A seismic shale gas injection

Sinopec and Total's shale gas deals can only be interpreted as a big vote of confidence in the sector's future, and will bolster confidence in BHP's own play.

Overnight, China’s Sinopec and France’s Total announced deals worth nearly $US5 billion that would have brought a smile to Mike Yeager’s face.

Last year the BHP Petroleum chief executive plunged nearly $US20 billion into a massive US shale gas play that has generated considerable scepticism, in terms of both its economics but more particularly its politics.

Around the world the 'fracking’ process used to release unconventional reserves of oil and gas is producing intensifying controversy among communities concerned about contamination of aquifers and a growing conviction that the process – which involves injecting water, sand and chemicals into drill holes to release the oil and gas – is inducing seismic activity.

Only last week Ohio froze drilling in its north-western region after a series of small earthquakes amid fears that they had been triggered by fracking. Last year the UK halted drilling by Australian group AJ Lucas near Blackpool after 50 seismic events.

Despite those concerns Sinopec, China’s second-largest oil company, and Total, one of the world’s biggest energy groups, have ploughed billions more into US shale gas. The two companies already had positions in the sector in the US and are also major investors in the Australian coal seam gas sector – Sinopec is a shareholder and the core customer for the Origin Energy/ConocoPhillips APLNG project and Total is a major shareholder in the Santos/Petronas GLNG project and a customer.

The decision by Sinopec to invest $US2.5 billion in five new development projects with Devon Energy of the US and by Total to spend $US2.3 billion to buy into an Ohio joint venture with Chesapeake Energy (which sold BHP its original shale gas beachhead last February) and EnerVest can only be interpreted as a vote of confidence in the future of the sector despite low gas prices and rising community opposition.

The issues raised by shale gas and coal seam methane are slightly different, with the major worry about coal seam methane its potential impact on groundwater, given that the coal beds tend to be at relatively shallow depths. With shale gas, while there are also concerns about the impact on aquifers, reservoirs tend to be at depths well below aquifers and the primary concern is the connection between fracking and seismic activity.

BHP has been relatively unconcerned about the environmental issues raised by fracking, although it did voluntarily plug and abandon two water injection wells in Arkansas last year because of fears that they may have been related to earthquakes in the region.

It has pointed out, however, that not only has the shale gas industry in the US been operating for decades but that there was recorded earthquake activity in regions where drilling for shale gas is now occurring decades before there was a US shale gas sector.

Another point often made by the sector is that until very recently the sector was the province of junior companies. It is only very recently that the big energy companies started moving into the sector – the landmark transaction was Exxon’s $US30 billion acquisition of XTO Energy only two years ago.

Development of shale gas reserves requires very significant amounts of capital, beyond the capacity of smaller players, which created the opportunity for the majors to move into the sector. The big companies have a conviction that their financial and technical capabilities will enable them to better deal with the environmental issues.

The investments by Sinopec and Total have been made despite the impact that the boom in shale gas activity has been having on gas prices in the US, where they fell nearly 30 per cent last year.

The majors appear to take the view that the centrality of gas to the long-term energy security of the US, the ability to leverage the existing extensive gas pipeline infrastructure, the potential for exports of LNG and their own ability to steadily improve the economics of producing the gas will produce a validation of their investments over the longer term.

For BHP, the continuing big investments by global energy heavyweights in the sector will buttress its confidence and that of its investors that the $US20 billion bet on the future of shale gas in the US will eventually produce a reasonable pay-off and a reward for the risks of being a relatively early mover at the big end of the sector.