When it comes to the shale debate, the Middle East is usually framed as a region under threat. Holding half the worlds conventional oil reserves and 40 percent of its gas, many of these countries obtain the bulk of their income from hydrocarbons sales. But, with the rise of shale oil and gas production in nations traditionally consumers of fuel, such as the US and China, ongoing demand for Middle Eastern output is at risk, threatening revenue and the ability to manage oil prices by adjusting supply through the Organization of Petroleum Exporting Countries (OPEC) cartel, of which eight out of twelve members are Middle Eastern. Indeed, the US was pumping more than 8 million barrels a day of crude by the end of 2013, and is expected to become the worlds top oil producer in the next two to three years a reversal of its output trajectory thanks to shale, with obvious implications for imports.

For a number of reasons, Middle Eastern and North African (MENA) national oil companies (NOCs) are beginning to look at their own shale resources.

Understanding the challenges and implicationsFirstly, given the threat to their traditional export markets, MENA nations want to understand the true challenges and implications of shale. Despite the rapid growth in production from US shales, articles regularly appear claiming it to be some form of bubble or ponzi scheme that is non-sustainable. The questions centre not so much on the high cost of shale development, but on the high decline rates that require a large number of wells to be continuously drilled just to maintain production. Moreover, some of the innovative subsurface techniques being applied to shales appear to have potential in conventional reservoirs. For these reasons alone, MENA NOCs are eager to learn more and the obvious testing grounds are their own shale resources (Far East NOCs, such as CNOOC and Petronas, have sought this experience through North American acquisitions).

Understanding potential reservesSecondly, because limited independent assessments have been made of their potential reserves, Middle East governments wish to inventorise their potential shale resources for future generations. The US Energy Information Administration (EIA), which analysed in detail shale resources in 41 countries outside the US last year, omitted most Middle Eastern countries, although acknowledging that potentially productive shales exist in most of the countries in the Middle East and the Caspian region, including those holding substantial nonshale oil and natural gas resources. In its 2011 report, the EIA said the Middle East was largely excluded due to scarcity of exploration data, or the presence of abundant reserves in conventional reservoirs, which made shale development unattractive.

The MENA region could be sitting on vast shale resources according to Thomas Ahlbrandt, who led a US Geological Survey in 2000. In an Arab Petroleum Investments report last year he said: US source rocks are modest compared to the Silurian, Jurassic, Cretaceous and Tertiary source rocks in the region. The Silurian is found in Algeria, Libya, Saudi Arabia, Iraq and Jordan, while the giant North Field, shared by Iran and Qatar, is the conventional leg of a huge unconventional gas accumulation.

Algeria, the biggest natural gas exporter to Europe after Russia and Norway, is looking to develop its shale reserves. The oil and gas exporter has proposed tax breaks on shale drilling and has signed agreements with a number of companies including Shell, Eni and Talisman of Canada. Holding 707 trillion cubic feet of potential shale gas, according to the EIA, the country already has export infrastructure in place and could further displace some Russian supplies to Europe, which currently pays about three times the US price for gas.

Libya, which holds the fifth largest shale oil resources after Russia, the US, China and Argentina, is seeking foreign companies to conduct joint studies on the countrys shale development.

Shale and the Middle EastFebruary 2014

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Maintaining gas suppliesA third reason Middle Eastern NOCs are delving into shale is because they are actually short of gas. Conventional gas, although abundant in theory, has been notoriously difficult to find, or produce from tight reservoirs, or develop due to its high sulphur content. And where gas has been available, its subsidised pricing has led to enormous increases in gas demand, which, in some cases, is now outpacing supply. Indeed, the United Arab Emirates (UAE)s oil minister, Suhail bin Mohammed al-Mazroui, was quoted in Upstream this week as saying the country is looking at the potential of importing gas from North America, possibly through upstream shale investments.

Oman may be the first Middle Eastern nation to develop tight gas this decade. Petroleum Development Oman, responsible for most of the countrys energy production,

will invest some $26 billion in new oil and gas exploration and production over the next five years, much on the development of light, tight oil and shale gas. BP is considering investing a further $20 billion in tight gas reservoirs, although these are strictly tight sandstones and not shale. The Sultanate is over-committed on gas given its two LNG projects, extensive gas-fired power and various petrochemical projects that are supplied by a combination of limited conventional and deep, tight gas and seeks to offset costly gas imports.

Saudi Arabias national oil company Saudi Aramco has been studying its unconventional reserves, as it scrambles to find additional gas resources to satisfy demand thats expected to double by 2030, and to replace the growing amount of crude oil used domestically for power. The kingdom holds some 645 trillion cubic feet of technically recoverable shale gas, more than double its conventional gas reserves,

CURRENT ACTIVITY(also: Egypt, Tunisia, Algeria)

Gulf unconventional gas plays

Source: PacWest/Manaar

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according to Baker Hughes data. That would put it in fifth place among countries assessed by the EIA, after China, Argentina, Algeria, and the US. Saudi Aramco has carried out appraisal drilling and piloting of three prospective areas for unconventional gas in the northwest, in south Ghawar and for condensate-rich shale gas in the Rub Al-Khali.

The UAE is also looking at shale. Abu Dhabi National Oil Company. has tested source-rock shales offshore and is looking to accelerate this onshore in the prospective Diyab and Shilaf shales. The UAE currently imports gas via pipeline from Qatar, and plans to satisfy future power demand with LNG imports, nuclear power, and by developing its costly sour-gas reserves.

The Middle East also has abundant oil shales, in countries that are traditionally resource-poor, such as Jordan. Oil shale, in contrast to shale oil, is essentially an immature source rock that contains solid bituminous materials called kerogen. Oil shales usually require mining and then heating to convert the kerogen into oil or gas, although some technologies are looking at subsurface conversion (for example, that of Shell). Jordan is estimated to hold the worlds fourth largest reserves of oil shale after the US, China and Russia, with 90 to 100 billion barrels of oil equivalent in deposits. Since 2009 Shell has explored for and evaluated the commercial potential of the deeper layers of Jordanian oil shale. Jordan and China signed last year a memorandum of understanding to build a $2.5 billion oil shale-fired power plant in the southern city of Karak.

Understanding the risksIn the coming months, we will seek to apply the RL 7-risk framework to individual countries. When considering the region as a whole, its licence to operate challenges are characterised largely by economic considerations. Insufficient water resources is one. Another is fiscal terms: as it stands, domestic gas prices resulting from a history of subsidiaries are very low, coupled with the notoriously harsh resource rent mentality where host governments attempt to maximise their take of revenues. This contrasts with the US, where emphasis is placed on the economic (and

employment) multiplier effect from massive investment in response to low taxes.

However, the operating environment varies from country to country. The Gulf monarchies, while low risk from a security perspective, are hard for foreign companies to access because NOCs tend to control hydrocarbon production. On the other hand, the terrorist attack at Algerias In Amenas gas facility last year is a reminder that the strategic importance of the oil and gas industry will always be a target. Meanwhile, countries such as Jordan are notoriously difficult for business, including complicated laws about mineral rights.

Against these points, public opposition of the kind felt in Europe and parts of North America is likely to be less. Much of the potential shale resources are in remote, lightly populated areas that have long experience with oil operations in general. Exceptions may exist, as in Tunisia, where small numbers of protesters have mobilised against the countrys shale plans, but for now the principal impediments rest with economic considerations and, of course, geology.

Regester Larkin Shale Report is published monthly. To receive the publication, please email insights@regesterlarkin.com.

REGESTER LARKIN SHALE REPORT

Copyright Regester Larkin 2014. All rights reserved.