May 26, 2010 3:31 pm

ExxonMobil takes a long-term view in Europe

ExxonMobil was not as quick as it could have been to invest in unconventional gas resources in the US.

Hence its decision to pay $41bn, including debt, for XTO, which has built a strong position in shale and other unconventional gas resources over the past decade.

If Europe’s unconventional gas industry develops in the same way, Exxon will not be left behind a second time. It has made itself one of the leaders in exploring the potential for shale gas and other unconventional production there.

However, with the European industry still in its infancy, it is still unclear whether the spectacular success of the US industry can be repeated.

Mike Dolan, Exxon’s executive board member with responsibility for technology, says the crucial factor is the ability to deploy the right techniques and processes.

“If you look at the history of the US, everyone knew the shale gas was there; this was not something that was discovered. But the shale is less porous than concrete, so it’s quite difficult to extract,” he says.

“It’s a technology story in terms of how several of these technologies have come together to enable [shale] to be produced at an economic price.”

The two most important technologies have been horizontal drilling, running wells over long distances through the shale, and techniques for breaking up the rock to allow the gas to flow out, including the “hydro fracking” – essentially pumping in water at high pressure – and Exxon’s proprietary “multi-zone stimulation” technology, which uses explosive charges to a similar effect.

There have also been improvements in processes; what Mr Dolan calls “good industrial engineering” in drilling multiple wells.

“You have to do these things over and over again. The question is, can you do them almost in a production-line type of scenario so you can save money, so every well is not some unique activity,” he says.

“And that’s what has really come together to unlock this tremendous resource.”

Mastery of these techniques has been the secret of XTO’s success, and Exxon hopes to use its acquisition to deploy that expertise around the world.

It plans to create a global unconventional resource organisation based in XTO’s offices in Fort Worth, Texas.

In 2009, Exxon acquired significant acreage in Poland and Germany, two of the most promising countries in Europe for unconventional gas, and now has one of the largest positions in the continent.

However, Mr Dolan warns that it is still early days for Exxon’s understanding of Europe’s potential. “The key to it is the geology,” he says.

“There are some shales that are amenable to this type of processing, and some that aren’t. When you prop the layers of shale open, something has to hold it open while the gas flows. So you need not only shale, but also perhaps some silica that’s going to hold it open.”

For Europe, that means that while the gas is certainly there, the amount that can be produced is uncertain, dependent on geological factors that can vary widely over short distances.

“The technology we developed in the US may give a head start to the whole thing, but until we can get in and get a real understanding of what the geology is, we may or may not be able to apply that technology directly,” Mr Dolan says.

Exxon’s recent experience in Hungary has made his point clearly. The company drilled three wells in a licence area, and found gas, but not in commercial quantities.

As Rex Tillerson, Exxon’s chairman and chief executive, put it in March: “The nature of the reservoir and the nature of the geology doesn’t look – in the area where we have tested – to be particularly attractive.”

Mike Dolan says that, as always in the oil and gas business, it will take years to reach decisions about whether production is viable.

“We have to go out and do the seismic, to figure out where the resource is and where it isn’t, then take core samples to look at the geology, then go back to the lab to try to figure out whether it’s got the right elements to use these technologies that have been successful in the US.”

From the first attempts, he says, it probably took about 20 years to develop commercially viable shale gas production in the US, with a host of companies large and small working on it and experimenting with techniques.

Europe could go the same way, he believes, but it is still at the start of that process.

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