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| Potential shale gas basins in China |
Mike Dawson has brought together a SWAT team of experts aimed at helping the Chinese develop their shale gas riches.
This article appears in the July issue of Oilweek; the map is available from here, p. 16
By
Peter McKenzie-Brown
If you
want online information about Telamonn Energy Services Inc., you’re mostly out
of luck. The company is so new the data available is sketchy. That’s too bad,
because the company could be a ground-breaking model for Canadians wanting to
export expertise to booming China.
Chief
scientist and technical services VP for this venture is Victoria-based Mike
Dawson, who was president of the Calgary-based Canadian Society for
Unconventional Resources (CSUR) until last October. CSUR originated two decades
ago as an association of corporations interested in coalbed methane. Today it’s
one of the world’s ranking sources of technical information on such unconventional
resources as shale gas and shale oil.
Today
China needs these technologies so the country can use less coal. “The pollution in many large Chinese cities is
staggering,” says Dawson. “China knows that that’s not sustainable. They know
they can’t continue to grow their economy at the expense of the environment and
the people. So they are quite keen on energy substitution.”
Also
important is that Northern China, which contains most of the country’s coal and
coal-fired power plants, has barely one fifth of the country’s water.
Increasingly, that region is thirsty for water. By contrast, shale gas
prospects occur in less arid parts of China. Although shale gas production does
consume a great deal of water, many of the country’s shale gas prospects can
secure abundant supplies from local lakes, rivers and groundwater.
According
to the International Energy Agency, China’s shale gas potential is greater than
its potential for conventional gas. In 2010, China targetted 30 billion cubic
metres of shale gas reserves. Several foreign firms, including Shell, soon applied
for shale gas production-sharing contracts. In March of this year, Shell
received official approval for its first project.
To
heat up the temperature, last year America’s White House announced a “US-China
shale gas initiative.” In effect, the Americans would provide knowledge in
exchange for investment opportunities. Canada was now on the wrong foot. To be
a success, Dawson’s plan needs to steal a march on the Yankees.
Pollution
Problems
To put
that plan in context, some background: Traditionally, China’s central government
has allocated petroleum rights to three major national oil companies –
PetroChina, CNOOC and Sinopec, each of which trades on major global stock
markets. While the central government regulates natural gas prices in China, municipalities
also play a role. In a recent commentary, The People’s Daily worried about
price increases for the product, for which residential consumers in some
districts now pay the equivalent of $0.40 per cubic metre.
Issued
at year-end 2010, China’s 12th Five-Year Plan focused on energy conservation
and environmental remediation – notably, through large reductions in CO2 pollutants.
A future planet suffering from GHG-induced global warming is not a top-of-mind
concern for many Chinese. What does matter is the existence of cities and
communities in which people are choking in pollution created by burning coal.
Another worry is that most of the country’s coal-fired power plants exist in
the coal-rich north, where water is scarce.
“To
achieve their energy substitution goals, they are going to have to swap out
coal-fired electrical generation plants with facilities based on natural gas,”
says Dawson. “They also need to be more compliant with international concerns
on the environment. To do this they are making efforts to find other sources of
energy.”The big gas-import deals China
has signed “are steps to help clean up the environmental pollution. They know
that Beijing has some of the dirtiest air quality in the world.”
Dawson
believes the recently signed Gazprom deal between Russia and China – a 30-year deal
that will export 38 billion to 60 billion cubic metres of natural gas from
Siberian fields via China National Petroleum Company – was “quite a big one,
but it’s really just a drop in the bucket compared to what the Chinese need to
meet their energy needs.”
Shale
gas development represents another step in the environmental clean-up. To make
that happen, China needed a novel approach to issuing permits for shale
resources. Accordingly, the central government made 20 shale gas blocks (roughly
400 km2 each), available to “smaller entities” within the country. To
buy these blocks, companies had to be of a certain size and had to have expertise
in dealing with this kind of asset.
This
was easier said than done: the permit holders include power generators, heavy
industry manufacturers and big industrial gas users, for example, and they have
little or no shale gas expertise. “They have to meet certain government edicts
about power generation and air pollution, and this is how they have chosen to
do that.” Indeed, many of these “entities” can’t even assess their new
properties, much less develop them. “It’s still a question,” says Dawson,
“whether they have acquired really good green-fields prospects or just moose
pasture.” Ever the experts in moose pasture, this is where Canadians enter the
picture.
A key
factor in Dawson’s business model is to mobilize Canadian shale gas expertise.
Because of worries about fracking in eastern Canada, for example, and the glut
of gas across the continent, the market for Canada’s shale gas expertise is
unfairly in a funk, according to Dawson. “Canadian expertise in this area is undervalued,”
he says. “Yet much of the innovation that is so critical for unconventional
resource development had its origin right here. The entrepreneurial attitude of
Canadians is very strong, there is a lot of expertise here, yet we have an
economic disadvantage for producing shale natural gas for the North American
market.”
Swat
Team
To
deal with those economic issues, Dawson created a notion which one commentator
described as a “shale gas swat team.” In effect an alternative to the American shale
gas initiative, the Telamonn scheme comprises a freelance group of earth
scientists, engineers and other technical specialists that Dawson assemble into
teams as needed as he develops Chinese contracts. “We are an amalgamation of
smaller consultancies that probably wouldn’t be able to compete on a global
scale by ourselves,” he says.
“Ours
is an alliance of consultancies with special skills in the shale gas industry.
Together, we can provide a service package that is suitable for global
competition,” according to Dawson. “This alliance can provide fully integrated
services for shale gas exploration – specifically for China but potentially for
global exploration as well. [Telamonn] is quite small; there are just a few
major shareholders, like myself. The technical alliance team consists of 10 or
12 individuals who are all individual consultants in their own right.”
Because
all of the technical teams in his alliance are functioning consulting firms,
Telamonn’s business model is the key to success, in Dawson’s view. “We bring in
the appropriate people when and where necessary to provide the technical
expertise required on a specific project. We could provide fully integrated
exploration services, for example, from conception through completion and
development.” Of course, “you may not need that.”
He
gets animated when he talks about the possibilities. “I’ve been to China many
times. I just got back two weeks ago and will probably be going back in May and
June, too. I’m mainly going there to participate in business development
meetings.” With a grimace, he says the meetings can be exhausting. “The Chinese
want to absorb as much western knowledge as possible. Getting hammered with
technical questions during a lengthy meeting is an experience unto itself –
especially when there’s a translator in the middle of it.”
Then
he gets back on message. “With our business model we can help them bring in the
right equipment or make sure the equipment they are using is applicable for
this kind of development. The reality is that in the early stages, there are
key technologies they don’t yet have. We specify the tools they would need to
acquire for the project.”
Enhanced
Infrastructure
As
Dawson explains it, shale gas production is supported by a three-legged stool,
the legs of which are horizontal drilling, multistage fracking and
micro-seismic. “The foundation of unconventional development is to increase
your contact with hydrocarbon-bearing rocks,” he says, and “the best way to do
that is with horizontal drilling. The second component is hydraulic fracturing
to stimulate the entire horizontal leg of the wellbore. The third part is
micro-seismic, which lets you know what you’ve done. Micro-seismic gives you
constant feedback on how you’ve done underground. Being able to observe what
you’re doing underground in real time allows you to be very effective in
stimulating the wellbore.” These three legs are highly transportable.
Three-legged
stools generally require flat surfaces if they are to be comfortable. Shale gas
requires pipeline infrastructure, and many of China’s shale gas prospects don’t
yet have pipeline connections to industrial users. “[That’s] one of the
challenges you face in some of these shale blocks. There isn’t any
infrastructure you can actually tie into if you are successful with one of
these plays. We know where the cities and the major shale gas prospects are. Clearly
in some cases there is going to have to be enhanced infrastructure in order to
provide those pathways for the transmission of natural gas.”
Dawson
has no doubt the country can resolve its infrastructure issues. “China’s going
to be an importer of petroleum for a long while. The economy is still really
strong: we talk about a slowdown there, yet they are still growing by anywhere
from 5% to 8% per year.”
Much
has been made of China’s new status as the world’s second largest economy. But
let’s put that in context. According to the World Bank, “China remains a
developing country and its market reforms are incomplete.” In 2011, per capita income
stood at $4,940 – 114th in the world. More than 170 million people still live
below the international poverty line, officially defined as $1.25 per person
per day; only India has a larger number of poor.
Dawson
seems unconcerned. “Capitalism is doing quite well in China, thank you very
much. In the next 10 years we are going to see 350 million people moving from
urban areas into the cities. The amount of infrastructure development going on
right now to support that urbanization process is huge.”
Ready
to wrap up the interview, he stresses again that his team have all worked in
the industry for long periods of time. “We all understand that shale gas
development is capital intensive. You need a well-thought-out policy if you’re
going to people and asking for hundreds of millions of dollars. Our approach of
having an alliance of professionals ranging from geoscience to petro-physics to
logistics can help us build a strategy for success. We can provide an
integrated approach where geoscience and engineering all come together. We can
add to our unconventional resources expertise a well-developed exploration
strategy that will enable us to marry all this together.”
On
reflection, at this stage in its life Telamonn seems like a vision rather than
a business. This is not meant to damn with faint praise. Great businesses begin
with great ideas.
