped natural gas.
These efficient extraction technologies are part of the reason why shale well activity has increased over the past decade. In 2000, the U.S. produced 0.39 trillion cubic feet of natural gas. In 2010, it produced 4.8 trillion – a 23% increase, according the U.S. Energy Information Administration, or EIA. By 2035, shale gas production will account for 46% of all U.S. natural gas production.
A piece of the fraction
According to the EIA's World Shale Gas Report last year: "There is significant international potential for shale gas that could play an increasingly important role in global natural gas."
Out of 32 countries that were assessed for potential shale reserves, the EIA estimates 5,760 trillion cubic feet of recoverable shale natural gas. The map below shows the countries where the shale formations exist:
Source: U.S. Energy Information Administration
Red areas on the map show basins with resource estimates, yellow areas highlight basins without resource estimates and the white areas show countries included in the EIA's report. If we take the United States out of the equation, then China, Argentina, Mexico and South Africa top the list for largest shale reserves. Argentina's vast reserves explain why Chevron (CVX +1.62%) will drill 120 exploratory wells in the country over the next three years.
The amount of shale gas resources worldwide deserves more than just a passing glance from domestic companies, and investors. If we add shale gas resources to other proven worldwide natural gas resources, worldwide natural gas resources increase by more than 40%.
The opportunity
In a recent earnings call, the CEO of National Oilwell Varco said the company is exploring the vast potential of overseas shale projects, including "very attractive" plays in China and Australia.
ConocoPhillips (COP +0.53%) has large shale projects in the U.S., but has reduced production because of the influx of natural gas production by other companies, which drives down natural gas prices. The company bid for Chinese shale leases in October, along with BP, Total, and others – and they're all smart to do so. China wants shale gas production to hit 6.5 billion cubic meters a year by 2015, with a goal of 60-100 billion cubic meters a year by 2020.
China and other countries are trying to catch up with the resourceful new techniques the U.S. has employed to unlock its shale holdings. Back in January, China's Sinopec paid $2.2 billion to Devon Energy (DVN +1.38%) for a third of Devon's interest in five U.S. shale fields. Sinopec hopes to learn from Devon how to extract oil and gas from shale, while Devon uses the cash to cover drilling costs.
Over the past two years, Chesapeake Energy (CHK +0.00%) has made several deals in China, worth billions of dollars, with state-owned CNOOC (CEO +0.00%). Chesapeake has sold gas fields and pipelines to pay for its astronomical debt, but hasn't sold any of its extraction technology to CNOOC, according to The Washington Post. This could either be a smart move for Chesapeake, or missed opportunity. Time will tell.
National Oilwell Varco, ConocoPhillips, Devon Energy, and others like them are wise to work with foreign countries and companies. Whether by selling technology or taking their operations abroad, U.S. companies can benefit from a growing global demand for unconventional oil and gas extraction.
Investors should watch the relationship between foreign countries and companies like National Oilwell. China, for the most part, tried to keep non-Chinese companies out of its first round of shale play leases. When the country didn't get the bids it wanted, it started warming up to outside companies – a much better approach. But foreign shale plays are new territory for both sides, which means it could take longer to build strong relationships between governments and companies.
