Shale Gas

A Global Game Changer?

 

Background
In 1825 William Hart sold shale gas (produced from a drill hole) to the village of Fredonia, to be used for lighting. Fredonia, Pennsylvania is in the United States, about 500 kilometres due west of New York City and 100 kilometres east of Cleveland. This was the world’s first commercial exploitation of natural gas. It pre-dated Colonel Edwin Drakes famous discovery of oil and gas (also in the United States, at Titusville near Fredonia) by 34 years.

Shale gas is natural gas that occurs in fine-grained sedimentary rocks such as shale, siltstone and limestone.  These rocks have low permeability and considerable associated organic matter that is considered to be the source of the gas. Thus shale gas plays are effectively hosted within or adjacent to their source rocks. To oil and gas geologists such rocks are known as “the kitchen”.

Most shale gas is thermogenic, that is formed,  or “cracked”, from the organic matter after being subjected to high temperatures and pressures for long periods of time. Some shale gas is biogenic, that is as primary methane.

The source rocks for shale gas occur in sedimentary basins that can be gigantic in size. Further, there is evidence that natural gas is still being formed in these basins today. Some consider that this ongoing formation of natural gas feeds into to the biotic and abiotic quarrel about how oil and gas formed, a commentary for another day.

Natural gas in shale gas plays is often accompanied by economically significant condensates and liquids – oil, that is, Texas tea. This can make gas wells profitable that would otherwise not be drilled if natural gas was the only product. By way of comparison, coal bed methane (natural gas from coal seams) does not have associated condensates or liquids.

Current Production
Shale gas  is currently produced in North America, where the extraction technology has been developed. Read about the primary technologies – horizontal drilling and hydraulic fracturing, here.

The United States Department of Energy and private interests commenced research into the commercial extraction of gas from shale during the 1970’s. But large scale, deep shale gas was only possible as a result of the pioneering work of George Mitchell (Mitchell Energy and Development Corporation). It is his experience over the 18 year period to 1999 that has directly led to the explosion of shale gas production in the United States.

The industry has gone gangbusters in the United States. According to the US Energy Information Administration (“EIA”), shale gas production increased from 1.0 trillion cubic feet ¹ in 2006 to 4.8 trillion feet in 2010, about 25% of total dry natural gas production. Total technically recoverable shale gas resources amounts to 862 trillion cubic feet, along with 23.9 billion barrels of oil. However, the rate of new production coming on line over the past 2 or 3 years has appreciably slowed.

Shale gas plays that can be economically exploited have a number of similar properties. They need to be rich in organic material, be amenable to hydraulic fracturing and have been subjected to appropriate pressure and temperature over sufficient time.

Shale gas is not uniformly distributed within a basin but occurs in sweet spots, where production is higher and the cost is lower. Shale gas wells vary in production rates as well as in well life. Further, different drilling and fraccing methods are required for wells in different basins and even different parts of the same basin.

 

The Cost
This rapid growth has come at a cost. At the end of March 2012 spot natural gas prices at the Henry Hub ² were USD2.02 per million British thermal units (“MMBtu”). This compares with the price of around USD4.00/MMBtu in 2011 and prices in the USD4.00 to 10.00/MMBtu range during 2006 to 2010. It is thought that, except where there is associated oil production and/or forward selling, much shale gas production would be uneconomic at current prices.

In contrast the prices for June delivery liquefied natural gas (“LNG”) in the Asian region is currently around USD17.50 per MMBtu. Much of the upward pressure is coming from Japan which is importing much more energy as a result of the closure of its nuclear reactors. The United States does not presently have significant LNG export capacity and thus cannot compete in the seaborne market. It does export to Mexico and Canada via pipeline.

The Controversy
The exploitation of shale gas has raised controversy in the United States on several fronts. The writer has no intention of taking sides here but merely in outlining the various areas of dispute.

A broad range of commentators, from bank analysts to industry insiders, is of the view that recoverable shale gas reserves are overstated, well life is projected too far into the future and profitability is exaggerated.

Some companies in the shale gas business have sought to curtail development of the coal industry through political lobbying.

Supporters of “renewable” energy, such as wind and solar, are concerned that abundant, cheap natural gas will reduce the competitiveness of these technologies. This will in turn lead to lower take up, lower employment and less research and development of renewables.

There are a number of environmental issues, mostly around contamination of land and water by fraccing fluid and by methane.

In response to the above, proponents argue that improvements in technology and methodology will reduce costs, improve productivity and reduce environmental impact. Natural gas is a cleaner fuel than coal and can be used for  back-up and peak load electricity production to support wind and solar. Perhaps most importantly, improving energy self-sufficiency and reducing the cost of energy is of huge benefit to the United States, and indeed many other countries.

The Future
This is a new source of energy with a very short history, time is required for a clear understanding of the issues affecting the industry. A couple of examples:

It is unlikely that the price of natural gas can remain as low as it is. The number of drill rigs active on shale plays has about halved over the past few years, and the United States has just had one of warmest winters on record. Thus, it can be expected that production will level out and then decline at current prices, while demand is likely to be higher in future years.

Producers are estimating well lives of up to 30 to 40 years, however decline rates of some wells appear to be at a rate that suggests a much shorter life. It could be that wells in the sweet spots are long lived and others are not, it is too soon to tell.

Finally, the rest of the world. Many countries around the world have suitable geology for the development and production of shale gas. The EIA estimates a total of technically recoverable shale gas resources of 6,622 Tcf for the world, excluding Russia, the Middle East and much of Africa. Annual consumption by the same countries is currently around 55 Tcf.

Exploration and development is already underway or being encouraged in several countries, but in others it is surrounded by controversy. For example China is keen to develop shale gas, as is Poland, but it looks like being banned in parts of Western Europe. However it plays out, it will be some time before we see meaningful commercial production outside North America.

Last Word
It is too early to accurately value an investment in a shale gas producer, so beware of the unquantifiable risks. An investment in a company that wants to develop shale gas outside of North America and without American technical support is speculative at best.

Shale gas is not a Ponzi scheme as some have claimed, but it could be a massive source of worldwide energy with wide-ranging global political and economic implications. Too soon to tell so take care. A fascinating story of technical innovation and persistence.

 

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1
Measurement of natural gas is complicated and characterised by very large numbers. The basic measurement is volume, either metric or imperial: 1.0 cubic foot =  0.2831cubic metres. The next measurement is energy, either British Thermal Units or megajoules: 1 megajoule = 948 Btu’s. Finally converting volume (or weight) to energy requires knowing the energy content of the gas. In Australia, conventional natural gas is typically around 40 megajoules per cubic metre.

2
The Henry Hub, in Louisiana, is owned and operated by Sabine Pipe Line LLC. Its significance is that it is the pricing point for natural gas futures contracts as traded on NYMEX (New York Mercantile Exchange). More info here.