12 june ipa network mtg ucg

Economic Opportunities in Unconventional Gas

Colin McNaught

Industrial and Power AssociationNetwork Meeting

12 June 2013

Introduction

• Covers some results from report to Scottish Enterprise on the economic opportunities global unconventional gas

• Recognises that global opportunities exist and some Scottish companies have already moved to exploit these

• Unconventional gas is an opportunity and a threat to the oil and gas industry in Scotland.

• So important that potential suppliers of goods and services make informed responses about their involvement

Agenda

• Where are the opportunities?−Review of selected markets

• How big is the opportunity? −Review of economic impacts

• What are the specific opportunities? −Supply chain analysis

• Conclusions

Global Resource

• Shale gas reserves are much more common than conventional gas reserves.

• Offers countries with no past in hydrocarbons to develop indigenous resources, with security of supply and energy cost benefits.

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Impacts on gas prices in the US

Comparison of traded prices for natural gas in $/Mmbtu: 1994 to 2011

Factors that drive markets

Factors

Scale of resource The amount of recoverable gas

Accessibility of resource The cost of physically accessing the gas

Security of supply benefits A key driver for Government and regulators

Long distance gas pipelines Access to markets for gas production

Skilled oil and gas workforce Needed across all stages of project development

Supporting infrastructure Road, Water etc.

Stable regulatory system For permits to develop and operate as well as fiscal incentives

Privately owned mineral rightsWas a key factor in the US, but other markets have government owned rights

Socio-Political acceptance An important influence on planning and regulation

Markets Studied: USA

• Largest and most established unconventional gas market.

• Short term lower gas prices are reducing development.

• But an equilibrium is likely to be reached, where the pace of new development is appropriate for the price of gas.

• If this equilibrium is reached at lower levels of market development, the scope for Scottish suppliers will be much reduced, as the local experienced supply chain will be less stretched.

• However if the pace of development remains high, or the supply chain is stretched by addressing the shale oil or tight gas markets, there will be greater opportunities for Scottish suppliers.

Markets Studied: UK

• While the UK does not have the highest reserves, the existing regulatory framework for oil and gas development is in place and supports extensive conventional oil and gas investment.

• Recent developments announced to encourage shale gas development:

−Tax incentives as a shale gas field allowance which would extend the ring-fence expenditure supplement from six to ten years for shale gas projects.

−Technical planning guidance on shale gas by July 2013 to provide clarity around planning for shale gas.

−Proposals to ensure that local communities will benefit from shale gas projects in their area.

• The developments make the UK a most promising opportunity for growth.

Markets Studied: Poland

• After initial investment, shale gas developments appear to be stalling.

• Government approach to regulation and role of state owned companies reduces opportunity in Poland.

• Market for gas services in Poland is dominated by a very large subsidiary of the state-controlled monopoly with over 50 land rigs, this leaves very little space for other players, apart from:

−Specialist services, which are not available on the local market;−Equipment and products

• Market opportunity in Poland is small and specialist, and is likely to remain small for some time to come.

Economic Impact Assessment

• Understanding the economic impacts signposts to the areas of greatest job and value creation and hence the company level opportunities.

• Economic data is necessarily US based, as this the main market thus far.

• Several US studies conducted:−US level−State level−Shale play level

US Wide Impact

• A study by IHS in October 2012 assessed the economic impacts of unconventional oil and gas on the US economy.

• Covered unconventional oil, tight gas and shale gas.

• The headline findings for shale gas only were:

−Upstream capital investment in 2012 of $87 billion−Lower 48 employment of over 900 thousand in 2012−Valued added of $121 billion in 2012−A projection that capital expenditure of almost $3.0 trillion would be made

in unconventional natural gas activity between 2012 and 2035.

US Economic Impact

• For the US market this strongly suggests that the direct opportunities are in the mining and manufacturing elements, e.g.:− Drilling rigs, fracking and associated equipment. Scottish companies

need inventory of equipment in the US to provide the drilling services, consumables and equipment.

− Manufacture of equipment. This includes the capital equipment (drilling rigs, frack trucks, frack pumps, mud pumps, well heads etc.) and the consumables (drill mud, tubulars, etc. ).

• The indirect impacts are greatest in the service sector. Moving experienced professional staff around the world is already a common element of the oil and gas service industry.

• The labour opportunities are also greatest in the service sector. As many Scottish oil and gas workers operate as one person businesses, this is a potential opportunity for these individuals.

UK Economic Impact

• Using US analysis and transposing this to UK• Using capex and well numbers for the UK’s Bowland Shale

− A mid scenario of well development of 400 wells drilled over a period of 9 years.

− A capex of £10.5 million per well

• Estimated value added of £7.7 billion

• Expectation that estimates of UK shale resources will increase with new BGS data, may increase economic impact

Supply Chain

• Many elements of the unconventional gas supply chain are also part of the conventional supply chain.

• Unconventional sector has important differences:− Cost base, margins lower, with high capex for the total recoverable

resource− and service levels that are required for economic success in the

unconventional gas market.

• The global market for specialist equipment and services is the main prize for Scottish suppliers

• Development of unconventional gas in UK may also provide additional opportunities for local providers of non-specialist goods and services.

Supply Chain

The early stage development markets have the greatest need for innovation or adaptation of existing supply chain offers. Hence:

−Scottish companies wishing early market share will need to invest now to match the short and medium term exploration and development opportunities.

−These earlier stage opportunities may have higher barriers to entry as they may need prior experience in the unconventional gas sector. There will be established competition in the exploration and development phases, albeit predominantly US based.

Conclusions

• Short term market will be dominated by the US• US market factors are unique, but there is potential growth in UK,

Australia and other markets• Scottish companies have acquired businesses in the US to break

into the dominant market• Specialist Scottish suppliers have orders for Australia and other

markets• Scottish Enterprise now considering options to support export

potential.