PERTH (Reuters) - Australia’s fledgling shale gas sector is picking up steam, but significant production is still at least a decade away, even if the industry clears hurdles such as high costs, a growing shortage of labor and environmental concerns.
Global shale gas exploration and production has taken off in recent years, particularly in the United States, where rising production has cut the need for the world’s largest economy to import gas, instead turning the country into a gas exporter.
But shale gas faces a bumpier ride in Australia, where drilling costs are triple those of the United States, labor costs about 50 percent higher, and the continent’s vast distances and infrastructure deficiencies will slow progress.
A recent flurry of activity in shale gas has awakened speculation the new energy source could lead Australia’s next wave of energy growth, after the nation’s A$70 billion coal seam gas industry.
“There’s very high potential. The amount of shale that’s available is more than even coal bed methane. But I don’t see significant shale production this decade,” said Tony Regan, an analyst with Tri-Zen International in Singapore.
“We’ll have pilot plants and people will declare first production, but it will be relatively small quantities. It’s going to be small production within the next five to ten years, but could become substantial after 2020.”
Australia has 396 trillion cubic feet of technically recoverable shale gas resources, the U.S. Energy Information Agency says, equivalent to about 46 percent of U.S. reserves.
ConocoPhillips this month became the first U.S. major to step into the Australian industry and Australian energy explorer and producer Beach Energy tapped its first shale gas well with results that were better than expected.
Australian oil and gas explorer New Standard Energy has made a preliminary agreement to farm some of its shale gas acreage in Western Australia’s Canning Basin to ConocoPhillips for A$109.5($118.703) million.
Also in July, Beach Energy’s first shale gas well in central Australia’s Cooper Basin produced 2 million standard cubic feet per day (mmscf/d), five to ten times the company’s expectations.
Top global miner BHP Billiton, also known as “the Big Australian,” placed its bet on shale gas when it announced mid-month it would buy U.S. Petrohawk Energy Corp for $12.1 billion in cash, representing a 65 percent premium.
Although the company said it was not looking to acquire Australian shale gas assets, some speculated the mining giant might bring shale gas expertise to future investments.
“This sector is going to take off at some point and I think we are right at the early stages. I liken it to the early days of what happened on the east coast with coalbed methane,” Sam Willis, managing director of New Standard Energy, said.
Proponents say Australian shale gas could take a course similar to that of the U.S. industry.
“We’re sort of where America was 10 years ago,” said Chris Jamieson, investor relations manager at Beach Energy, adding that he saw Beach having some small commercial operations by 2014 to 2015.
Others say the U.S. shale gas industry was 20 years in the making and emerged when U.S. gas prices exceeded $6 per million British thermal units; natural gas prices in the U.S. have since fallen to about $4 per mmBtu as shale gas brought a supply glut.
High costs that have plagued more conventional gas development as well as Australia’s other mining and resource projects will also pose a challenge for shale gas.
Australian shale gas drilling costs are about three times those of the United States partly because of tight labor supply, and although industry growth will bring costs down, they are only likely to drop to one and a half to two times those in the United States, Citigroup analysts said in a recent note.
“Australia is already suffering skilled labor shortages due to the boom in the coal seam methane, LNG and mining industries. We understand labor costs in the Australian petroleum industry are currently 40 to 50 percent higher than in the U.S., which has a flow on effect to both cost of services and supplies,” Citigroup analysts, led by Mark Greenwood said in a recent note.
And environmental concerns have been stirred by ”hydro-fracking, a drilling technique that shoots water and chemicals into shale rock at high pressure to produce the gas, particularly over how the technique could affect water quality, prompting a ban by Australia’s New South Wales state.
The vastness of the distances and lack of infrastructure also pose challenges-- natural resources are often thousands of kilometers from the nearest town, with nothing in between.
“It’s not like you can get a rig from the next county. A lot of people just don’t realize the logistics,” Peter Strachan, an analyst with Stock Analysis in Perth.
Australia’s shale gas reserves are scattered across the huge continent, with the most advanced operations in the center-east Cooper Basin. The Canning Basin lies in the Great Sandy Desert in the northwest, with the Perth Basin on the west coast.
Shale gas projects, which will produce cleaner-burning natural gas, could get a boost if Australia’s A$23 per tonne proposed carbon tax moves forward.
The tax could increase Australia’s demand for gas as it weans itself off coal.
“If we get this carbon tax, surely there’s going to be upward pressure on east coast gas prices,” Adrian Wood, an analyst with Macquarie in Sydney, said.
Australia’s east coast, home to its major population centers, is relatively accessible from the Cooper Basin, where Beach Energy is exploring for shale gas.
“You are closing down a lot of these more dirty power stations in South Australia and Victoria and you can supplement that with gas-powered stations fired potentially with shale gas from the Cooper,” Wood said. ($1=0.922 Australian Dollars)
Reporting by Rebekah Kebede; Editing by Clarence Fernandez