Shale Gas Development Prospects

The oil & gas industry is forecasting a significant increase in global shale gas development activity in the years to come. Some experts even claim that many regions currently importing gas may become self-sufficient by exploiting their own unconventional gas resources. Many countries are leveraging on the experience of the US oil and gas companies, involved in unconventional gas development over the last three decades, in exploiting their unconventional gas resources. 

The unconventional gas resources include tight gas, coalbed methane, shale gas and hydrate gas. The development of tight gas and coalbed methane started in the mid-seventies and early eighties. Shale gas activity started about a decade ago with acceleration in the last few years. The discussion of shale gas development, its economic viability and the related investment opportunities is currently a major topic of debate in professional circles. The US Department of Energy (DOE)’s Energy Information Administration (EIA) is forecasting US gas imports to drop from 11% (as a percentage of its annual consumption) in 2011 to about 1% by 2035. All this contribution is believed to come from the development of shale gas because production from the conventional sources and tight gas is declining (Fig. 1)1. To achieve this target, based on a typical average shale gas production forecast per well (Fig. 2)2, the US should be drilling about 4,500 wells in shale gas every year. The drilling of 4,500 wells per year can be easily translated into utilisation of some 400 rigs per year (if it takes about a month to drill and complete a well). Though a very challenging task, it will obviously generate a lot of activity and create business opportunities. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. U.S. Energy Information Administration (EIA), Annual Energy Outlook (AEO) 2011 Early Release Overview, from
http://www.eia.gov/forecasts/aeo/pdf/0383er(2011).pdf Accessed: January 2012

2. Based on this author’s study of the Barnett Shale Gas in Texas, USA

Billions of dollars are currently been spent on shale gas related activities. However, professionals dealing with this resource give mixed signals. Following are some of the recent news headlines from New York Times related to shale gas3. 

• Shale Gas search divides Romania (April 22, 2012)
• Sinopec and Total Continue Shale Gas Buying Spree (January 03, 2012)
• The Shale Gas Revolution (November 3, 2011)
• Exxon Executive Promotes Shale Gas to Europeans (October 12, 2011)
• U.S. Geologists Sharply Cut Estimate of Shale Gas (August 24, 2011)
• Former Enron official says shale gas reminiscent of Enron hype (June 26, 2011)
• Insiders Sound an Alarm Amid a Natural Gas Rush (June 25, 211)
• Shale gas a “Ponzi Scheme,” says IHS drilling data official (June 25, 2011)

In light of the above headlines, companies are buying stakes in US, Poland and China shale gas plays like there is no tomorrow! Total bought a piece of the Chesapeake Energy Corporation’s shale operation in Ohio for $2.32 billion. Sinopec International Petroleum Exploration and Production agreed to buy a 30 percent stake in five Devon Energy shale operations for about $2.2 billion. Chesapeake sold shale assets in northern Arkansas to BHP Billiton for $4.75 billion. Kohlberg Kravis Roberts sold assets in the Eagle Ford Shale formation to Marathon Oil for $3.5 billion. Progress Energy Resources sold a stake of similar size in its British Columbia venture to Petronas of Malaysia for about $1.1 billion. Sasol bought a 50 percent stake in shale assets owned by Talisman Energy and Mitsubishi bought a 40% stake in Encana shale gas assets for $2.9 billion. 

In addition the above mentioned deals, Royal Dutch Shell and US-based oil and gas giants ExxonMobil, Chevron, ConocoPhillips, Anadarko Petroleum, Statoil and Halliburton have moved into China (Sichuan Basin) to exploit vast shale gas resources. The multinationals are confident that their expertise in cracking shale basins is worth something to China. 

Shale Gas Plays in Other Regions

The “World Shale Gas Resources: An Initial Assessment” report, compiled by Advanced Resources International, Inc. (ARI) for the U.S. DOE’s Energy Information Administration (EIA), evaluated the shale gas resources in 14 regions
containing 32 countries. This study does not include significant additional shale gas resources that exist in the Middle East, Russia, Indonesia, and numerous other regions and countries of the world. According to this report, the total
risked technically recoverable gas amounts to 6,622 TScf. Breakdown by region is shown in Fig. 3.4

 

 

 

 

 

 

 

3. http://query.nytimes.com/search/sitesearch/#/Shale+Gas

4.  U.S. Energy Information Administration, World Shale Gas Resources: An Initial Assessment, U.S. Department of Energy, Washington DC 20585, February 17, 2011.

These estimates are likely to change as new information, additional experience, and advances in technology become available. Eighty nine percent of the 6,622 TScf technically recoverable shale gas is in 12 countries, i.e. China 1275, USA 862, Argentina 774, Mexico 681, South Africa 485, Australia 396, Canada 388, Libya 290, Algeria 230, Brazil 226, Poland 187 and France 180. A majority of the other shale gas formations in other regions of the world are deeper as compared to the Barnett (~8,500’), Fayetteville (~7,000’), Marcellus (~8,500’), Antrim (~2,200’) and New Albany (~2,000’) shales in U.S. Therefore, they will not only pose technical challenges (HP/HT and high fracturing pressure requirement) but their development at a reasonable cost will be an additional challenge.

Despite the acclaimed size of the reserves and extensive reliance on this source in the future, significant technological challenges remain in the economic recovery of gas from these unconventional reservoirs. Challenges include effective drilling methods, completions, stimulation, gas price in the market, sustainability of the production rates in the long run, crude oil/gas price parity and the long-run marginal cost (LRMC) of development. LRMC is the break even gas price, calculated at the desired rate of return. As a rule of thumb, approximate LRMCs at a Rate of Return (ROR) of 10%, monthly operating expenditure of $3,000 per well, average production forecast (Fig. 2) and various well costs are shown in Fig. 4. These do not include any tax implications and additional cost of infrastructure and gas processing facilities.

 

 

 

 

 

 

 

 

M. A. Mian

Mian has over 30 years of diversified experience in petroleum engineering, project economics and decision analysis. He had been involved in evaluating multi-billion dollar oil and gas field development, LNG, GTL, Aluminum smelter, refinery, petrochemical, power and production sharing projects. Mian is the author of four books “Petroleum engineering Handbook for the Practicing Engineer, Vol. I and Vol. II” and the best seller “Project Economics and Decision Analysis, Vol. I and Vol. II,” published by PennWell Books, Tulsa, Oklahoma, USA. Mian is one of the pioneers in working with unconventional gas resources. He has extensively dealt with reserves evaluation of tight gas and coalbed methane. Currently he is involved in applying his experience to shale gas resources. He has also served as an expert witness in US Federal court and Energy Commission hearings regarding tight gas pricing classification in the US.