International Shale Supply Chain: When the Timing is Right

American consultancy hopes to help boost shale supply chain

Providing services to both operators and suppliers (as well as to investors), Alexander Robart is a principal with PacWest Consulting Partners, which he describes as a boutique strategy and market intelligence consulting firm that tends to work with the oil and gas supply market, particularly with shale gas.

Attending Shale Gas Eastern Europe 2011 in Warsaw, Poland Mr. Robart provided an exclusive interview to Natural Gas for Europe.

While he said his consultancy was not yet active specifically in Poland, Robart reported that PacWest had already been doing some work with one of the operators who owned concessions in Poland. “We’re not doing work on their Poland concessions in particular, we’re working on the North American assets. We hope to gain more of their insights into the Polish  market.

“One of the goals to being here is to gain some on-the-ground knowledge that people here have. One person commented on the barriers to entry for suppliers and how Poland is still a pretty closed market, so even if the strategic decision-making is sound it’s not just a simple matter of saying ‘I am pressure pumper XYZ, I see an opportunity here, I want to be a part of this.’ You can’t just do that.”

Robart said he was looking to introduce such players to PacWest and its services as well as its recently launched Shale Gas Supply Market Research Service, which he contended provided a resource on the shale supply market that didn’t exist anywhere else.

Based on what he had heard from participants at the pre-conference day, Robart said some were just getting acquainted with unconventionals. “Some participants are at the early stages of learning what shale gas means, or even what E&P means.  " If they want to play in shale gas they’re going to have to learn it.”

He continued, “One place to start is by purchasing some market intelligence, digging into the market to understand what the supply market is, who those players are that are going to help provide the services to you.”

“The amazing thing about oil and gas is,” he remarked, “the operators are obviously the ones who take the risks, put the capital towards the major investments, towards the developing assets, but it’s the supply chain that does all the work.  Roughly eighty percent of operator spend is on third party services and products with this massive and deep supply chain we have in oil and gas. So those are the guys who are really doing a lot of the work.

In shale gas in particular, with one of the key differences between conventional and unconventional being hydraulic fracturing, where it takes some specialized critical skill sets and products and services to make shale gas a reality, you really have to know who’s out there with those capabilities and who has the experience in North America to actually run the fracturing, knows the proppant, knows the chemicals – there’s lots of things that are very specialized that only North American service providers, at the moment, know how to do.”

It’s exactly some of that expertise that he believes PacWest can deliver to facilitate the unconventionals industry.

“Our point of view at PacWest is this: obviously when it comes to international shale gas development, the technical determination of whether or not oil/gas are present in the ground is critical,” explained Robart. “However, we do think second after that is the movement of supply chain into various markets and countries. So, we’re working with operators and suppliers to help facilitate and, particular on the supplier side of things, helping to build up strategies and give them the rationale to make the tough choice to bring assets into the country.

“Particularly for a medium-sized supplier who is not one of the big Four, who doesn’t have billions of dollars to throw assets into a country and take that risk – they need some more pushing, so I think we can play some role by working with the suppliers to help them analyze the situation and say, ‘You’re going to have to make a strategic bet here to get in early, rather than waiting because you won’t make any money if you wait until everyone else is there.’

While not yet present in Poland, Robart had a good sense of what was going on there.

“The land grab ended several years ago,” he recalled. “We’ve got the 11 major groups of entities who own acreage here and I think things are still pretty early stage and there’s a minimum guaranteed amount of work with these concessions and the associated well programs.”

Robart said PacWest had conducted a drilling program analysis, so players could know what the business would look like for the next three years or so until some programs moved from exploration to development phase.

“So there’s a market which is enough to provide for some people to move assets in and so far the only people to have assets here on the supplier side are really the big four, excluding Weatherford. So you’ve got Baker Hughes, Halliburton and Schlumberger who have assets in country; Baker’s in the process of moving assets into country, but there’s really no other intermediate or even large suppliers beyond that.

“Particularly in pressure pumping,” he continued, “I have heard rumors of one other player who’s one of the top five by capacity in North America; they’re not the big three, but one of the only ones who we may have heard of moving assets in country.”

Costs, he said, were unlikely to come down until everyone else started coming into the market. “Until those costs come down to a more economic level beyond the $13 million we’re seeing on a per well cost basis, you’re not going to see meaningful amounts of production up to the 1 BCF or 1 TCF everyone’s looking for. So we really think that the supply chain is really the critical factor that’s going to bring down those costs, to ramp up production.”

Robart said, that in terms of the supply economics for, for example, a pressure pumping company, its cost structure was driven by three things: the costs of the equipment, the consumables, and labor.

“So when there’s only a minimal guarantee of the amount of work, they’ve got to charge really high rates, particularly on the mobilization of those assets from location to location, because when you’re looking at a massive well development program in full production phase – in the Marcellus or Barnett, for example – these guys are drilling 100+well programs, so they’re running one [frack] after another, like a factory. That’s the whole flexible factory approach that people are talking about – you can afford to charge very affordable rates in between, because you’ve got tons of work guaranteed.

“But when you’ve only got – you’ve run one frack here in Poland so far – we’re going to run a few more probably in 2011 and probably more after that in 2012 – these guys have to charge really high rates per frack to make up their money and to justify the economics of bringing an asset in country.”

According to Robart, shale gas development in Poland was likely to be a lot easier than in Western Europe.

“I think we’re looking at some real challenges. Sweden and the UK have seen some protests against fracking, France has a de facto moratorium set up right now, pending the elections which are a year away. So I don’t know what things are going to look like in Western Europe. You’ve got some real development constraints in Europe that are not present in most of the formations in the US that really led the way for shale gas.”  (Editor's Note: Click for Updates on France and the UK)

“Poland is probably the best positioned of the high potential shale plays in all of Europe right now,” he added. “The geopolitical situation is compelling for them to invest in shale gas and to put some incentives in place. I think they do have some water issues as there’s less water supply, so water prices are going to be high.”

He continued: “If people start with the right regulations and the right rules ahead of time, I think most of the issues can be resolved, but again a lot of it comes back to the supply chain – getting that in place, because if Poland maintains a regionally closed and uncompetitive environment that’s restricted mostly to state associated service companies like Nafta Pila, the state driller, they’re never going to get the costs down. And until they get those costs down, they’re not going to get to meaningful production levels.”

Robart said he believes there is a trickle down effect being felt in Europe from the American documentary Gasland. “I think it absolutely is, particularly in Western Europe. In the US right now I’m a little bit dismayed at the debate – not that I don’t believe there are legitimate concerns that haven’t been and need to be addressed – but because the debate right now is focused on the wrong things."

“Gasland was a compelling piece of storytelling, but it largely lacks any evidentiary basis on which it’s telling its story. There really has been no evidence about any incident where downhole chemicals are causing water contamination – there’s thousands of feet of separation between the water table and the depth at which the fracturing is actually occurring. “

“The only instances that may have occurred are in poor well construction and integrity, and I’m fully in support of efforts to ensure better well construction and integrity, but [the] real concerns are really in the water flowback. It’s really high in salt content and that’s coming from these formations it’s going into; in addition there’s some radiation concerns, material that naturally occurs in deep formations that’s brought back up in relatively minute levels, but they need to be dealt with and addressed. The concerns need to be solved,” he said.

Robart said he believed there were solutions to these problems and in the last 2-3 years there had been an explosion of innovation in the water management space. “

“A lot of players are jumping into the marketplace, so the supply chain sees the opportunity, sees the market need, so the environmental concerns are driving a major course towards innovation of the water treatment technology and services, but also in the fracturing chemistry, so you’ve also seen most of the major pressure pumpers who make their own chemicals have introduced “green” products. And that’s going to continue to evolve and advance in the next couple of years.”

Still, he said he thought environmental concerns were a risk to the entire shale gas revolution which everyone was looking for internationally. “Because my view, to some extent, is [that] if the US puts in place regulations that are irrational, and that threaten to shut down shale exploration/production in a lot of key geographies across the US, other countries are going to look to that model as a template for regulation. So I think there’s a major risk that if the US doesn’t get it right, it’s going to put the entire revolution at risk.”