Making a Financial Case for Shale Gas

It’s not only early days for shale gas exploration in Europe; it's also early days in terms of the ability to secure project financing for unconventional gas E&P, according to Ravi Suri, Managing Director & Head of Project Finance and Export Finance, MESA at Standard Chartered Bank.

Speaking at the Tight and Shale Gas Summit in Budapest, Hungary, he said the most important thing now was to make a case for shale case. 

“Is there one?” he asked, answering, “Yes, there has been a long term decline in gas production, and the nuclear accident in Japan has led to renewed activity in shale gas. The fact that it is widely dispersed also makes a strong case.”

According to Mr. Suri, unconventional gas was complex but could be drilled for economically. He said, “As time goes by, extraction costs will likely decline. However, that’s a very futuristic, optimistic lens. 

“There are some key challenges, like the availability of horizontal drilling and the availability of fracking equipment, the environmental issues, availability of skilled resources.” 

He added: “Repeat fracking may be required for decline rates.”

Given all this background, Suri question how a shale gas project could be financed. He said there was a need to break up the value chain to determine that.

The US, he said, had had a significant impact on such prospects. 

“Encouraging results may not be replicable in other places,” he noted.

He showed delegates how widely dispersed shale gas reserves were, explaining: “Development will take time through limited equipment and expertise outside of  North America, where the regulatory framework needs to evolve and environmental concerns need to be addressed.”

The biggest challenge, according to Suri, was the high quality reservoir stimulation required on shale gas wells, adding that horizontal drilling and hydraulic fracturing were unavoidable.

“Fracking using large quantities of water is a problem, regarding the availability, especially in places like Jordan.”

“There are environmental/sustainability issues. Are they overblown?”

“There are different schools of thought,” he said. “There’s the issue of groundwater contamination. The risk of chemicals escaping from a well is low as having no leaks is essential for gas production. 

“Most of the additives in fraccing fluid are also used for domestic applications and are unlikely to be a threat to human health when highly diluted.”

Reuse of water, said Mr. Suri, was also an issue.

“Banks are very conscious of environmental issues,” he commented.

He said nimby – “not in my backyard” sentiments - could be a bigger issue, and a big challenge for financing of shale gas projects with potentially objectionable aspects like large well pad footprints, trucks, and holding pools near drilling sites.

Suri offered that there were solutions like drilling several wells from the same pad.

“Acceptance of unconventional gas in Western Europe is uneven,” he said.

As to the question of could it be project financed, he said, “It’s difficult. As of now it cannot be project financed because of the issues I’ve explained to you.

“What can we do going forward?” he asked.

Mr. Suri showed a methane value chain for LNG, explaining that these questions had been asked of LNG which was quite successful. Its subsurface development was quite easy and the liquefaction plant technology was fairly well known, and proven. Sponsors stepped up, he said.

Then, he showed a value chain for shale gas.

“If you don’t get this part right, you’re not going to have any gas.”

“Over time, this will evolve,” he said. “The project financing market will start to take notice as significant developments are brought online and more data on recovery, production, decline, operating costs, etc. is established and environmental issues are addressed, project financing markets will start to take notice.”

Mr. Suri concluded: “As of now, shale gas cannot be project financed but over time this will converge more towards conventional projects. It’s very nascent as far as financing is concerned.”

One audience participant argued that in the US companies were involved in the project financing of shale gas projects.

“They probably did it on their balance sheets,” explained Ravi Suri. “If a top class multinational raises a billion dollars, it’s fine – that’s a different ballgame. It’s not complete equity financing.”

He added that the project financing of shale gas would happen over time, taking into consideration the exploration, construction risks, operating risks and market risks.

“From a financier’s point of view you have to look at it from an economics perspective and if it stacks up then it’s worth financing. If you cover these risks broadly then it’s worth financing.”