January 2014, Vol. 241 No. 1

From the Burner Tip

Gas And Oil From Shale Reservoirs Setting Records But Future Unknown

Technology advances in recent years on horizontal drilling and better methods of producing hydrocarbon resources from tight formations like shale reservoirs have had a major impact on United States energy resources. The shale-driven “revolution” has made the U.S. a leading natural gas, crude oil and liquids producer worldwide.

The impact has been much greater than just oil and gas supply as it has opened up new geographic locations for major oil and gas production, expanded employment and economic benefits for many businesses besides those in the petroleum industry.

It is hard to believe that less than a decade ago, energy planners were seeking new sources for natural gas – the energy resource looked to as the bridge fuel to better, more efficient, less environmentally harmful fuels. Time and big money were spent on planning, designing and building large facilities to take receipt of liquefied natural gas (LNG) from various countries to bolster U.S. supply.

Now, these monsters sit idle or await conversion into LNG-exporting terminals. The federal government has already issued a half dozen licenses for exporting LNG and has applications for 20 or more requests. All because of developing gas supplies from shale reservoirs. Equally as important, because of shale-developed supplies, the U.S. is becoming the world’s leading supplier of crude oil and other liquid hydrocarbons.

Natural gas liquids, the byproduct from natural gas production, have grown and made the U.S. the world’s leading supplier. This product is used by chemical and plastics manufacturers. With the increased U.S. supply at relatively lower prices than competing feedstocks coming from crude oil, the chemical and plastic industries are strong global competitors.

In addition to these direct benefits to the energy and aligned industries, the shale revolution helped the economy in many other ways. Energy jobs were a major factor in improving the country’s unemployment. The increased energy revenues helped local and other tax districts. Since many of the shale plays were in new geographic areas which previously had little or no oil and gas operations, this helped in building the energy infrastructure and many local economies.

Though the benefits of the new sources are obvious and there can be some discounting as may have been exaggerated, they are there. Still, there is a constant undercurrent of doubt and questions about whether this new energy play will ultimately be a bust instead of a boom!

As can be expected, most of those who doubt the total benefits of shale development are energy or investment people but there is a long list of others who are also casting doubts on the potential benefits, long-term profitability, or improved American energy position. These other skeptics, and maybe the most vocal, in the “boom-or-bust” scenario include regulators, climate change protesters, and clean energy advocates. Shale development is another fight for the “no fossil fuel” movement!

While most energy technical and business people agree with the benefits of shale development as evidenced by the participation of major energy companies and large investments, there are still enough questionable situations to look closely at whether the shale revolution is a boom-or-bust play!

The first area of concern that has yet to be fully covered, as the program has run too few years to make a solid decision, is the geophysical and geology questions – do formations like shale or tight sands have enough longevity and payout to make the original investment safe and profitable? Can these wells last long enough at good economic payout volumes to justify the increased investments over ordinary wells needed to drill and prepare the shale wells and operate them for production?

Economic conditions now favor shale development because of relatively high oil prices and low interest rates for borrowing. Economics are a disadvantage for natural gas where the huge surpluses have caused prices to drop to exceedingly low levels. Prices have increased from the lows of recent years but there is little hope of getting to higher prices anytime soon. Many forecasters say a major change in supply/demand basics is needed to get natural gas above $5/MMBtu.

In recent years, the high gas liquids content of the gas stream (the C2 and higher hydrocarbons in the gas stream) has added much to the economics. This made liquids-rich wells the priority for drilling and production. With gas liquids prices somewhat lower too, this does not help as much. Greater demand is needed for higher prices to maintain a large drilling program. This has played a big role in the need for a natural gas export program!

Now the question is do the current results show shale development is more than a short term (less than 10 years) flash in the pan? Are the estimates of reserves and payout time for the wells correct? Many experts and energy forecasters look to the first shale development, the Barnett in the Fort Worth area, in developing conclusions as to whether the plays will have five, 10, 20 or 40 years of economic life.

According to a recent article in VANGUARD which was based on data from the Barnett play, “There was a recent study done saying that:10 years or five years; but certainly not 40 years.” There are many articles that can be found on the Internet giving economic data for the shale plays. The New York Times has done research and numerous articles on the investment worthiness of the shale operations.

A Nov. 12, 2013 article was headlined, “Shale’s Effect on Oil Supply is Forecast to Be Brief.” The article acknowledges the impact of shale-derived oil but states, “The (International Energy) Agency’s assessment of world supplies is consistent with an estimate by the U.S. Energy Department’s Energy Information Administration, which forecasts higher levels of American oil production from shale to continue until the late teens, and then slow rapidly.”

The Times goes a step further in its reporting. They were able to collect emails from energy executives, lawyers, geologists/ state officials, and market analysts commenting on the forecasts coming from the industry and questioning the intentions of the companies in their statements.

To quote one of the Times writers, Ian Urbina, in his June 25, 2011 article, “Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States. But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundred of industry emails and internal documents and analysis of data from thousands of wells.”

In addition to questioning the geology and economics, many of the shale detractors have targeted other aspects of the program. Climate activist, regulatory concerned groups, and green energy activists have questioned the shale gas and oil programs. They have mostly questioned the safety of the fracking used to dislodge the resource from the ground, the escaped natural gas emissions from the drilling and producing programs, the tremendous amounts of water and chemicals used to develop the wells and the handling of the waste water from well production.

No question, any of these could impact the shale programs much like it is being impacted in New York state because of the fracking issue. The industry is already heavily regulated and is working with state and federal agencies to improve as safety and efficiency as much as possible. Many of the public groups fighting shale development are the same ones opposed to the usage of any fossil fuel. They see the success of shale programs as threats to replacing fossil fuels in total.

The shale revolution is new and like any new industry or technology, the learning curve is steep. Shale production has added greatly to U.S. hydrocarbon production. It has substantially increased U.S. crude production as well as NGLs, making the U.S. the world’s largest supplier. In 2012, natural gas from shale operations was 39% of total U.S. dry gas production of more than 25 Tcf.

Production from shale operations has already proven its value. Hopefully, they will continue and be even more valuable. Many of the detractors of the value of shale operations really have alternate purposes in denouncing its values and future importance.

In the brief time of the shale operations, economic improvements in the oil and gas production have already occurred. Savings are being made in drilling operations; less water is needed for fracking and there are better methods of handling water disposal. As drilling continues and production increases, like any other new technology, cost savings and economies will be found and instituted.

Boom or bust – time will tell but the boom looks good!