Korea rushes to jump on shale gas development bandwagon

Korea rushes to jump on shale gas development bandwagon. August. 04, 2012 07:55. mint4a@donga.com jhk85@donga.com.

“We must thank God.”

This is how Rex Tillerson, the head of the world’s largest oil company Exxon Mobil, described the shale gas development boom in the U.S. Amid growing fears that crude oil deposits could be gradually depleted, he said the existence of shale gas itself is a “blessing from God.”

The shale gas reserve is reportedly enough for the world to use for up to 200 years.

Korea National Oil Corp. will enter shale gas development by establishing a related company in the U.S. to avoid falling behind in the shale gas revolution.

○ Korea seeks to spearhead shale gas revolution

The Korean oil company chose to establish a shale gas company in the U.S. by forming a consortium with Korea Gas Corp. and private Korean companies, because many established Korean companies hold the know-how and expertise in shale gas.

Unlike in Korea, where natural resources are owned by the state, oil and gas deposits are owned by landowners in the U.S. So many companies seek to participate in projects to explore and collect shale gas under contract with landowners. This means that if the U.S. shale gas development market is under an oligopoly of a few companies, the Korean consortium will have significantly inferior negotiating power.

The move by a number of U.S. shale gas companies to sell their stakes at low prices is also considered a great opportunity for Korean companies.

Shin Hyeon-don, a professor of energy and natural resources engineering at Inha University in Incheon, said, “With the supply of shale gas exceeding demand in the U.S., related companies are financially struggling and thus seeking to attract investment. If Korean companies acquire stakes and receive technology transfers, Korea can also enter the race to develop the resource.”

Another factor that prompted the Korean government to spearhead the drive is the prevalence of shale gas deposits in many parts of the world, including China, Latin America and Australia as well as North America.

A Korea National Oil Corp. source said, “If we secure technological prowess in the U.S., we can also take on projects to develop shale gas in countries that lack capital and technology including those in Latin America, Southeast Asia and Africa.”

○ Low cost, abundant reserves

The world energy industry is paying attention to shale gas in the U.S. due to its low costs and abundant reserves. Amid surging production of shale gas in the U.S., the price of natural gas in North America declined to the 3-dollar level per MMBtu (amount of gas required to generate 250,000 calories) in this year’s first half. If translated into a per-barrel price, this amounts to about 14 dollars, or 1/7th the international oil price of around 100 dollars.

Another positive factor is that the volume of shale gas deposits has been confirmed to reach 187.4 trillion cubic meters, enough for humanity to consume for 59 years. If translated into ton of oil equivalent, or TOE, the figure amounts to 168.7 billion TOE, which is on par with that of traditional natural gas with 168.4 billion TOE and oil with 188.8 billion TOE.

Sohn Yang-hoon, an economics professor at University of Incheon, said, “As experts predict that shale gas deposits, when including potential reserves, amount to a volume humanity can use for about 200 years, it has emerged as an energy source that can replace crude oil and coal.”

○ Criticism over shale gas bubble

Skeptics, however, are more cautious about the prospects of shale gas, saying the resource should not be considered a pure blessing. For one, critics say even the U.S., despite having large deposits of shale gas and advanced exploration technology, is limited in its capacity to constantly export the gas.

While shale gas production increases in the U.S., production of traditional gas has continued to decline. So Washington could further tighten export restrictions.

Lim Ji-soo, a researcher at LG Economic Research Institute, said, “Only when China, with larger shale gas reserves than the U.S., starts producing shale gas in earnest will the price of this energy source decline worldwide.”

The Korean consortium will also find it hard to start development of shale gas elsewhere with shale gas technology secured from the U.S. This is because production requires a massive volume of water and chemicals.

So Korea will have no choice but to target niche areas, including Eastern Europe, Latin America and Southeast Asia, rather than China and South Africa, which suffer from water shortages. Eastern European countries are also fearful of environmental pollution.

Korean industry watchers say the shale gas revolution will become a “double-edged sword” for Korea. If the U.S. is to export shale gas abroad, it needs large-scale plant facilities for gasification, transportation and storage of gas, as well as vessels.

Since certain Korean companies such as POSCO and Hyundai Heavy Industries have world-class competitiveness in this field, this could also offer a new business opportunity.