Tuesday, July 02, 2013

The A Team

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.
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
o 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.
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