On the other side of the world, Kazakhs look at US shale gas

Platts Moscow-based reporter Dina Krennikova joined with Platts Washington-based reporter Brian Scheid to file this report from the Kazakhstan International Oil and Gas Conference in Almaty, Kazakhstan.

Roughly 6,500 miles from Texas, they were talking about the Barnett Shale this week.

With the Trans-Ili Alatau mountain range in the background, there was a little talk of the natural gas wells which continue to sprout up in the Marcellus, sparking natural gas boons in farm towns in Pennsylvania and Ohio, and even a mention of the Eagle Ford shale plays in south Texas.

These conversations have become almost mandatory at oil and gas conferences since the US shale boom began roughly five years ago, but this discussion was unique since it was taking place pretty much on the other side of the globe.

At the Kazakhstan International Oil and Gas Conference in Almaty, Kazakhstan’s former capital and its current commercial center, many came to talk pipelines and conventional crude and gas production and exploration in the Caspian region, but some wanted to talk shale gas too.

Specifically, analysts and scientists wanted to know if the Central Asian country and former Soviet Republic could launch a shale gas revolution similar to the one in the US. The US shale boom spawned record low prices, a North American gas glut and radically shifted much of the global energy balance, a market shift some Kazakhs are increasingly wondering about.

A similar shale gas revolution in Kazakhstan is certainly possible, but will it happen?

“Will it be a breakthrough or will it be a failure? We don’t know,” said Sergey Kolobanov, deputy director of the energy department at the Eurasian Economic Commission, through an interpreter.

Kosan Taskinbayev, director of the Kazakh Petroleum Institute of Scientific Research and Geological Survey, has been trying to get the Kazakh government to fund a comprehensive, five to 10-year exploration study to look into the country’s shale potential.

“Kazakhstan has never run any exploration of its shale potential so we have no idea at the moment how much gas we have,” Taskinbayev said on the sidelines of the conference.

The exploration program, which Taskinbayev said he was also open to funding through private, foreign investment, would focus on whether Kazakhstan can pull off a shale gas revolution and, perhaps, answer questions over whether the country even needs to and if it ultimately will attempt such an endeavor.

Somewhat strangely, Taskinbayev is pushing for this exploration program despite the fact that he believes a shale revolution in Kazakhstan is highly unlikely, if not impossible.
“There’s this joke that a scientist is a person that satisfies his own curiosity at the state’s expense,” he said.

Taskinbayev said there is almost no infrastructure to support shale gas development, no industry seemingly eager to take it on and very limited demand. The country has a population of roughly 17 million spread over about 1.05 million square miles. Compare that to the US, which has a nearly 19 times the population and only about 3 times the land mass.

Almaty, Kazakhstan’s largest city, has a population comparable to that of San Jose, California
“There are too many limitations,” he said. “No shale gas revolution like that in the US is possible in Kazakhstan.”

Andrew Neff, a principal energy analyst with IHS Energy, said there are two primary barriers to a Kazakh shale revolution: the country lacks even the most rudimentary data on potential shale gas reserves, and, because of its abundance of conventional oil and gas resources, there’s no real need for an aggressive push for shale development.

In fact, much of this week’s conference was focused on three major Kazakh oil and gas fields that global investors are eagerly tracking the progress of: the Tengiz, the Karachaganak and the relatively new and giant Kashagan.

The projects are expected to be the key drivers behind the growth of Kazakhstan’s production of traditional crude oil and gas at least within the mid-term period, according to the country’s oil and gas ministry.

Tengiz, a giant onshore field near the Caspian Sea, now produces around 25 millon mt/year of crude. The output is set to grow to 38 million mt/year by mid-2018 through gas and water reinjections and construction of new wells.

Kashagan, another giant crude field offshore Caspian, started up on September 11 and is expected to produce 8 million mt already in 2014. At its peak, the field’s current phase one is set to produce up to 370,000 b/d. The exact timeframe for the ramp up is yet unclear as the field has been plagued by technical difficulties. It took the Kashagan consortium over a decade to produce first oil and the partners had to shut it in just days after the launch due to a gas leak.

Hydrocarbon output at the onshore Karachaganak field is also expected to grow from 381,000 b/d of oil equivalent produced in 2012, once the expansion project is launched. The size of the expansion is yet unknown but work on the project has already started: until year-end the Karachaganak consortium plans to finish reassessment of the field’s resource base.

With such potential for production of traditional hydrocarbons, Kazakhstan has little incentive to begin shale gas studies, Neff said.

“Shale gas is the gas of necessity,” Neff said. “When you don’t have the conventional resources then you’re pushed into shale gas as a fallback option.”

According to Neff, shale gas was developed in the US, in essence, because high prices and limited conventional resources motivated it.

“In the US shale gas became the solution to a problem, but there’s no incentive on the Kazakh side,” Neff said.

Kazakhstan has “gas to burn,” he said, pointing out that unless the country discovered a massive shale field in a strategic position, such as in very close proximity to the Chinese border, it would make little economic sense to develop it.

“Shale gas in say, Astana [Kazakhstan’s capital and the country’s second largest city], is only good for supplying the local market,” Neff said. “There’s not a strong incentive to develop it.”

While new pipeline are being constructed, Kazakhstan is a massive country with infrastructure dating back to the Soviet era, Neff said.

And outside of China, there’s no clear market for the gas to go, considering the hold Russia’s Gazprom has over much of the region, he said. Marketing, Neff said, would be a major hurdle.

In addition, the country may have limited water resources needed for the fracking process, Taskinbayev pointed out. In addition, fracking has been linked to seismic activity in the US, already a problem in Kazakhstan, and transporting gas over long distance contains inherent dangers, he said.

But Aurelia Bouchez, the ambassador for the European Union’s Delegation to Kazakhstan, said a shale revolution should not be ruled out in the country.

“It’s certainly a possibility,” she said on the sidelines of the conference, adding that the Kazakh state government has been studying shale success and failures in other countries. ”My impression is that Kazakhstan doesn’t exclude any option when it comes to energy security,” she said. “There are decisions to be made and I do not know which direction they will take. But they are always looking for new options.”

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