Shale Gas Global Perspective

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KPMG GLOBAL ENERGY INSTITUTE

Shale Gas –A Global Perspective

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KPMG INTERNATIONAL


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ContentsShale gas shakes up the world energy markets 2

Shale gas – The Americas perspective 6

United States – Transorming rom importer to exporter? 6

Canada – Slower o the mark 9

Argentina – Looking or a rise 10

Shale gas – The European perspective 11

Western Europe – Uncertain uture 11

Eastern Europe – Hedging bets 13

Shale gas – The Asia-Pacifc perspective 15

Australia – The price o extraction 15

China – Five-year strategic plan 16

Burning bright? – 5 risks that could dim

the uture o shale gas 18

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.



2 | Shale gas – A global perspective

Shale gas shakes up the

world energy marketsShale gas has the potential to turn the world’s energy industryon its head. It’s abundant. It’s cheap. It burns cleaner thanossil uels. And it’s being ound almost everywhere.

But or shale gas to become the game-changer that someanalysts predict, the industry has to surmount tremendousreputational and regulatory hurdles. And there are noguarantees that natural gas prices will ever rise high enough to

make the high costs, nancial risk, and extended developmentperiods worth the returns. Even still, with the prospects osubstantial prots and stable, secure supplies, players at thenational and industry levels are placing their bets.

By oering countries a cheap, carbon-riendly way to helpmeet their energy needs, shale gas has the potential todisplace ossil uels in selected locations and potentiallyslow the development o renewable sources. With shalegas deposits being ound in areas that previously had noexploitable gas reserves, shale gas production could turncountries that traditionally import natural gas into producers,making them more sel-sucient with domestic supplies.

And shale gas deposits are being ound in both mature andunderdeveloped energy markets, opening the potential tolevel the playing eld when it comes to supply and demand.

For shale gas to become the game-

changer that some analysts predict, the

industry has to surmount tremendous

reputational and regulatory hurdles.

Shale gas has become a viable energy source due to the useo hydraulic racturing, or “racking”, technology to extract it.Fracking technology, has been used in oil reservoirs and tightormations or many years without raising any signicant

concerns compared to the more traditional methodso extraction. Increased scrutiny on the environmentalimpact o the technology and its potential to cause greaterenvironmental harm in the shale gas context – with itsshallower deposits, greater permeability and more supercialormations – is a result o the greater role this energy sourcecould play in a country’s overall energy mix as discussionsabout energy security and resource scarcity continue to gain

momentum on the world stage.

All energy production creates saety and environmental risks.The extent to which shale gas will be a larger componento the energy mix will depend, to a certain extent, on theenvironmental protection versus economic growth trade-o.In some countries, such as France, environmental concernshave caused regulators to suspend or ban hydraulic racturingin some areas completely. Other countries, such as Argentinaand China, may be willing to take on greater environmentalrisks to advance shale gas production in order to becomemore sel-sucient and to meet rising energy demands. Anattractive side benet o ull-scale production is the substantialnumber o new jobs that ull-scale production would open orlow-skilled workers in these countries.

For companies subject to greenhouse

gas emission reduction targets, natural

gas usage may offer more “tick-the-box”

benefits than traditional fossil fuel sources.

Once captured and processed, natural gas is one o the cleanestburning and lowest carbon content ossil uels. In addition tothe economic benets, developing new natural gas suppliesmay provide a means to help countries meet their greenhouse




Shale gas – A global perspective | 3

gas emission targets. For companies subject to greenhousegas emission reduction targets, natural gas usage may oermore “tick-the-box” benets than traditional ossil uel sources.At the consumer level, regions that rely on oil-based heating,such as parts o the United States, could bring their emissionsdown by encouraging homeowners to convert to natural gasheating. Additional incentives could be granted to encourage thedevelopment and sale o natural gas-powered vehicles.

In the ollowing pages, we examine the current state o shalegas development in selected countries o the world. Wealso oer our views on the prospects o shale gas as part othe world’s energy mix – and whether this source o energyreally is the game-changer that some have claimed. In thenal section, we highlight ve key risks that could impact theuture viability o shale gas production:

1. I and when natural gas prices will rise in North America isthe big unknown – currently supply outstrips demand.

2. How shale gas development will impact investment inrenewable energy sources and how much environmentalregulation shale gas-related activities will attract are alsouncertain.

3. With price uncertainty, managing costs and nancing risksare top priorities or the industry.

4. The level o uture shale gas development will hingeon the industry’s ability to control reputational risk andmanage public opinion by minimizing environmental andcommunity impact.

5. As shale gas transorms supply and demand o the world’senergy mix, geopolitical actors will continue to create risk.

Shale gas production – Key success factors

In this publication, we examine the current conditions and outlook or the shale gas production in the Americas, Europe, and the

Asia-Pacifc regions. In evaluating the environment and prospects or the shale gas industry in various parts o the world, the

ollowing actors are critical.

Supply Shale gas plays must be big enough to warrant the tremendous investment in time and money required toextract and ully exploit it. The play should be suciently close to markets to acil itate distribution.

Demand Natural gas prices are currently depressed in some regions (e.g. the Americas), and the wealth o newly viableshale gas plays could drop prices even arther. But as oil and gas production rom conventional sources continuesto decline, the local price o natural gas relative to other energy sources will dictate whether the long-terminvestments required to develop and exploit a play will produce sucient returns.

Inrastructure Shale gas production and distribution requires more than wells. Production sites must be adequately servicedby roads and pipelines, or example, and special processing and transportation acilities are required to liqueynatural gas or marine transport.

Regulatory support Private companies need their country’s support to develop large-scale shale gas production capacity.A well-developed, stable regulatory regime, predictable access to permits and licenses, and governmentsubsidies or exploration and development are crucial.

Reputational risk While the environmental saety o shale gas production is st ill under study, many shale gas developers aremeeting strong opposition rom environmental groups on the basis o health and saety concerns related tohydraulic racturing technology and water usage.

Geopolitical context For many countries that rely on natural gas imports, energy security is a concern. Shale gas could help thembecome more sel-sucient. On the other hand, countries that are traditional oil and gas exporters will need toreact to their changing markets. The resulting political issues could radically alter relations between countries.

For urther inormation, please contact:Wayne Chodzicki

KPMG in Canada

T: +403 691 8004E: [email protected]





Pakistan

Russia

India

China

Australia

Note: 1 Russian has the largest proven natural gas reserve of nearly 1570 tcf.

However, data on Shale gas reserve is not available.

2 Data on Russia and Middle East was not provided by EIA, due to

reasons such as lack of information availability.

Source: World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the

United States, EIA April 5, 2011

0–100 trillion cubic feet




Greater than 400 cubic feet

Hydraulic fracturing – What are the environmental risks?

Natural gas is in many respects a clear and ecientburning uel and has the potential to lower carbonemissions with uel switching plays. However, risksremain since shale gas development around the worldhas met with erce opposition rom local residents andenvironmental groups due to environmental concernsover the hydraulic racturing, or “racking”, process.

Fracking involves drilling a well bore into the reservoir

rock ormation and then orcing water, sand andchemicals into the well at high pressure to createractures or ssures in the rock. Once the racture isopen, the released gas fows out o the ractures andinto the well bore. In addition to shale gas, the processhas recently been applied to extract gas rom coalseam and tight sand deposits.

With the impact o racking operations still under study,the jury is out on the extent to which the processmay be harmul to the environment. Some specicconcerns being raised by environmental groups, media,and regulated companies are as ollows:

Groundwater ContaminationSome have asserted that racking chemicals used inthe process could leak into underground rivers andreservoirs and ultimately into drinking water supplies.The health eects o long-term exposure to chemicals

commonly used in racking are being evaluated byregulatory agencies.

Gasifcation

When gas migrates into groundwater, the build-upo pressure due to gasication may lead to tremorsor explosions. Aquier gasication due to shale gasdevelopment has been cited as a potential cause orrecent minor seismic activity in the United Kingdom,

though these claims are largely uncertain at this pointand being investigated.

Water Usage Risks

Fracking can be water intensive depending on thewater management methods used. This may poserisks in water restricted areas.

Surace Water and Soil Risks

Risks may also arise rom the volume o chemicalsthat need to be stored at the drilling site and romthe liquid and solid waste produced during drillingand racking.

Spills and Blow-outs

Well blow-outs can cause spills that could spread intothe surrounding soil and into wetlands, streams andwaterways. There are also concerns that wastewaterkept in storage ponds could overfow in high rains.





Shale gas –The Americas perspectiveUnited States – Transorming rom importer to exporter?

In the United States, companies have unlocked access to richshale gas reserves and there is tremendous activity as thecountry ramps up or ull-scale production. Shale gas is in themidst o a boom across the country, with existing reservesbeing put into ull production in Pennsylvania, Louisiana andTexas, and with new reserves being discovered, recently, orthe Marcellus, Eagle Ford, and Utica reserves.

The United States mostly relies on oil, gas and coal—whichare less expensive and more abundant. Renewable energy

technologies, such as solar, wind, geothermal and biomasspower generation, are gaining traction, but are not yet viableat a utility scale level to play a signicant role in the country’senergy mix in the near uture.

There are signs that the United States is

poised to become significant player in

the global natural gas market.

Thereore, shale gas production has the potential to transormthe energy market in the United States and beyond. TheUnited States has traditionally relied on imports, primarily romCanada, or its natural gas needs. The size o US shale playsand the recent investments in developing them could makethe United States sel-sucient. In 2008, the country imported13 percent o its natural gas supply. That gure is expectedto drop to nearly 1 percent by 2035. There are signs that theUnited States is poised to become signicant player in the

global natural gas market. The United States has been workingto repurpose some natural gas processing and conversionacilities, originally designed or imports, to handle exports oshale gas in the orm o LNG.





Canada

Venezuela

US

Colombia

Bolivia

Chile

Source: World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, EIA April 5, 2011

Paraguay

Brazil

Uruguay

Argentina

Mexico










Forecasts or Consumption o Various Energy Sources in the US, Figures in Quadrillion British Thermal Units (Btu)

Year Natural gas Oil Coal Nuclear Wind Hydro

2015 25.77 39.10 19.73 8.77 1.40 2.92

2020 26.00 39.38 20.85 9.17 1.41 3.00

2025 25.73 39.84 22.61 9.17 1.49 3.04

2030 26.58 40.55 23.39 9.17 1.54 3.07

2035 27.24 41.70 24.30 9.14 1.59 3.09

Note: Oil includes petroleum-derived uels and non-petroleum derived uels, such as ethanol and biodiesel, and coal-based synthetic liquids and Petroleum coke.

Also included are natural gas plant liquids and crude oil consumed as a uel.

Sources: Annual Energy Outlook 2011, EIA.

Projected US net imports o natural gas

1990

Sources: Annual Energy Outlook 2011, Reference Case Presentation, EIA, Decemeber 26, 2010, Technically Recoverable Shale Gas Resources Jump 134 Percent.

Canadapress, May 16, 2011

T r i l l i o n c

u b i c t

e e t

30

25

20

15

10

5

0

1995 2000

Net Imports

2005 2010 2015 2020 2025 2030 2035

Natural Gas Supply Natural Gas Consumption

The speed and scale o US shale gas development is strainingthe resources o potential producers, requiring them toquickly boost their manpower and technological capabilities.The average age o US oil patch workers is rising, and the

pool o workers with the right middle management skillsis shrinking. Specialized equipment or drilling, processingand transporting shale gas is in short supply. Companies arewrestling with growth and struggling to continue to meetinternal business needs. Keeping up with the volume oactivity is straining their internal systems and processes.Other issues include procurement and strategic sourcingissues, reorganizing capital spending, and tax planning.

More regulation is expected that will

require more disclosure related to

environmental impacts in general andwater issues in particular.

As with all energy sources, shale gas in the United Statesis receiving strong ocus rom NGOs (non-governmentalorganizations) and government agencies, and suchopposition can delay the permitting and production schedule.





For example, many states such as New York, Texas andPennsylvania, which have sizable plays near populatedcenters, are poised to potentially impose additional state-levelregulation regarding water and air emissions on existing andnew operations. In addition, the US EPA has been petitionedby environmental groups to regulate disclosure o chemicalsused in the racking process and is also in the process odrating regulations or additional regulation o air emissions.

It is expected that the trend o new regulations and disclosurerequirements will continue with respect to water usage andracking chemicals, in addition to air emissions (specicallyVolatile organic compounds (VOC) emissions).

The risk remains that an issue in one company within a shaleplay quickly becomes the issue o the entire shale play due tothe degree o NGO attention in these shale play geographies.

However, US producers can take steps to manage publicperceptions and potential reputational harm by proactivelyeducating local ocials and working with community groupsto understand and mitigate concerns where possible.These companies can also help maintain a positive imageby adopting transparent corporate sustainability reportingprocesses, proactive operational practices, and strongstakeholder engagement processes.

Despite these concerns, US energy companies are movingull steam ahead to develop domestic shale gas capabilities.

Some o these companies are also looking beyond theirborders to invest in countries like China and Argentina, whichhave sizable shale gas reserves but largely undevelopedproduction capabilities.

Canada – Slower o the markCanada is the world’s third largest producer o natural gas,with an average annual production o 6.4 trillion cubic eet.1 Canada has traditionally been known to possess signicantconventional gas reserves, and the country was a key suppliero natural gas to the United States or decades until the recentshale boom in the country. Canada now trails the UnitedStates in developing its nascent shale gas resources. But withconventional natural gas sources in decline, Canada’s industryis turning to unconventional sources, including shale gas.

While large-scale commercial production o shale gas in Canadahas not yet started, many companies are now exploring or anddeveloping shale gas resources in Alberta, British Columbia,Quebec, and New Brunswick. According to Canada’s NationalEnergy Board (NEB), development o shale gas, and otherunconventional resources, will help ensure supplies o naturalgas are available to the growing North American natural gasmarket or many decades. The NEB predicts that shale gaswill likely help the country meet its domestic requirements ornatural gas “ar into the 21st century.”2

Forecasts or delivered energy consumption by sources in Canada, Quadrillion British Thermal Units (Btu)

Year Natural gas Oil Coal Nuclear Renewable

2015 3.6 4.5 1.0 1.3 4.3

2020 3.8 4.4 1.0 1.4 4.9

2025 4.3 4.4 1.0 1.5 5.2

2030 4.7 4.5 1.0 1.7 5.7

2035 5.2 4.7 1.1 1.8 6.0

Sources: International Energy Outlook 2011, EIA.

Early drilling at Quebec’s Utica shale reserve shows promise.Preliminary estimates suggest the reserve could hold morethan 20 trillion cubic eet o recoverable gas. Producers areproceeding with caution, but i estimates are correct, shalegas development in eastern Canada could tilt the balance o

production away rom the western provinces. Quebec now hasnext to no inrastructure to support extensive production, butthe province’s proximity to the Ontario and northeastern USmarkets make it well situated to exploit its shale gas deposits.

1 Canadian Association o Petroleum Producers, at http://www.capp.ca/canadaIndustry/naturalGas/Pages/deault.aspx#6eM9ROT7pZEr2 National Energy Board, A Primer for Understanding Canadian Shale Gas (Government o Canada, November 2009).





With US production rising, Canada will

need to develop other markets for its

excess natural gas supplies.

Canada currently exports about 50 percent o the natural gasit produces, but it lacks the processing acilities to liqueyand ship liqueed natural gas (LNG) beyond North America.With US production rising, Canada will need to develop othermarkets or its excess natural gas supplies, and there aresigns that the industry is preparing to invest in the necessaryinrastructure. In October 2011, the NEB issued the rstlong-term license to export LNG, clearing the way or aproposed $5 billion project to develop an LNG export terminal

in northeastern British Columbia. This terminal would allowCanada to export LNG to Japan, South Korea and China,allowing Canadian producers to enter markets beyond theUnited States or the rst time.

This terminal would allow Canada to

export LNG to Japan, South Korea and

China, allowing Canadian producers to

enter markets beyond the United States

for the first time.

With their rising energy demands and higher natural gasprices, the rapidly developing countries o Asia couldpresent strong prospective markets or Canadian LNG.In 2010, or example, Japan’s LNG prices averagedUSD$10.91 per million British thermal units (MMBtu),compared to Canada’s natural gas price average oUSD$3.69/MMBTU.3 However, Canada can expect to aceerce competition in the region i Australia and China alsoboost production to serve the Asian market.

Argentina – Looking or a rise

Deposits in Argentina are projected tobe so big that development will be very

important to the country’s economy.

Preliminary exploration in South America suggests that sizableshale gas deposits lie beneath several countries includingArgentina, Brazil, Colombia and others. In act, shale reservesin Brazil are estimated to be the second biggest in the regionater the United States, but there has been little interest orinvestment in exploring this resource. Argentina is the onlySouth American country that seems set to embark on ull-scaleshale gas production, primarily in the Neuquén Basin.

Deposits in Argentina are projected to be so big that developmentwill be very important to the country’s economy. Althoughsome shale gas wells have already been developed, Argentineproducers will need to conduct more drilling and hydraulicracturing to develop its shale gas reserves. In a 2011 survey ooil and gas executives conducted by KPMG in Argentina, mostrespondents said they expect shale gas production to occurwithin three to ve years.4 As in other parts o the world, mostshale gas projects in Argentina are being undertaken as jointventures, including large global energy entities.

Argentine politicians appear to support shale gas development.Given Argentina’s current reliance on expensive natural gasimports rom Bolivia and Qatar, Argentina is putting a priorityon developing its own sources. In act, all shale gas projectsthat come on line will be included in Argentina’s Gas Plusramework – a government initiative that allows better sellingprices or new oers o this fuid.

While some opposition to racking technology has beenexpressed in the media, most reports echo concerns beingraised in the United States and local opposition on the groundseems to be minimal.

In our view, the development o shale gas in Argentina will bevaluable to the country and occur at reasonable prices. Further,given the Argentine government’s willingness to supportthese projects, we expect that shale gas eld development willcontinue to be allowed.

3 German Federal Oce o Economics and Export Control (BAFA); Energy Intelligence Group, Natural Gas Week.4 KPMG in Argentina, Energy and Natural Resources Survey 2011, available online at: www.enr-kpmg.com.ar

For urther inormation, please contact:

Katherine Blue

KPMG in the United StatesT: +404 222 7606E: [email protected]

Steven Estes

KPMG in the United StatesT: 214-840-2448E: [email protected]

Néstor García

KPMG in ArgentinaT: 54-11 4316-5870E: [email protected]

Wayne Chodzicki

KPMG in CanadaT: + 403 691 8004E: [email protected]





Shale gas –

The European perspectiveWestern Europe – Uncertain uture

Greater competition, high production

costs and low margins are curbing

the appetite for investment shale gas

production start-ups.

In Western Europe, sizable quantities o shale gas and otherunconventional uel supplies have been reported in the UnitedKingdom, the Netherlands, Germany, France, Scandinavia andNorway. Exploration activity is occurring, primarily through jointventures to share risk and know-how. But due to a wide rangeo economic, environmental and regulatory obstacles, theprospect o large-scale shale gas production remains doubtul.Additionally, European investors are watching the United Statesto see i US players decide to develop the country’s capabilities

as a natural gas exporter. Greater competition, high productioncosts and low margins are curbing the appetite or investment inshale gas production start-ups.

France banned hydraulic fracturing,

as of July 1, 2011, including its use forresearch purposes.

Compared to the United States and Australia (discussed inthe next section), the regulatory regime in Europe is relativelyundeveloped. Companies are orced to work without apredictable regulatory ramework, and, even within the EU,there is no universal approach. Access to exploration permitsand development licenses is uncertain, creating signicantregulatory risks.





As reserves in France, Scandinavia and elsewhere in WesternEurope tend to be close to populated areas and as Europeanenvironmental laws tend to be quite strict, the potential orsignicant shale gas development there in the near uture

seems unlikely. Even though shale gas production is largelyundeveloped, the US environmental debate has crossed overto Europe, and environmental groups have been publicizingconcerns over the chemicals used in racking techniques.France banned hydraulic racturing, as o July 1, 2011,including its use or research purposes.

Environmental concerns aside, European countries also lackskilled resources and the inrastructure, creating questionsover the long-term economic viability o shale gas ventures.While there is a hope that technological innovations couldbring down the costs o shale gas production, this is not likelyto happen in the short term.

In the United Kingdom, shale gas production has commencedat the Blackpool aquier in Lancashire, and new shale gasdeposits have been recently ound in the Mendips. Productionat the Blackpool aquier was voluntarily suspended due to

concerns that the operation was causing seismic activity, butthis claims has not been proven.

In May 2011, a UK parliamentary

committee has said it found no evidence

that fracking poses a direct risk to

underground water aquifers, provided the

drilling well is constructed properly.







Norway

Sweden

Lithuania

UK

Netherlands

Germany

France

Ukraine

Russia

Turkey

Poland





In May 2011, a UK parliamentary committee looking into therisks and benets o shale gas said it ound no evidence thatracking poses a direct risk to underground water aquiers,provided the drilling well is constructed properly. Thecommittee concluded that, on balance, a moratorium inthe UK is not justied or necessary at present.

The committee also concluded that, based on estimateso the UK’s onshore shale gas resources, there will notbe a “shale gas revolution” in the UK based on domesticresources alone – nevertheless, developing shale gasreserves could make the country more sel-sucient byreducing its reliance on imported natural gas.

Eastern Europe – Hedging bets

In eastern Europe, Poland’s shale gas development potentialis high on radar screens, while Turkey and the Ukraine havesome potential. Russia’s dominance o the conventional gasproduction could present obstacles or companies seekingto develop shale gas production capacity in the region.Ultimately, the uture o shale gas production in Europe restson whether US producers decide to develop their potential toexport liqueed natural gas to European markets.

Perhaps more than any other European

country, Poland has sizable shale gas

reserves that it is actively seeking toexploit.

Shale gas poses a signicant threat to Russian interests inconventional gas production, and Russian politicians havebecome quite vocal in European debates over shale gasproduction’s environmental saety. Further, nearly25 percent o the natural gas fowing into Europe viaUkraine is transported by Gazprom, the Russian nationalgas transmission company. In the past, Europe hasoten been held hostage to decreased gas supplies due tocontract disputes between Russia and Ukraine.

Perhaps more than any other European country, Polandhas sizable shale gas reserves that it is actively seeking toexploit. Seeking to diminish the country’s reliance on Russianimports, private companies in Poland are working to developthe industry in cooperation with scientists, private researchand development, state labs and geological services andregulators. I Poland, Hungary, and other countries are ableto develop commercial shale gas production capabilities,Russia’s infuence on Europe could diminish.

In Russia itsel, investors in the oil and gas industry are dividedabout shale gas’ long-term potential. Some Russian playersdo not think the opportunity or shale gas is signicant,especially given the current price o natural gas. Other playersare hedging their bets. Russia’s national oil and gas company,or example, has entered a strategic partnership agreementwith Exxon that reers to the transer o shale gas-relatedtechnological know-how and experience, an indication thatRussia’s state oil producer is at least aware o shale gas’suture potential.

Potential eastern European investors in

shale gas production are holding their

cards in anticipation of US shale gas

industry developments.

Potential eastern European investors in shale gas productionare holding their cards in anticipation o US shale gas industrydevelopments. I US companies decide to produce shalegas or domestic use only, then the boom in US shale gasproduction will have little eect in Europe. But in the more likelyscenario that US players decide to invest in the conversion andtransportation acilities they need to enter the European naturalgas market, Europe’s current reliance on supplies rom Canadaand Russia will diminish. In that event, Russia will likely turn itsattention to serving the growing Asian markets.


For urther inormation, please contact:Hilda Mulock Houwer

KPMG in Russia

T: +7 495 937 4444 ext:14099E: [email protected]

Marcin Rudnicki

KPMG in Poland

T: +48225281177E: [email protected]

Tim Tillson

KPMG in United Kingdom






Shale gas –The Asia-Pacifc

perspectiveAustralia – The price o extractionAustralia is one o the world’s richest countries when itcomes to conventional gas supplies, and companies in thecountry have also made signicant investments in coal seamgas production. The primary driver o growth in the gasmarkets is the opportunity to sell gas on the internationalmarket through LNG acilities.

Due to Australia’s relatively small population, domesticdemand or natural gas is limited, and the country producesnatural gas or export in liqueed natural gas orm. With

limited pipelines, natural gas liqueaction plants or otherinrastructure, shale gas development is in an early, immaturestate and its economic viability is uncertain. Further,Australia’s shale gas is oten located in remote locations,making it even more expensive to commercialize. While acombination o oreign and local companies are exploringor shale gas plays in various locations, there is currently no

commercial production o shale gas.





Pakistan

India

China

Australia






Forecasts or delivered energy consumption by sources in Australia, Quadrillion British Thermal Units (Btu)

Year Natural gas Oil Coal Nuclear Renewable

2015 1.4 2.3 2.5 – 1.2

2020 1.6 2.3 2.5 – 1.4

2025 1.9 2.4 2.5 – 1.4

2030 2.1 2.5 2.5 – 1.5

2035 2.3 2.5 2.5 – 1.6

Sources: International Energy Outlook 2011, EIA





Many experts eel that signicant production o shale gas in

Australia is at least a decade away and will ace challengesdue to the ollowing actors:

• Shalegasdrillingcostsareaboutthreetimesthoseof

the United States due to the lack o inrastructure, tightskilled labor and contractor supplies, and a lack o drillingtechnology and expertise.

• Concernsoverfrackingarealreadybeingraisedinthe

context o coal seam gas, and so it is likely there would besimilar concerns with shale gas.

• Shalegasmaynotbeabletocompetewithcoalseamgas

because coal seam gas is located close to large east costpopulation centres while the shale deposits are ar awayand require transportation.

Since most o Australia’s conventional shale gas is remotelylocated, its production may ace less environmentalopposition than operations in the more populated areaswhere coal seam gas is currently being developed.

For the Australian producers, the biggest

issue involved with shale gas is the cost

of extraction.

For the Australian producers, the biggest issue involved withshale gas is the cost o extraction. Currently, there is notenough incentive or companies to invest signicantly in shalegas. I conditions improve, the country is well positionedto develop export markets in countries such as Malaysia,Taiwan, Japan, Korea and China, especially as some o thesecountries seek to diversiy their energy sources. Additionally,

Australia’s has proposed to introduce a carbon pricing

mechanism in 2012, which could ultimately create moredemand or shale gas.

In short, i an Australian company were to nd a big enoughreserve in the right place to extract it and distribute it tomarket, then economies o scale could make shale gasproduction viable.

China – Five-year strategic planIn 2010, the Chinese government began to explore shale gasproduction. While there are no ocial statistics, it is estimated

that China has over 1,275 trillion cubic eet o shale gasdeposits. Shale gas could be China’s largest onshore sourceo energy, and the country is looking to develop this resourcein order to decrease dependence on Russian and otheroreign natural gas sources.

China’s target is to fulfill most of its

energy needs from alternative sources

by 2020.

China’s latest ve-year plan places great emphasis on theexploration o non-traditional/alternative energy sources,such as coal seam, petroleum gas and oil sands. China’starget is to ulll most o its energy needs rom alternativesources by 2020. (However see International Energy Outlookon acing page) As part o this strategy, China will enter intostrategic partnerships with oreign companies in order tohelp China acquire the skills and technologies needed todevelop and exploit its shale gas reserves.





Forecasts or delivered energy consumption by sources in China, Quadrillion British Thermal Units (Btu)Year Natural gas Oil Coal Nuclear Renewable

2015 5.6 24.5 80.7 2.3 11.2

2020 7.1 27.7 85.5 4.3 15.8

2025 9.0 31.6 96.4 6.1 17.8

2030 10.6 33.3 106.5 7.8 19.7

2035 12.1 34.4 113.6 9.5 21.6

Sources: International Energy Outlook 2011, EIA

5 “China Begins to Tap Its Shale Gas, Despite Daunting Technological, Environmental Hurdles”, New York Times , October 14, 2011.

Currently, under a joint venture between PetroChina and Shell

Oil, 10-15 wells are in operation, producing about 2000 cubicmeters daily. The venture started in the last quarter o 2010and is situated in western China. In October 2011, productioncommenced in the Sichuan Basin.

China’s shale gas deposits are geographically dierent thanthose in the United States, and so it is uncertain i U.S.methods o retrieving the gas can be duplicated. While wateris relatively abundant in the Sichuan province, it is also neededto support agriculture in the region, which supplies 7 percento China’s rice, wheat and grains.5

China’s Ministry o Resources has invited some major oil

and gas companies to pitch or shale gas exploration work,oering our licenses or exploration in western China. Asshale gas production is in its inancy, there is no regulatoryramework in place in China. China is pursuing joint ventureswith oreign companies to help build up know-how in shalegas exploration and extraction, and it appears likely that theChinese government will continue to promote and supportshale gas development.


For urther inormation please contact:

Eric Cheung

KPMG in China

T: +861085085304E: [email protected]

Brent Steedman

KPMG in Australia

T: +61 8 9263 7184E: [email protected]

Chi Woo

KPMG in Australia





Burning bright? – Risks that could

dim the uture o shale gasWith so many large shale gas deposits already discovered andmore being ound in new locations, greatly expanded naturalgas use around the world seems likely, especially in electricitygeneration. In the short term, because natural gas burnscleaner than coal and oil, the proportion o natural gas in theenergy mix could rise in response to carbon emission targets.Over time, however, these targets will lessen dependenceon all ossil uels, including natural gas, unless technologicaladvances make carbon capture and sequestration techniques

more eective.

So how bright is the uture or global shale gas production?Despite its abundance and advantages o less clean-burninguels, a number o risks could impact its uture viability. Belowwe highlight ve o the biggest.

1. I and when natural gas prices will riseis the big unknown.

Given the amount o time it may take to explore, develop andexploit a new shale gas source, it can take many years beorethese investments start to produce returns. Whether natural

gas prices move up or down during that extended periodcreates huge potential or prots, but also signicantnancial risks.

Despite the current slump in natural gas prices in somemarkets, some traditional oil and gas companies and newerplayers are continuing to invest in developing shale gassupplies in the belie that the current oversupply will not lastand that prices will ultimately climb higher. As a result, smallerproducers run the risk o becoming acquisition targets in alow-price market.

In the United States, natural gas prices are projected to all toUS$4.63 per thousand cubic eet by 2015. By one estimate,however, the spot gas price o shale gas should amount toUS$7.50–8 per thousand cubic eet to recover the ull costextraction (Ben Dell, Bernstein Research).6 Extraction projectsrequire huge amounts o capital. The limited availability oinrastructure is expected to push costs even higher.

Further, shale gas reserves tend to decline aster thanconventional gas wells. As a result, producers may have toresort to making prot in a shorter period, leading to moreprice risks concentrated in the early months o productionthan or conventional gas.

6 Ben Dell, Bernstein Research, quoted in “The True Cost o Shale Gas Extraction”, Financial Times, March 7, 2010.

Japan (LNG)

Average Natural Gas Prices – 2005–2010

U S D o l l a r s p e

r m i l l i o n B T U

European Union (LNG)

United Kingdom (NG)

United States (NG)

Canada (NG)

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

2005 2006 2007 2008 2009 2010

* Source: 1984-1990 German Federal Statistical Oce 1991-2010 German Federal Oce o Economics and Export Control (BAFA).

† Source: Heren Energy Ltd.

‡ Source: Energy Intelligence Group, Natural Gas Week.

Note: Btu = British thermal units; ci = cost+insurance+reight (average prices).





Private companies cannot develop a

full-scale shale gas industry on their own.

Realizing the potential or shale gas as a protablealternative energy source requires signicant investmentsin technologies, equipment and inrastructure. Privatecompanies cannot develop a ull-scale shale gas industry ontheir own. They need their local governments to support themwith a combination o direct nancial subsidies, investmentsin transportation inrastructures, and avorable regulatoryenvironments. Given the current economic environment,whether governments will be willing to commit to theseinvestments is uncertain.

2. Shale gas could slow investment inrenewables and attract costly regulation.

In an inormal KPMG poll o oil and gas industry clients,7 88 percent o respondents agree that climate change andsustainability issues will continue to have a strong impact onhow corporations invest in the energy sector. However, somecritics suggest that the industry’s ocus on developing shalegas and other unconventional sources is taking attention andresources away rom the development o renewables. Low-cost power generated with abundant natural gas suppliescould disrupt the economic viability o wind, solar and

geothermal projects. As a result, some worry that increasedshale and other unconventional gas production could delaythe shit to renewables by many years.

As you can see rom the energy consumption orecasts orindividual countries throughout this publication, ossil uelsare expected to make up a signicant portion o overall energysupplies into the oreseeable uture. As long as natural gasprices remain low, there will be less incentive to invest ingreener sources. To meet their carbon reduction targets,there is a risk that governments could compel the industryto make these investments through regulation. Such movescould dramatically increase costs across the entire oil and

gas industry, with particularly impact on highly cost-sensitiveshale gas development operations.

3. Due to price uncertainty, managingcosts and nancing risks aretop priorities.

The two risks above lead to the third: companies gettinginto shale gas production now will need to survive or anextended time period beore they can turn a prot. At thesame time, costs or shale gas producers continue to spiral.As they ramp up production, these companies need tostreamline their procurement costs and invest in productivity,technological and capital improvements. Tax costs across theirsupply chains also need to be managed, including complexindirect tax and transer pricing obligations and rising uel andresource extraction taxes. More costs will arise rom the needto comply with new greenhouse gas reporting and vericationrequirements and participation in energy trading systems insome locations.

To maintain their nancial viability, these companies need tokeep a close eye on cash fow, careully orecast and identiyuture nancing needs and unding options, and assesstheir liquidity risk. They will also need to conduct complexeconomic modeling and orecasting to analyze risks relatedto uture changes in demand, pricing, costs, return on capitaland other key perormance indicators.

4. The industry needs to controlreputational risk and turn publicopinion around.

Negative public opinion about the environmental saetyo the hydraulic racturing process could undermine thedevelopment o this industry, particularly where the processis used in – or directly under – populated areas. In act, theprocess has already been banned in France and parts o theUnited States. As noted, a UK parliamentary committeecautiously endorsed this method o shale gas extractionater nding no evidence that the process endangered watersupplies, provided the operations were conducted withproper saety procedures.

According to the KPMG poll o oil and gas industry executivesnoted above, environmental and sustainability concernsare perceived as the biggest challenge acing shale gasdevelopment (41 percent), with regulatory concerns voted asthe second (27 percent).

7 This inormal poll o oil and gas industry executives was conducted in the course o the KPMG Global Energy Institute webcast “Shale Gas – A Game-Changer

or World Energy Markets” (November 10, 2011). To replay the webcast, visit the Institute’s website at www.kpmginstitutes.com/global-energy-institute/

events/2011-11-shale-gas.aspx.





Clearly, many industry members realize that more needs to bedone to change public opinion and promote public condence.Producers need to show that they ully understand thegeology o shale gas ormations and know how to modelthe impact o hydraulic racturing with accuracy. As thereputational impact o the recent Gul o Mexico oil spilland Japan’s nuclear disaster on oshore drilling and nuclearenergy production show, any environmental or saety lapsescould tarnish the entire industry and attract more regulation.All industry players will need to consider adopting leadingpractices to mitigate environmental impact, preservereputation, and avoid more stringent regulation which couldpreclude growth o the industry.

For example, Shell Oil has attempted to instill better industrypractices and improve public perception by releasing its set o“Global Onshore Tight/Shale Oil and Gas Operating Principles”.These principles comprise a ramework or how Shell andother oil and gas producers should protect the environmentand the communities in which they drill or and producenatural gas and oil. These principles include:

1. Sae well design and operation

2. Protection o groundwater and reduction o water use

3. Emissions reduction and ugitive emissions control

4. Reduction o surace impact

5. Transparency and community engagement

By developing and demonstrating a commitment to such aramework, shale gas producers can orestall uture protestsand negative regulatory repercussions or the entire industry.

5. As shale gas transorms supply anddemand o the world’s energy mix,geopolitical actors will continue tocreate risk.

Shale gas will undoubtedly have important – andunpredictable – strategic implications on geopolitics and the

energy industry. For example, the development o shale gas

production in Europe and potential imports rom the UnitedStates could help ease European reliance on Russian gas.In turn, Russia will need to develop its capacity to deliver itsnatural gas to new markets. Beore doing so, however, Russiacould try to exert political or economic pressure to preserveits access to existing markets. Russian politicians are alreadyquite vocal in European debates over shale gas production’senvironmental saety. With nearly 25% o the natural gasfowing into Europe via Ukraine is transported by Gazprom,Russia’s natural gas transmission company, the country couldgo so ar as to thwart uture shale gas production in countrieslike Poland by threatening to cut o current natural gassupplies.

Elsewhere, countries like the United States and Chinahave traditionally depended on uel imports rom politicallysensitive regions, constraining their oreign policy options.Abundant natural gas can help these countries gain securityo supply, which could dramatically change their relationshipswith other nations. On the other hand, exporting countrieslike Canada – which could soon see its biggest natural gascustomer transorm into a competing supplier – will needto make huge investments in inrastructure to create newoutlets or their excess supplies.

Finally, exploiting shale gas deposits in new less developed,politically sensitive rontiers, such as Libya and Mongolia,could open up a whole new set o geopolitical challengesand risks.

Economic and population growth will

continue to put pressure on the world’s

energy supplies, and so all fuel sources

will be needed.

Production o various energy sources in the World, Figures in Quadrillion British Thermal Units (Btu)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Oil 135.43 133.91 131.66 136.51 143.90 145.91 145.86 143.26 145.80 137.46

Natural Gas 90.96 92.84 95.87 97.68 99.92 102.87 106.62 108.87 113.24 109.77

Coal 89.09 93.85 97.56 105.28 116.58 123.24 127.64 134.03 142.02 145.25

Nuclear 25.65 26.38 26.67 26.37 27.32 27.54 27.76 27.15 27.16 26.82

Hydro Electricity 26.72 26.51 26.46 26.75 27.86 28.94 29.75 29.56 30.73 24.25

Wind 0.31 0.38 0.51 0.63 0.81 1.00 1.25 1.62 2.07 NA

Sources: International Energy Statistics, EIA, accessed on September 28, 2011





Whether or not shale gas turns out to be a game-changer, it seems certain that it will soon comprise a largershare o the world’s energy markets. In our inormal poll oindustry executives, 77 percent o respondents agreed thatthe term “game-changer” applies, and 93 percent expectthat companies will shit toward more investment in shalegas development in the uture. This is clearly evident by therecent announcement that BHP Billiton will spend aboutUS$4.5 billion to develop shale gas in 2012.

What’s more, by 2030, the world primary energy demandwill be 40% higher than in 2007 (according to theInternational Energy Agency). Couple this with worldpopulation expected to reach 9.2 billion people by 2050 and

it’s clear that all energy sources (traditional ossil uels andalternative energies) will be required to keep pace with thisdemand.

In addition, as countries seek to ollow through on theircommitments to move away rom coal-red gas plants andreduce greenhouse gas emissions, shale gas may providean important alternative energy source.

The extent to which shale gas comprises a larger or smallerpiece o the energy-mix pie will depend on its economicviability and environmental impact and the trade-oscountries are willing to make to secure their energy suppliesand sustain long-term growth.





North

America

500

Natural gas trade

LNG exports

LNG imports

Pipeline exports

Pipeline imports

LNG exports and importsPipeline exports and imports

450

400

350

300

250

200

150

100

50

0

500

450

400

350

300

250

200

150

100

50

0Latin

America

Europe &

Eurasia

Africa Middle

East

Asia

Pacific

North

America

Latin

America

Europe &

Eurasia

Africa Middle

East

Asia

Pacific

Source: BP Statistical Review of World Energy (June 2011).

92.4

9.4

20.9

5.4

9.8

Pipeline Gas

LNG

16.036.5

20.16.2 44.1

5.5

12.1

113.9

55.9

16.632.0

21.0

6.54.118.8

17.3

10.9

14.9

8.8

6.5

5.2

8.2

17.7

7.05.8

43.3

US

Canada

Mexico

S. & Cent. America

Europe & Eurasia

Middle East

AfricaAsia Pacific

Source: BP Statistical Review of World Energy (June 2011).

Major trade movements

Trade flows worldwide (billion cubic metres)





Further insight

Recent KPMG Oil & Gas Thought Leadership

1. Ater the Gul o Mexico Oil Spill: recent developments in theoil and gas industry. This paper reviews some o the many impactso the spill, including changes to operating models, contractorrelationships, business risks and a number o new and proposedregulations.

2. Procurement in Oil & Gas, published by KPMG’s Global EnergyInstitute, ocuses on procurement in the oil and gas industry andhighlights trends and tools as well as issues and challenges in bothup-stream and down-stream sectors o the industry.

3. Accounting or Carbon discusses the impact o carbon tradingon nancial statements. It provides insights and strategies to helporganizations understand and manage the business implications oclimate change.

4. Impact o IFRS – Oil and Gas (September 2011) This publicationprovides assistance to companies in the oil and gas sector whoare considering converting to IFRS. It gives an overview o theIFRS conversion process and looks at impact o conversion onIT systems, people and business processes.

Recent Global Energy Institute Webcasts1. Oil & Gas Trends and M&A Landscape

2. Transer Pricing Issues in the Oil & Gas Supply Chain

3. Key Tax Developments and Issues Aecting the Oil and GasIndustry

4. Shale Gas – A global perspective

For more inormation please visit:

www.kpmg.com/energy

www.kpmgglobalenergyinstitute.comwww.kpmgglobalenergyconerence.com





The KPMG Global Energy Institute (GEI): launched in2007, the GEI is a worldwide knowledge-sharing orumon current and emerging industry issues. This vehicleor accessing thought leadership, events, webcasts, andpodcasts about key industry topics and trends provides away or you to share your perspectives on the challengesand opportunities acing the energy industry – armingyou with new tools to better navigate the changes in thisdynamic arena. www.kpmgglobalenergyinstitute.com

The KPMG Global Energy Conerence: The KPMGGlobal Energy Conerence (GEC) is KPMG’s premierevent or nancial executives in the energy industry.Presented by the KPMG Global Energy Institute, theGEC attracts more than 600 proessionals each yearand brings together energy nancial executivesrom around the world in a series o interactivediscussions with industry luminaries. The goal othe conerence is to provide participants withnew insights, tools, and strategies to help them

manage industry-related issues and challenges.www.kpmgglobalenergyconerence.com

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Contact us

Michiel Soeting

Global Chairman

Energy & Natural Resources

KPMG in the UK T: +44 20 7694 3052E: [email protected]

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Global Head o Oil & Gas

KPMG in Canada


Steve Estes

Dallas Energy & Chemical

Industry Lead

KPMG in the United States

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Partner in Charge o Energy &

Natural Resources

KPMG in Argentina

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Partner, Tax

KPMG in Poland

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E: [email protected]

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National Head o Oil & Gas

KPMG in Australia


Katherine Blue

Managing Director, US Climate

Change and Sustainability

KPMG in the United States

T: +404 222 7606

E: [email protected]

kpmgglobalenergyinstitute.com

kpmg.com

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