Vast amounts of shale gas promise a new energy future for North America, perhaps even for Europe. However, recent developments indicate that whilst the gas is undoubtedly there, the transformation of energy markets is unlikely to happen overnight – a long view is necessary.
Global gas reserves
The 2010 BP Statistical Review of World Energy noted that global proved reserves of natural gas grew by 2.21 Tcm (78 Tcf) in 2009, driven by increases in Russia, Venezuela and Saudi Arabia. The global R/P ratio increased to 62.8 years, representing the length of time that those remaining reserves would last if production were to continue at the previous year's rate.
Proved reserves of natural gas are those that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions.
So even under these quite conservative assumptions, global gas reserves are considerable. Global gas resources, dominated by all manner of unconventional gas sources that are yet to be proven commercial, are vastly more. Unconventional gas includes Tight Gas, Coal Bed Methane, Shale Gas and – potentially – Gas Hydrates.
Gas reserves are dominated by the Middle East, Europe and Eurasia (i.e. Russia) and Asia Pacific. In contrast, gas resources (excluding gas hydrates) are dominated by North America and then the FSU. Shale gas is the dominant contributor in North America, China, Latin America, the Middle East/North Africa and the rest of the world, which excludes the former regions and the FSU and Western Europe (Stevens, 2010).
Science and Technology Behind Shale Gas
The fundamental idea behind the exploration and exploitation of shale gas is that in some cases, rich oil-prone source rocks buried at the centre of a basin will have passed into the gas generation ‘window’ and that most of the gas, rather than being expelled and subsequently migrating into conventional traps, will be retained trapped in the source rock itself. This basin-centred saturation concept can be applied to shale oil as well, where a source rock has entered into and then remained in the oil generation ‘window’. Some pundits argue that up to 75% of the generated hydrocarbons remains in the source rock.
These plays involve considerable risk and it seems that as many as 75% of wells are non-commercial at current North American gas prices. Great emphasis is placed on engineering ideas and technology, but actually geological and geophysical insights are the key to success, and appropriate “know how” is uneven among shale players. All shale plays are different and require a thorough understanding of thermal maturity, structural geology, rock fracturability, the presence of silty or sandy beds within the shale package, and sweet spots.
The intensity and scope of drilling and completions activity necessary to exploit shale gas is revealed in one of the established US plays, the Haynesville/Bossier, which covers nearly 20,000 km2 in Texas and Louisiana. It has been drilled by 860 wells to date. Typically, a five horizontal well development program for Barnett Shale gas, will produce from three different zones in the Barnett and lead to a high gas recovery factor. In this play typical wells have average true vertical depth of around 3,500m, and the average measured depth is 4,650m.
As natural permeabilities in shales are very low, hydraulic fracturing is applied, in which high pressure water is injected to cause fractures to open in the reservoir, and a so-called propant is then used to keep them open; a typical ‘frac’ job in a horizontal well bore will have at least seven, and in some cases as many as 12 or even 15 stages. Hydraulic fracturing is intense, with 600–750 lb sand/lateral foot pressure in horizontal boreholes.
These powerful completion technologies allow gas to be extracted from exceedingly low permeability rock and the accessing of extensive areas.
Using all technologies
Achieving these increases in practice, in any one real development, is underpinned by a profound understanding of the geology and rock mechanical properties of the rocks that are going to be developed, from initial deposition, through their burial history, with emphasis on the use of, for example, X-Ray tomography to demonstrate connected pore volumes.
Having understood the target shale at the connected pore volume level, the next step is to select targets for multi-lateral horizontal wells by building a detailed 3D geological model. Here conventional 3D seismic has a major contribution to make, with the additional nuance that description of fracture density and preferred orientation (if any) is important.
There is a final seismic contribution in monitoring the efficiency and effectiveness of a series of ‘frac’ jobs, because each ‘frac’ acts as a small seismic source which can be accurately located in the three-dimensional sub-surface provided a recording network of sufficient areal extent is deployed. This technique can demonstrate that two reservoirs have stayed independent, or that fractures have not spread into surrounding sealing rock or reached out as far as distant aquifers that provide water for human consumption.
None of these technologies are ‘new’, they are widely available from oil field service companies. Equally, it is clear that the application of each of them involves a learning curve and that it is highly likely that some companies, although not all, will become very smart appliers of these technologies, in an integrated fashion, with proprietary models and insights.
Shale Gas in the US
Shale gas represents a huge resource, especially in North America, but the very size of the resource seems to be having a dampening effect on gas prices, and hence on developments, and there is evidence of a rising regulatory and environmental ‘push back’ at the local level.
What can we say about what has happened recently?
A huge amount of shale gas is being documented and shale gas-oriented companies are rising up the list of North American gas reserve holders. For example, Chesapeake Energy, with 13.5 Tcfg, is now the second largest holder of US gas reserves, and XTO Energy, with 12.5 Tcfg, is third. In 2009, Chesapeake, XTO and EOG Resources reported 4.5, 2.2 and 1.9 Tcfg of extensions and discoveries respectively. The reported total volumes of US gas resources quoted are truly staggering – in excess of 1000 Tcf!
On the other hand, EOG Resources, one of the leading lights of the Texas/Louisiana shale gas ‘plays’, is reportedly farming down its gas positions to focus more on shale oil, quoting the significantly inferior economics of the former relative to the latter.
Meanwhile, regulatory authorities are reacting to the ‘Shale Gale’ in two ways.
First of all, via taxation, with the rationale of recognising that whilst shale gas exploitation in their region will create jobs, it will also exert pressure on infrastructure, government and social services which local governments are financially ill-prepared to deal with.
Secondly, a number of well-publicised incidents have heightened focus on the environmental issues associated with shale gas exploitation, raising fears as to the consequences of massive amounts of hydraulic fracturing, the sourcing, use and disposal of massive amounts of water and so on. Environmental regulators are responding to local concerns by becoming much more active. For example, the Pennsylvania Independent Regulatory Review Commission has introduced stringent new treatment regulations for the recycling of flowback and produced water in the Marcellus shale (estimated to contain almost 500 Tcf) and the Arkansas Department of Environmental Quality has demanded heavily evidence-based demonstrations of companies’ abilities to treat wastewater from Haynesville shale gas drilling, to a point where the processed water is so clean it may actually benefit rivers into which it is fed.
Europe and North Africa?
Nowadays, of course, ideas travel at the speed of light and there are already a significant number of companies promising to pursue unconventional gas, especially shale gas, in all sorts of places, including the British Isles, Poland and North Africa.
And at first glance, it would seem reasonable to expect that a prolific source rock such as the Kimmeridge Clay, the Bazhanov Shale or perhaps the Silurian of North Africa would provide opportunities to apply the basin-centred saturation concept developed in North America.
Hill & Whiteley (2010) for example have reviewed the opportunities that might exist in North Africa and have concluded that there is considerable shale gas potential in the region – an estimated un-risked GIIP of 5,250 Tcf - with the Palaeozoic (Silurian) the most promising target, but Carboniferous, Devonian and Ordovician locally prospective. However, in one key point, their observations are similar to those from some parts of Europe itself, notably Poland, namely that the gas content per unit area is generally significantly lower than that for both conventional gas resources and economic North American examples. This indicates the need for a drilling and completions effort that is even more intensive than that seen in the USA, making the economics of shale gas even more precarious. It is difficult to see that developments of such shale gas will be economic at current European gas prices.
Whilst much of the technology used in North America is available ‘off the shelf’ from oil field service companies, Europe as a whole cannot muster rigs and completion equipment in the number that is tackling just one region in the USA. It is believed the total number of onshore rigs available in Europe, outside the FSU, is less than 100, compared with almost 1,500 in the USA. There will be a similar discrepancy in the number of skilled drilling, completions and production engineers.
Also, much of North America consists of ‘wide, open spaces’ and, despite the issues previously mentioned, water is freely available: neither is true in Europe, and the latter is certainly untrue for North Africa.
Finally, as is clear from the North American experience, exploration for and development of shale gas requires a very high intensity of geological effort - on a scale that it is difficult to envisage in a company newly arrived on the European shale gas scene.
Taking a long view
Exploitation of shale gas reserves is an established fact in North America. It requires intensive geological effort, considerable drilling and completions “know how”, careful attention to environmental issues and then an economic gas price. With especially richly endowed shales, such as the Barnett, it is possible for a significant company such as EOG Resources to flourish although even they have diversified into shale oil which is presumably more economic.
Given the fundamental points that there are vast amounts of gas that can be exploited with today’s technology and that gas prices are currently weak, is it sensible to see shale gas as a long-term game to be played by the ‘big boys’? ExxonMobil have clearly taken such a long-term view with their purchase of the North American unconventional gas player XTO.
It may well be that a similar story will develop in or near to Europe, with prolific shale gas accumulations being identified and the various oil field equipment, manpower and environmental issues being overcome. However, in my opinion, this has the look and feel of an even longer term game for the ‘big boys’ and that therefore it would be foolish for investors to imagine that AIM-sized companies are going to make a killing in a second ‘Shale Gale’.
At a time when gas prices are low, government and local authority budgets are being massively constrained, and yet awareness of environmental issues is rising, perhaps the shale gas revolution will start of as little more than gentle breeze - taking the long view is recommended!