Evaluating the effectiveness of government
initiatives and intervention policies in emerging
unconventional gas markets
Professor Stefaan Simons
Director, International Energy Policy Institute
UCL Australia
University College London
Australian Domestic Gas Outlook 2014 ǀ 25th-28th February 2014 ǀ Sheraton on the Park ǀ Sydney
INTERNATIONAL ENERGY POLICY INSTITUTE
Outline
• Shale gas prospects in Australia – learning lessons from
the U.S. experience
• Managing natural gas resources – LNG vs domestic
consumption
• Comparing global best practice in community
engagement and environmental regulation with
Australian policies
• What is the potential for targeted governmental
initiatives to mitigate market failure risks?
INTERNATIONAL ENERGY POLICY INSTITUTE
Download the paper from:
http://www.ucl.ac.uk/australia/files/shalegas-in-australia-green-paper-final
INTERNATIONAL ENERGY POLICY INSTITUTE
How shale gas revolution evolved in the US?
US
Characteristic
Favourable geology
Lots of drill core data to help identify “Sweet spots”
Yes
Weak environmental regulation for fracking
Yes
Tax credits + Intangible drilling cost expensing
Yes
Property rights to the landowner
Pipeline access very easy – large network + common
carriage
Dynamic and competitive service industry
Yes
Population familiar with oil and gas operations
Yes
Licensing large areas with vague work programs
Yes
Significant government investment in basic R & D
Yes
Much of the shale gas has high liquids content
Yes
Higher gas prices and demand
Yes
Investment on infrastructure
Yes
Yes
Yes
Yes
INTERNATIONAL ENERGY POLICY INSTITUTE
Geology
Temp. (F)
(75,340)
Thermal maturity (%)
(0.65,2.5)
Thickness (ft)
(160,1200)
Max
Nappamerri
Barnett
Eagle Ford
Haynesville
Clay mineral content
(%)
(8,50)
TOC%
(1.1,12.5)
Horn river
Marcellus
Woodford
Antrim
Quartz%
(15,61)
Ohio
GIP (bcf/sqmile)
(7.5,220)
Adsorbed gas (%)
(20,70)
New Albany
Lewis
Fayetteville
Porosity (%)
(3,11)
INTERNATIONAL ENERGY POLICY INSTITUTE
Development costs (all in USD)
Royalty (12.5% - 30%) – Private owner Royalty (10% - 12.5%) – State revenue
Based on value of petroleum
May be credited against PRRT
Income tax
(35% Federal) + (0-12% State)
Income tax
Earnings before interest and tax *30%
Severance tax
Up to 5% of revenue
Petroleum resource rent tax (PRRT)
PRRT Taxable profit * 40%
Leasehold costs
$5,000 per acre
Land lease costs (State) + Native lands
Up to 1-2% of revenue
Depreciation
Drilling and lease costs
Depreciation
Diminishing value or Prime cost
Drilling and completion costs
$3.5 to $7.0 M per well
Drilling and completion costs
$12 -16 M per well
Operating costs
$0.50 to $1.00/GJ
Operating costs
$1.00/GJ
In the Cooper basin,
Shale gas development cost ranges from $6-10 per GJ
Fiscal
costs
Australian fiscal regime
Development
costs
US fiscal regime
INTERNATIONAL ENERGY POLICY INSTITUTE
Service industry
•
Lack of skilled personnel
•
Drilling capacity (Australia: 50 rigs US:1681 rigs)
•
In a global context, Current Australian hydro fracturing
capacity is less than 1%
The challenges of acquiring essential source materials
•
Water (10 Ml – 20 Ml per well)
•
Ceramic proppants (1,000- 10,000 T per well)
•
Guar gum (9 T per well)
INTERNATIONAL ENERGY POLICY INSTITUTE
Pipeline / Infrastructure Access
Australia (25,000 km)
Common carriage / Contract carriage
United States (350,000 km)
Common carriage
• The pipeline network development is vital for the shale gas industry. However, in the
Australian context, execution of common carriage will deter investment in future
pipelines.
INTERNATIONAL ENERGY POLICY INSTITUTE
Current status
Characteristic
Favourable geology
Lots of drill core data to help identify “Sweet spots”
US
AUS
Yes
Weak environmental regulation for fracking
Yes
Yes?
Depends on the
basin
Depends on the
state
Tax credits + Intangible drilling cost expensing
Yes
Yes?
Property rights to the landowner
Pipeline access very easy – large network + common
carriage
Dynamic and competitive service industry
Yes
No
Yes
No
Yes
Population familiar with oil and gas operations
Yes
Licensing large areas with vague work programs
Yes
Significant government investment in basic R & D
Yes
No
Depends on the
state
Depends on the
state
No
Much of the shale gas has high liquids content
Yes
Depends on the
basin
Higher gas prices and demand
Yes
Yes
Investment on infrastructure
Yes
?
Yes
INTERNATIONAL ENERGY POLICY INSTITUTE
2010
2009
2008
Offshore
2007
2006
2005
2003
2002
2004
Onshore
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2001
Gas Production (tcf)
Conventional gas (Onshore vs Offshore gas)
Annual conventional gas production, 2001-2010
Remaining reserves (2011)
Source: Geoscience Australia
INTERNATIONAL ENERGY POLICY INSTITUTE
East coast gas market and long term contracts
Long term domestic gas contracts
(Core energy,2012)
Actual
Projections
Gas Demand (PJ)
Annual gas demand (PJ)
700
600
500
400
300
200
100
0
2008
SA
2013
VIC
2018
2023
2028
2033
Year
TAS
NSW/ACT
QLD
Annual gas demand projections (AEMO,2013)
900
800
700
600
500
400
300
200
100
0
2012
2014
2015
2017
2018
2019
2020
2022
2024
800
Year
INTERNATIONAL ENERGY POLICY INSTITUTE
Projected Annual LNG vs Domestic Demand
East Coast
Annual gas demand (PJ)
2,500
2,000
1,500
1,000
500
0
2008
2013
2018
Year
Total Domestic
2023
2028
2033
LNG
Source : AEMO,2013
INTERNATIONAL ENERGY POLICY INSTITUTE
East coast - domestic
East coast - exports
West coast - domestic
West coast - exports
3000
2500
In PJ
2000
1500
1000
500
0
2010
2015
2020
2025
2030
Grattan Institute, 2013 ; AEMO, 2013
INTERNATIONAL ENERGY POLICY INSTITUTE
Regulatory systems
Public disclosure of chemicals
US (www.fracfocus.org)
Europe
(http://www.ngsfacts.org)
Environmental concerns
can be minimized with
responsible development
practices (Royal Society,
UK).
Source: Ashurst, Australia
• Disparity of state regulations can also cause community concerns to
escalate
• However, imposing excessive regulations will deter investment
INTERNATIONAL ENERGY POLICY INSTITUTE
Community engagement
Governance
Regulations
Public disclosure
Education and Training
Public information days
Presentations to local
community groups
Newsletters and mailings
Corporate responsibility
Social
License to
operate
Website and contact
points
Respect community
aspirations
Environmental safety
Early engagement
Involvement of all
stakeholders
Direct benefits
Jobs
Local development
Sponsorships for education
Sharing infrastructure
INTERNATIONAL ENERGY POLICY INSTITUTE
Potential government initiatives to mitigate
market failure risks
Australia
• Exploration Development Incentive (1st July, 2014 up to $100 mil)
• Review of licensees failing to comply with the original work
programmes ( this has been proposed for offshore gas projects)
• More investment (e.g.: Chevron and Beach Energy)
US
• Shale gas development benefited from 1980 Energy Act which
gave tax credits amounting to 50 cents per GJ
• Intangible Drilling Cost Expensing Rule
UK
• Councils to receive all the business rates collected from a shale
gas site (up to £10m per wellhead)
Local supply chains, More concurrent development plans,
Government sponsored research, Effective community engagement
INTERNATIONAL ENERGY POLICY INSTITUTE
Cameron urges fracking opponents to
'get on board‘ BBC, 13/01/14
David Cameron: "Shale is important for our
country"
INTERNATIONAL ENERGY POLICY INSTITUTE
Conclusions
• Research is a key component for future shale gas
success of Australia.
• Effective collaboration among communities, industry
and governments is vital for long term success of an
Australian shale gas industry.
• Collective learning and infrastructure sharing could
also expedite the development progress.
• Dealing with community misconceptions and
education should be given a high priority.
stefaan.simons@ucl.ac.uk