Shale O&G Projects Outlook 2012: The Fracks and figures

Gaurav Sharma 25/01/2012

The shale oil & gas industry has grown immensely in stature over the last halfdecade banking mainly but not exclusively on project development and prospection in the US. Despite the existence of shale oil & gas being known to geologists for better parts of five decades if not more, out of practically nowhere shale gas has invaded the industrial, environmental and political discourse not to mention Infrastructure Journals humble database of energy projects of late. To say that shale gas has altered the American energy landscape would be the understatement of the decade, or to be more specific at least half a decade. Courtesy of the process of hydraulic fracking, shale gas prospection most of which was initially achieved in the US by independent upstart project developers has been an epic game changer. US shale gas production stood at 4.9 trillion cubic feet (tcf) by end-2011, which is 25 per cent of total US production up from 4 per cent in 2005. Concurrently, net production itself is rising exponentially owing to the shale drive[1]. The US Energy Information Administration (EIA) reckons the country has 862 tcf of gas reserves. With such an impressive projected volume, there is now talk of the US, which was once a major LNG importer, to become a gas exporter. When such a game changer arrives, others take notice with European project sponsors especially keen to join the game. Furthermore, China is thought to have the largest shale reserves anywhere in the world. Fact or exaggeration IJs project finance and corporate finance data, which only saw US shale projects near exclusively bar the occasional Canadian one, has started seeing entries from Chile to Jordan. Market feedback suggests 2012 would see the UK, Ukraine and Poland, the latter considered by geologists to be the Mecca of EU shale, join their ranks.

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IJ Data: We will, we will Frack you!

Whether conventional or unconventional, initiatives in the oil & gas sector always bear out equally well in both project finance as well as corporate finance data unlike other infrastructure sectors. Shale projects are no exception and follow the oil & gas sector norm. However, in their case corporate finance data has carried a higher weight both in terms of deal valuation as well as the number of projects. Both shale project finance and corporate finance data recorded their first financial close in IJs current series in 2009 although the series itself has been running since 2006. On the project finance side, the year 2009 led the way with six projects reaching financial close while 2010 and 2011 recorded four and three projects respectively. Last year was also one of significance when IJ analysts noted two deals outside of North America for the first time namely the Patagonia Non-Conventional Gas Fields project in Chile and a joint 30 per cent stake in two Shale projects in Jordan. In terms of deal valuation, while 2009 had more projects, 2010 had a higher valuation at US$4.47 billion (versus US$3.84 billion in 2009). Moving away from project finance, it is in the IJ corporate finance data where the shale story is truly reflected i.e. one of a steady rise both in terms of deal valuation as well as the number of projects. From four corporate infrastructure finance deals valued at US$1.89 billion in 2009, both data metrics posted an uptick to seven deals valued at US$8.35 billion in 2010 and 10 deals valued at US$7.58 billion in 2011.

Infrastructure Journal 2012

Healthy it might well be, but IJs corporate finance data on shale differs from the project finance data on one critical front, the latter dataset saw a more diverse mix of countries and regions while the former only contains projects from US and Canada so far. Of these, Chevrons acquisition in 2010, of shale gas developer Atlas Energy, supplying the former with a key route into the lucrative Marcellus unconventional gas reserve in the Appalachian Basin leads the way. The transaction was valued at US$4.3 billion which includes cash of US$3.2 billion and assumed pro forma net debt of approximately US$1.1 billion. As part of the deal, Chevron will become operator of a joint venture with Reliance Industries and will contribute US$1.4 billion

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to the drilling costs for that project. Atlas' average daily natural gas production is 118 million cubic feet (mcf) equivalent. The 2011 acquisition deal of privately held exploration firm Phillips Resources and its affiliate TWP, by ExxonMobil, valued at US$1.7 billion is next in line in the list of top transactions. The move will see ExxonMobil almost double its acreage of the Marcellus Shale reserves in Pennsylvania, USA to just over 700,000 net acres. The transaction came in wake of the US oil majors mammoth takeover of Texas-based XTO Energy, then the USs largest independent natural gas producer, in December 2009. XTO will take charge of the Phillips asset which currently produces 50 mcf of natural gas per day. It has been claimed that the Marcellus field may contain up to 500 tcf of gas. Other key transactions on IJs database include the Statoil Eagle Ford Asset Acquisition (valued at US$ 1.51 billion), BG Group acquisition in Haynesville Shale (US$1.31 billion) and asset acquisition in Niobrara Shale and Powder River Basin (US$1.27 billion) completing the list of top five corporate finance transactions between 2006 and 2011 all of which were American. (For a more detailed list, see table above)

Fracking there, fracking here: All hail shale?

In the summer of 2005, American think-tanks and market analysts were increasingly debating how US dependence on Venezuela would rise in order to meet the domestic demand. There was even some talk of easing-up on Iran. However, by 2007 all of this had been kicked into the long grass with talk of the US as a gas exporter becoming all the rage and with some conviction. As noted, shale presently provides 25 per cent of US gas production and is projected to rise to 46 per cent by 2035 according to the EIA. This entirely narrows down to the technique of hydraulic fracking wherein high pressure fluids blast the shale rock formation. This subsequently releases the gasoil or gas trapped inside which is then pumped to the surface. The fluid or fracking mix not only contains water, but a mix of sand and chemicals. The technique has been around for 20 years and but it has taken almost the last 10 years to improve it in order to make it viable and there is room for more improvements. Mark Sadeghian, Senior Director (Energy), at Fitch Ratings notes that the application of newer drilling technique to crack open North American shale has been a critical driver of the improved economics of liquids shale plays and wet gas drilling.

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 Infrastructure Journal 2012

As a result of these technologies, high oil prices, and ready access to resources in North America, a surge of upstream capital has been earmarked to exploit North American plays that are designated as liquids-rich. The rise in announced capital expenditure budgets for North American drillers has been dramatic, he says. According to Fitch records and company filings, among the project sponsoring companies (via equity, corporate and project finance) those with the largest increases in capital expenditures for US shale explorations are: ConocoPhillips, which allocated US$2.9 billion of its US$13.5 billion 2011 capital expenditure budget to the lower 48 US states and Canada drilling programs, (with almost half of this dedicated to Eagle Ford shale alone); Marathon Oil Corp., which dedicated US$1.0 billion to the Bakken, Eagle Ford, and Woodford shales; Hess Corp. (Hess), with US $1.8 billion in drilling and infrastructure spend in the Bakken in 2011; Devon Energy Corp., with more than 90 per cent of its 2011 capital budget dedicated to oil and liquids-rich plays in 2011; Occidental Petroleum Corp., which is running the largest 3-D seismic program in history in California and has a growing presence in the Bakken shale. In addition, the entry of numerous national oil companies and large integrated oil companies into North American shale plays through acquisitions or joint ventures is expected to keep

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spending levels and production growth for domestic shale plays high through the near to medium term. These groups entry into North American unconventional plays bodes particularly well for long-term development of shale, given their large size, ability to finance capital expenditure programs throughout the cycle, and strategic interests in developing shale know-how, all of which support long-term growth in North American plays, Sadeghian concludes. As an American bonanza turns into a mega bonanza, those overseas are watching intently for a multitude of reasons. While LNG exporting nations rework their business model in wake of the shale influence, importing nations wonder how they could replicate American practices and bring shale projects to market. In the mix of it all, an EIA report on the Global Shale paradigm published last April throws in some staggering statistics. The report puts forward a theory of 48 shale gas basins spread out over 32 countries with recoverable reserves of 190 trillion cubic metres (tcm). Away from North America, the EIA reckons the largest shale gas basins could be in South Africa (13.7 tcm), Australia (11.2 tcm), Argentina (21.9 tcm) and largest basin of the lot China (36.1 tcm)[2].

Infrastructure Journal 2012

Independent upstarts aside, oil majors are also taking shale very seriously as IJ data illustrates. The majors moves have well and truly graduated beyond America, with Royal Dutch Shell for example having made its mark both in China and South Africa. For Europeans, Poland which may hold 5.3 tcm of shale gas, remains the promised land. Ukraine, Norway, Sweden, France and the UK could also have meaningful deposits.

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However, for a shale gas prospection exercise that took two decades to yield viably in the US; neither will shale projects start mushrooming in Europe nor will project financiers be convinced all that easily any time soon, notes Carl D. Hughes, Global Head of Energy & Resources at Deloitte. Big question here is to what extent will Shale transform gas markets in Europe with lots of companies buying acreage and exploring not just in Poland, but Romania, Ukraine and the UK. However, I think this story has some distance to go. Let us not forget, the US shale experience, while described as a bonanza with some conviction by many, is also still in its infancy, he says. There are issues about prospection, profitability, the environment and other ancillary matters which need to be addressed and how the Americans and Canadians address them would be looked at by the global community, Hughes adds. Furthermore, environmental concerns have not disappeared. As shale projects get

increasingly contemplated in various jurisdictions, the voices for and against them rise in audibility. Primary concern globally is one of shale exploration polluting the water table of the prospection zone as well as the drilling acting as a seismic trigger. In the US, as the time of the publication of this report, fracking is more or less unregulated owing to the 2005 statutory exemption from the Safe Water Drinking Act. A US Congressional hearing recently counted over 2500 products used in fracking from harmless citric acid to toxic benzene. This has prompted five US states to demand public disclosure of the fracking mix and more are following suit. Nonetheless, both pro and anti shale lobby groups have accused the other of scaremongering which does not take much. For example, the US Barnett Shale is underneath Forth Worth, one of Texas and the countrys largest cities. European lawmakers, while pining for a US-style shale bonanza, appear to be spooked even more. France for instance has a temporary moratorium on shale prospection based on concerns about water pollution (South Africa has recently followed suit). In the UK, a parliamentary committee, sounded positive towards fracking providing appropriate safeguards and full disclosures were obtained from the players. One of these willing players Caudrilla Resources started fracking in September 2011 in the countrys Lancashire region with plans of drilling no less than 400 wells. However a series of mini earthquakes in the region has hampered development with seismic tremors being linked to fracking activity. It is clear more studies as well as public consultation would be needed in the UK before shale prospection takes off meaningfully. However, Poland remains the main destination for European shale prospection. The country could have up to 5.3 tcf of shale gas according the EIA; much more than deposits of the UK, Scandinavian and Benelux nations put together. Polands government, parties across its

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political spectrum as well as the wider public generally favour shale development and it certainly helps. So far, according to a government spokesperson, the Polish administration of Prime Minister Donald Tusk has awarded nearly 100 concessions. The government says it is keen to invite firms with proven expertise of fracking in North America led by ExxonMobil and ConocoPhillips. The concessions are cheap in relative terms when compared with the wider market and are not that difficult to bag. However, the catch is that prospecting firms will be penalised should they fail to drill the test wells as pledged in the concessions promissory documentation. This is still incentive enough and players ranging from Chevron to UK independent 3Legs Resources have arrived in Poland in hopes of striking fracked gold. Warsaw-based Arkadiusz Wicik, Director (Corporates Energy, Utilities and Regulation) at Fitch Ratings, believes that it is right to be excited about shale gas in Poland, but the excitement needs to be tempered. There is presently a lot of discussion and media coverage in Poland about the exploration activity for shale gas currently underway in the country. A number of foreign and domestic companies have exploration concessions for shale gas in Poland. Several companies have already drilled first exploration wells, some more companies plan to start the exploration activity soon. Over the next two to three years we should know more about Polands shale gas reserves and the potential for shale gas production. The first commercial drilling is not expected before 2014, he says. Wicik notes that the said time is needed to get a sense of where the Polish market actually is. Were not just talking about reserve volumes but also the economics of a future shale industry in the country. Importantly, the government is very much in favour of shale gas exploration and public opinion is largely favourable. Question marks persist over both the cost of production (in terms of local feasibility, complexity and depth of drilling on a relative basis to the shale gas production in the US and Canada) and what will be the environmental impact. The legal framework is another piece of the shale gas puzzle the government plans to work on a new law related to shale gas as well as the taxation system and royalties in the next several months, he adds. As international oil majors and independents gauge the Polish markets prospects as well as share the application of their processes, domestic oil & gas companies including PGNiG and oil refining company PKN Orlen, are also taking an active role in shale gas exploration. The Polish government also confirmed to IJ that a high level delegation of the countrys geologists and officials visited Canada in May 2011 to gain know-how of social and technical issues that shale prospection might throw-up. Apart from gaining knowledge, it also demonstrates our commitment, adds a spokesperson.

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The real reason behind the sudden enthusiasm over tapping shale resources is much more complex than the obvious one of energy security. It also has much to do with what sort of power projects would benefit from a post-Fukushima turn-off and how geopolitics influences decision-making. It is why those who feel they can do indeed hail shale.

Geopolitics, power generation & shale gas what the Frack?

Following the Thoku earthquake and tsunami on 11 March 2011, the now infamous nuclear disaster unfolded in Fukushima, Japan as structural damage to a nuclear power plant in the region resulted in a sequence of equipment failures and the release of radioactive materials in the vicinity. Dubbed as the largest nuclear disaster since Chernobyl (1986), Fukushima has undoubtedly turned people and whole nations away from nuclear energy. Led by Germany in May, one European nation after another revisited nuclear power generation in its backyard and with very different outcomes. For instance, Germany abandoned its plans for nuclear energy outright, followed by Switzerland while Italians voted against it in a referendum. France has held firm about its commitment to nuclear while the UK included nuclear energy in its future power generation mix after much procrastination. However, as long term plans for nuclear were shelved, hardly any European jurisdiction came-up with cohesive, workable and not to mention convincingly cost-effective plans to promote renewable energy as a replacement. Conjecture is now rife in Europe that in the absence of a workable nuclear or renewable energy plan, gas-fired power plants are likely to be the medium to long term beneficiaries of a post-Fukushima nuclear turn-off. For those lacking a secure recourse to natural gas, shale prospection comes naturally. This is further compounded in favour of shale prospection by Europe's complicated geopolitics and EU standards on greenhouse gas emissions. To the former first; the two leading players for shale prospection Poland and Ukraine and their need to tap shale gas as a resource is obvious. Both would like to reduce their historic dependence on Russian gas which is embedded in decades of tensions. Near Europe, which imports gas from Russia, views it as a bully which uses gas supplies to hold importers to ransom. The RussiaUkraine gas dispute of 2009, which saw a Europe-wide supply disruption, was a stark reminder about the unpredictability of Russias Gazprom as a supplier. Shale gas offers a long term outlet along two tangents the first being a bolstering of the energy security of those directly impacted by Russian clout (Poland and Ukraine) and second using these as export hubs for near Europe. Some of the would-be import hubs might not permit shale prospection within their borders but are secretly happy that the Poles and Ukrainians are doing so. Neither Germany nor France (which has a moratorium on shale exploration within its borders), have expressed any loud public apprehensions about Polish plans for shale.

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Ultimately, what is important is that there is government and public support for shale gas whether wider EU legislation poses a challenge or Poland could have its own regulatory framework remains to be seen, notes Wick of Fitch Ratings. Ukraine, thought to have 1.2 tcf of shale reserves, has invited both ExxonMobil and Shell via exploration licences issued over Q4 2011. A spokesperson for TNK-BP also told IJ that it was planning to commit US$1.8 billion towards shale projects in Ukraine. Sources in Kiev suggest that government has asked a pool of investors to prepare feasibility studies on a project which involves the commissioning of the countrys first liquefied natural gas plant. While impact of shale gas will not be felt immediately in Europe, the Russians (and other LNG exporters) are rattled and they have a good reason to be so. A study by the James Baker Institute at Rice University, Houston, Texas, (USA) published in 2011 notes that if European shale-gas reserves are fully exploited and factored in to the global market dynamic, Gazprom, the Russian state energy giants share might fall from 27 per cent in 2009 to 13 per cent by 2040[3]. It is no surprise that Russian Prime Minister Vladimir Putin mooted the idea of a Gas OPEC in Q4 2008. Perhaps, much to the Russians chagrin that is what it has stayed at since an idea. A gas exporters cartel will simply not work on the lines of an oil exporters cartel like OPEC, especially as managing the supply of gas would be virtually impossible to handle. Gas, unlike oil, continues to be supplied to utilities companies on long term contracts with stringent safeguards. Besides utilities suppliers can adjust their fuel mix to mitigate supply constriction unlike motorists consumption of gasoline (or diesel). Geopolitical connotations aside, Poland has another reason. The country has the highest exposure to CO2 emissions related costs due to its (more than 90 per cent) reliance on coal for power generation; not yet a taboo in the EU, but fast approaching it. Poland is also the worst carbon emissions offender in the OECD rubbing shoulders with Australia. A revival of gas-fired power plants would help Poland mitigate the effects of EU restrictions on greenhouse gases. It might even help its peers too. Faced with the shale situation, most LNG exporters are responding to the challenge led by Qatar which is busy signing supply contracts, commissioning a bevy of liquefaction projects and redirecting gas to a wider pool of importers. Australia, Indonesia and Papua New Guinea are also constructing export terminals to bring unexplored markets for their projected LNG exports within reach. The theory of the USA as a gas exporter is gaining traction by the year and American companies are putting money where the mouths are. The drive is lead by the Freeport LNG project in Texas, part-owned by ConocoPhillips, which is going ahead while Sempra Energy has filed for a permit to export LNG from its Cameron LNG facility in Louisiana. According to US Federal Energy Regulatory Commission (FERC) a total of seven LNG export terminal sites

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are at various stages of government approval (either at US Department of Energy, FERC or in some cases both). These include - Sabine, Louisiana (Cheniere/Sabine Pass LNG, capacity 2.6 bcf/d), Freeport, Texas (Freeport LNG Dev/Freeport LNG Expansion/FLNG Liquefaction, capacity 1.8 bcf/d), Corpus Christi, Texas (Cheniere Corpus Christi LNG, capacity 1.8 bcf/d), Lake Charles, Louisiana (Southern Union & BG LNG, capacity 2.0 bcf/d), Cove Point, Maryland (Dominion Cove Point LNG, capacity 1.0 bcf/d), Coos Bay, Oregon (Jordan Cove Energy Project, capacity 1.2 bcf/d), Hackberry, Louisiana (Sempra Cameron LNG, capacity 1.7 bcf/d). Additionally, across the border in Canada, Apache Corp, Encana and EOG Resources plan to join forces to build an LNG export facility in Kitimat, British Columbia (Capacity - 0.7 bcf/d). Douglas Island, BC (BC LNG Export Cooperative - 0.25 bcf/d) and Prince Rupert Island, BC (Shell Canada - 1.0 bcf/d) are other potential sites for LNG export terminals. As natural gas conventionally sells at a higher price per million British thermal units overseas than it does in the US (in some cases by as much as 40 to 50 per cent higher); that is more than enough of an incentive to export. Abu Dhabi-based Kenneth McKellar, a partner at Deloitte and their Middle East Energy & Resources leader, notes that selling the concept of shale gas has been successful as has been the bankability of some of the projects stateside. However, McKellar feels the acceptance of shale plays by the global community has some distance to run in markets beyond North America. Natural gas exporters like Russia and Qatar, with their vested interests, would remain sceptical about shale and the hypothesis that US can export gas. Yet your journal notes the LNG export terminal plans in North America and that many states like Texas for instance are redesigning LNG import terminals to export terminals. So there is a debate to be had between the consuming public, policy planners, governments, academics and project developers and it is only just beginning, he adds. Project financiers are realistic enough to see that the dust will not settle any time soon but rather gradually. There are also a multitude of reasons why a US-scale replication of the shale project finance and corporate finance market is unlikely to take-off at a global level in general and a European level in particular over the short term.

Short term global replication of a US fracking heaven is unlikely

Exporting of the US shale business dynamic globally is unlikely over the short term and not just because there isnt a one size fits all model to employ. Examining the most intent of shale gazers, a case study of Europe would be a good starting point. While American success with shale projects has not escaped the notice of Europeans; financiers and sponsors in certain quarters of the old continent are pragmatic enough to acknowledge that Europe is no USA. The recent shale projects bonanza stateside is no

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geological fluke; rather it bottles down to a combination of geology, American tenacity and inventiveness. Starting with geology itself, Europes is less favourable than North Americas as the formers shale deposits are deeper underground than the latters and by all accounts harder (and costlier) to extract according to a spokesperson for the British Geological survey. Furthermore, while European oil & gas majors such as Shell, Total and BP have drilling expertise, Europe itself not a drilling destination on any scale comparable to North America. IJs market feedback from a pool of services firms and project sponsors suggests that a single gas well (of at least 8,000 feet) would cost in the region of US$4 million in the US. A well of comparable dimensions would cost on average US$11 million in Europe using a US$-weighted average; not to mention project specific costs and ad hoc drilling bills. Furthermore, cost is not the only issue as population density (which is much higher in Europe) also plays a part in getting the actual drilling licence itself. It is no surprise that the US had 1400 gas rigs in operation to a little over a 100 in Europe by the end of 2010. Another reason against European shale exploration is that the legal framework in the USA is much more conducive. What works well for independent exploration in the US is the fact that, unless the drilling site itself is actually on Federal land, mineral rights belong to the landowner. In Europe they belong to the government which is why landowners attitude and willingness to allow drilling differs vastly in both jurisdictions. Industry regulations are also much more favourable in the US when compared to the EU. For starters, fracking has an exemption from the Safe Water Drinking Act of 2005. A similar EU concession is unlikely. But legal experts at Baker & McKenzie point to another piece of US legislation enacted in the 1970s the Natural Gas Policy Act of 1978. The market deregulation, facilitated by this act, incentivises gas prospection of all varieties not just shale as prospectors big or small attempt to seek the stuff constantly improving drilling (and fracking) technology in the process. Then the pipelines and market dynamics come into the picture. Whether an independent wildcatter or an oil major hits fracked gold, both have access to a vast network of existing pipelines to move the product to market; something which would trump not just Europe but many if not most other jurisdictions. Finally, the US shale bonanza which is on the global radar now, was years in the making. Comparing the situation with Poland, Wicik of Fitch Ratings remarks, Lets not forget that in the US (and Canada), shale took a long time almost 20 years before the industry took off meaningfully in 2007, so much so that shale gas had a significant impact on gas prices and production. Similarly, meaningful production of shale gas is not likely in Poland in the next five years, but rather in the 10 to 20 years horizon depending on the outcome of the exploration activity currently underway.

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He also believes that the Polish gas market is not fully liberalised and while moves are underway, the country is not yet ready for full-scale production of shale gas. However, on a positive note, Poland has quite substantial indigenous production of natural gas, covering about 35 per cent of domestic gas demand. As a result, the infrastructure to transport gas from shale deposits to consumers will be easier to develop than in countries with no meaningful domestic production. The same applies for qualified labour, Wicik concludes. Anecdotal evidence suggests financiers themselves are neither befuddled nor overexcited over European shale although corporate literature from various quarters would have investors think otherwise. To cite an example, Fitch Ratings recently conducted an energy outlook conference for investors, issuers and bankers in Warsaw with close to 100 participants. The agency asked a specific question about how many of them thought that in 10 years time there will be significant shale gas production in Poland and the response was overwhelmingly sceptical about the speed with which these projects can be brought to the market. A Fitch Ratings spokesperson stresses this was not a proper statistical poll or an industry survey, but it gives a flavour of European investor sentiment. A Polish government spokesperson acknowledges the infrastructural challenge and the absence of a maze of pipelines. It is spending Zloty 8.1billion (US$2.5 billion) towards building a natural gas terminal on its Baltic Coast which is meant for importing gas but could be remodelled to export gas along the lines of port works in the USA. The Donald Tusk administration is also committed to building an additional 1,000km to complement Polands existing pipeline infrastructure over the next five years. Rather intriguingly, PKN Orlen a Polish refining company in which the government has a 28 per cent stake is remodelling its whole corporate philosophy. Local media reports suggest a palpable drive by PKN to position itself as a utility company and a gas extractor in the main. No doubt it is eyeing a shale bonanza of its own and hopes to be a gas exporter. What frustrates Europe is likely to impact investor mindset at a pan-global level beyond USA and Canada. While Argentina, Australia, China and South Africa are all known to have shale resources, of these, only the Chinese and Argentines are going gung-ho about seeking shale oil & gas. South Africa maintains its moratorium on shale prospection and an Australian government spokesperson told IJ that while the country acknowledges the benefits of shale resources its existing activity in natural gas projects was a medium term priority.

Conclusion: Let overexcitement not supersede pragmatism

Based on research, market conjecture and direct input from industry players and financiers, IJ analysts believe the European shale oil & gas projects market is unlikely to record an

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uptick between 2012 to 2017 on a scale noticed in North America in general and the USA in particular between 2007 and 2012. The financing for shale projects be it corporate finance or project finance would be a slow, but steady trickle rather than a stream beyond North America. Forecasting debt pricing at a global level is even trickier as the overwhelming majority of shale projects on the IJ database are either American or Canadian. North American debt deals in the circa of Libor+175bps to 300bps for 10 to 15 year term loans are on IJs radar, but this rises to as much as Libor+350bps for shorter 5-year term loans. Any debt finance for shale projects in Europe is likely to carry a risk premium of at least 50bps above North American debt pricing for short and long term loans and that too would be contingent upon the wider macroclimate and credit conditions. Beyond Europe, based on the few Latin American and Asian examples available to IJ analysts, we forecast at least a risk premium of 100bps above North American debt pricing. However, there is one caveat wherever a shale play involves one of the top 20 IOCs or a part-privatised NOC, the debt terms are generally more favourable regardless of the jurisdiction in question. Invariably, given the fluctuation in gas prices or the overcapacity seen in 2011, many large scale shale projects would be delayed and some maybe mothballed. The USA and Canada will in all likelihood continue to dominate the shale market for over the medium term. IJs project finance and corporate finance data coupled with research along related tangents by IHS Global Insight and Spears & Associates Inc. supports this viewpoint. IHS Global Insight forecasts that shale gas will account for 60 per cent of all US natural gas production by 2035. It also projects that US shale gas project capital spending would amount to US$1.9 trillion between 2010 and 2035[4]. Additionally, Spears & Associates forecast that the global fracking market will grow 19 per cent to US$37 billion in 2012; with North America accounting for 87 per cent of all fracking activity. Four companies, Halliburton (with a 20 per cent market share), Schlumberger (13 per cent), Baker Hughes (12 per cent) and FTS International (11 per cent) dominated the fracking services market share for 2011[5]. Away from the US, should Chinese shale prospection take-off meaningfully, it would be of little benefit to the debt markets given how rarely the country approaches debt markets for energy projects. We also forecast that by 2015 Poland could very well provide a minor spark to the European market. The Polish government itself is realistic enough to admit not much movement may take place before 2015; some observers think 2020 would be more realistic. Furthermore, how global legislation in general and EU legislation in particular shapes out to the betterment or detriment of shale projects is another red herring. All it would need would be one environmental mishap, and the setback would hurt project investment for years.

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However, it is our belief that full disclosure of the contents of the fracking mix will be a price worth paying by project sponsors big or small and some sponsors would be, and already are, willing to pay it. Finally based on 'fracks', figures and feedback, we believe that US shale prospection began 20 years ago and it took until 2007 for it to come on finance communitys radar. The European shale projects market is expected to take longer to mature. Nonetheless in a needs-based world, mature it definitely should. - Ends With additional reporting and research by the author from the 20th World Petroleum Congress in Doha, Qatar (Dec 4 to Dec 8th, 2011) and 160th OPEC Conference, Vienna, Austria (Dec 14th, 2011) Publishing note: The author gratefully acknowledges the assistance of the World Petroleum Congress and the off-record and on-record insight of several industry professionals who spared their valuable time to discuss his findings. Publishing disclaimer: Please note that the commentary and opinion of individuals from third party institutions contained in this report are solely theirs and not those of the institutions they represent or work for. This report is a data and trends based assessment of the industry. It does not explicitly or implicitly constitute investment advice or an endorsement either by the individuals and institutions quoted or by Infrastructure Journal. NOTES: [1] US EIA Natural Gas Leaflet 2011. Available here. [2] US EIA, April 2011. Available here. [3] James Baker Institute at Rice University, Houston, Texas, (USA), July 2011. Available here. [4] IHS Global Insight, December 2011. Available here. [5] Fracking Market to Grow 19% to US$37 billion in 2012, Bloomberg, Jan 19, 2012. Available here.

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