This is an edited version of a story published in the December 2013 edition of RESOURCESTOCKS

“Time to ride the wave” was London-based energy and mining corporate advisory RFC Ambrian’s headline trumpeting Australia’s unconventional oil and gas industry to investors in September this year.

However, it came with a considerable caveat: that its development would be considerably slower than the United States’ due to Australia’s significantly smaller and less competitive oil and gas services market, the remoteness of its basins and far less developed infrastructure.

While industry and commentators like to compare the US’ shale revolution with what could happen in Australia, Aussies who have spotted this conundrum decades ago believe Australia has a five-year window before other LNG markets and energy sources rise up to threaten investment.

Innovation and technology can and must provide the fundamental step change to well construction costs.

Only through that approach can costs come down to comparable levels achieved in North America.

Therein lies the rub, at least for Western Australia and across the northern border to the Northern Territory. South Australia is a different proposition entirely, with Beach Energy booking 2 trillion cubic feet – a third of the amount of conventional gas produced by the Cooper Basin over the past 40 years – with its first two shale wells way back in 2011. It’s on for young and old there.

North America’s shale revolution has awakened countries across Europe to the need to try to unlock its own unconventional oil and gas resources to lessen Mother Russia’s grip on the market.

Ironically, the Wall Street Journal predicted in October that the US would overtake Russia as the world’s top oil and gas producing nation this year, “if it hasn’t already”

Some perspective is needed before leaping into shale plays outside the US.

Patersons Securities oil and gas analyst Alexis Clark said rolling out a shale industry globally as it had in the US was problematic because the equipment just was not there.

“In the US they have those rigs, but they have to use them intensively to get the results, because with shale gas wells you get massive production in the first 30 days then it declines rapidly, so you need to keep drilling to maintain your production levels,” Clark told RESOURCESTOCKS.

“That is the key.

“The Barnett shale was discovered in the 1980s, they then took until the 1990s to drill the first horizontal well, then they took another 10 years perfecting the fraccing techniques since the water fracs were developed by George Mitchell, the founder of horizontal drilling. It wasn’t until 2005-06 that they really started significant production out of that shale – that’s a 25-year time line.

“They’re going to take the lessons learned from that in Australia, but the point is it’s not going to happen overnight, it’s going to take maybe 10 years to explore and work up the geology, work out the best methods, get the rigs to the locations etc.”

Australian companies such as Santos, which made its millions via conventional oil and gas production, is turning to shale gas to feed its Gladstone LNG project, following the lead of Beach Energy, the first company to test the shale and basin centre gas play after scoping out basins in Australia with its knowledge of the US experience in mind.

WA was a bit later to the party, but it certainly was not for lack of trying. It started behind the eight-ball, at least in the infrastructure-light Canning Basin, with remote locations and tropical cyclones making life tough.

The Perth Basin has established infrastructure, however, like the Canning Basin (Mitsubishi-backed Buru Energy excepted), service provider shortage – especially drill rigs that can go some 4000m down, and frac spreads – have proved debilitating.

In recent major reports on the potential of Australia’s unconventional industry, investment intelligence firm Edison and RFC both point to the influx of majors and “super-majors” into Australia (Chevron, BG into the Cooper; and Mitsubishi, ConocoPhillips into the Canning) as proof of the quality of its acreage prospectivity, but also its cheap price due to the industry’s relative immaturity.

As founder of upstream consultancy AWT International, Cameron Manifold spent the best part of the past decade trying to solve the problem in WA, having seen it coming for the past two decades.

He was involved in a cross-industry effort a few years back with WA’s Department of Mines and Petroleum to get a “rig club” up, but the different specs of the various companies and other complications meant it fell through.

This supplier shortage means the US majors Halliburton and Schlumberger have local explorers over a barrel, because there has been no local competition. However, things are changing.

Condor Energy, founded by ex-Schlumberger man Christian Lange, has emerged in WA this year to provide well cementing, hydraulic fracturing stimulation (fraccing), coiled tubing and nitrogen services; Enerdrill launched new drilling equipment early this year; and Manifold has launched his own outfit, Advanced Energy Group to provide well advisory, construction and contract drilling services.

This is all part of a concerted effort by local contractors to right past wrongs. Manifold said Australia’s drilling contracting industry over 25 years was all about friction – who got what out of whom and how much they could get the cost down while on the other side of the equation it was about “how much time can I get out of you to be on your wells so I can pay off my wells more”.

All this is “completely counter-intuitive to what we’re trying to achieve now”, he said.

Local rig technology had not until recently caught up with down hole technology in the speed and efficiency with which unconventional wells could be constructed.

Juniors have lamented a fundamental lack of infrastructure in WA’s most prospective basins. There are no roads to take rigs where they need to go, pipelines ares not there, nor are the combined logistics facilities to draw from within a couple of hours of the key operations.

Thus, operators and contractors need to plan their rig operations several weeks ahead to ensure all the equipment, services and bulk products they need are at the site when they need them.

Then they are exposed to weather interruptions when they have not planned that properly.

It is not just the cost of the rig either.

“We are now talking about spread rates on shore in extremely remote areas above $120,000/day for the package, of which the rig is a small component,” Manifold said. “It’s the logistics, infrastructure, camps, transport to and from the rig, getting fuel to the rig over 600km when we consume 6000L a day. All of this adds to well costs.”

There is a WA task force that deals with PR issues and government lobbying, but industry does not have a collaborative approach to structuring a well campaign that will attract new technology and equipment to the state. So if you do not have enough wells, nobody can make a commitment to move a rig from where you do have a lot of wells to where they are needed in WA.

There is also limited capital available to the small-cap companies because there is little confidence that capital can be used effectively to get value out of the ground.

This is overlaid by an environment where the approvals process is very time consuming. It is a necessary evil, so to speak: some cases include native title determination and cultural heritage clearances simply to get the roads in and leases built and then there are health and safety and environmental approvals and well program approvals to get.

This combination of challenges and issues, which are somewhat but not exclusively unique to WA, are what drives up cost of well construction. If explorers are spending more money on wells then there are less wells they can actually drill.

Manifold, a Queenslander, knows where the strain is coming from. While he was emphatic that “we’ve got to find a step change to break this nexus”, he acknowledged his home state’s massive coal seam gas industry required hundreds of rigs, each needing between 12-20 people working on them.

“It’s a massive drain on WA and NT because all those resources are being sucked into the black hole of coal bed methane in Queensland,” Manifold said. “Married to that, we now have an accelerated interest in the evolution of unconventional gas in the central Australian basins of the Cooper-Eromanga, where we have major companies running multiple programs there all requiring experienced drill crews.

“So this drain on equipment, services and people is constraining our ability to get wells done in WA that we need to get done. There’s no point having a fantastic drilling rig if you don’t have people who know how to run it. It’ll just be a stagnant piece of steel.”

Thus, the only way to verify and transform prospective acreage into reserves is drilling holes, and US analogues are proving unhelpful.

The US is believed to have more than 1800 land-based drilling rigs – and that feat is building and being refreshed dramatically, to particularly target the wet gas but also the dry gas areas. If and when they get to significant LNG exports, that fleet will increase dramatically again.

“That is consuming all of the materials – the BOP [blow-out preventer] stacks, mud pump fluid ends – all the hardware we need to put rigs together,” Manifold said. “So it’s very hard to get a rig actually built to bring to WA.

“They’ve had the privilege of going through a 25-year timeline of learning, from drilling vertical wells through shales that somehow were producing gas that nobody expected, to now targeting that as their primary industry, doing multiple horizontal wells in shales then multiple fracture stimulations in those wells, creating a multi-trillion dollar industry in the US.

“That’s what got them through the majority of the GFC damage. There’s a phenomenal powerhouse of economic benefit if you get to that point.

“We need to condense a 25-year time frame into five years or we’ll miss the boat. We’ll have too much competition in LNG export and we’ll find other energy solutions if our gas is too expensive onshore.

“So we have a time frame with which to fix some of these issues, and import as much knowledge as we can and find a way to effectively apply that knowledge by partnering the equipment providers with the operators in an almost seamless operation, where everybody’s objectives are completely aligned.”

MAJOR MENTORING

These local contractors shaping up as the saviour of the unconventional hydrocarbon industry have the management, operational and technical expertise. All they really lack is opportunity and funding, while the likes of foreign multinationals Halliburton, Schlumberger and Baker Hughes dominate the supply side.

“What we need to see is more of these foreign companies taking more of a leadership role with regard to helping and sponsoring domestic companies gain a foothold and adopt a Norwegian approach where there is a very active service industry of Norwegian companies supporting the Norwegian energy platform,” Lange told RESOURCESTOCKS.

“Here in Australia we have all the foreign companies and very few domestic companies of any real size and scale.

“We need government and industry looking at how you can sponsor and support these domestic companies. The challenges include [establishing] a regulatory environment that is pro-investment, and there is a bit of work that needs to be done in that area in WA and Victoria and NSW.

“South Australia and Queensland have done a reasonable job of attracting that investment, hence you’ve seen large parcels of the CSG noise dissipate in Queensland.”

With such dominance by foreign companies on the supply side, Lange said the key elements for domestic companies to compete were the right people, the right strategy, funding and support from the client base.

“Getting the planets to align around those four things is challenging at best,” he said.

“The major issue is that in Australia we do not have a very mature understanding of the oil and gas service industry from a funding perspective. The likes of Cameron are breaking new ground, and unfortunately a lot of the funding has to come from outside Australia where there is a better understanding of the industry, and I’m sure we’re finding that’s the case too.”

He said the big steps in exploration and appraisals by the upstream multinationals that had made substantial investments in unconventionals in SA and NT had “been encouraging enough to give everyone a sense of cautious optimism that the industry will eventually boom. In the interim period there is certainly enough out there to be very attractive for companies like ourselves”

That goes for WA too.