With tightening availability of gas and demand continuing to rise, producers in the Middle East are now looking to exploit unconventional reserves.  

The rush to find few gas supplies to feed industrial diversification programmes is shifting to uncharted territory such as shale gas.

Shale gas is the same as conventional natural gas in composition except it is trapped between impermeable rock formations, usually deep underground. To free the resource, it is necessary to create permeability in the surrounding rocks to release the gas. Creating permeability in rock to release gas thousands of metres under the surface is complex and expensive. This is achieved by a process known as ‘fracking’, which involves drilling long horizontal sections and creating artificial permeability by fracturing as many as 400 wells.

In 2000, shale gas made up 1 per cent of the US’ gas output, but it now makes up more than 20 per cent. The success was driven by small exploration and production companies exploiting ideal geological conditions, good infrastructure, equipment, technology, and most importantly, high gas prices.

“The US has had phenomenal success with its shale gas exploration and production activities,” says Niall Rowantree, an analyst on unconventional gas service for the UK’s Wood MacKenzie. “But you need to remember that there were a number of key factors that fell into place in the US that made shale gas such an important part of the energy mix.”

The rise in the use of shale gas in the US has also had both advantages and disadvantages for the domestic market. Not having to rely on foreign supplies and also laying the foundation for a boom in petrochemicals production have been two positive aspects.

The main downside was that due to a huge influx of gas, the market became massively over-supplied. This caused gas prices to fall to $2 a million BTU, a drop of about 75 per cent compared to five years ago.

Some countries in the Middle East share similar sub-surface geological conditions with the US. The Middle East has decades of experience in developing hydrocarbons, but in terms of developing the region’s shale gas reserves, the region may struggle to match the rapid expansion of the US shale has industry.

 “In the Middle East, you’ve a conventional gas source that countries will focus on before they get to shale gas,” says Richard Quin, a lead analyst for the Mena Energy Research at Wood MacKenzie. “Why would you develop something that is going to be more expensive when you have an abundance of conventional resources that are likely to be cheaper?”

This is a pertinent question as gas prices in the region are some of the lowest in the world. Saudi Arabia charges $0.75 a million BTU for industrial use gas, while most of its GCC neighbours charge between $1 and $2.50.

Compare this with the cost of producing shale gas, which in most cases is between $4-6 a million BTU and it becomes clear what the hurdle is going to be when developing shale gas in the Middle East.

A major game changer is that some countries, such as Oman, are desperate for gas and $4-6 in production costs still compares favourably to buying gas on the international market.

Saudi Arabia is already conducting a feasibility study that will give the opportunity to develop shale gas reserves by 2020. However, Saudi Aramco has already said that this timeline is ambitious and it may be at least another decade before shale gas becomes a reality in the kingdom. 

It is unlikely that shale gas will become popular in the region in the near future, but that is understandable when billions of cubic feet of gas are still being flared each year in the Middle East. Reducing this wasteful practice will be a more important priority for regional governments.

 “I think it is the wrong decade for shale gas to take off in the Middle East,” says Quin. “There might be a lot of resources there, but it is too early to take that kind of risk.”