In my last posting I concluded that the energy transformation fueled by hydrocarbons derived from shale deserved to be called a revolution.  In many ways, we are still on the threshold of that revolution, both in terms of the full implications of expanding shale gas supplies and of the application of similar techniques to unlock large resources of oil and other liquid hydrocarbons.  Just as shale gas reversed the decline of US natural gas production, this shale oil--often called "tight oil" and distinct from oil shale--is now reversing a long-standing decline trend in US oil production, despite the slowdown in deepwater production from the Gulf of Mexico following the Deepwater Horizon accident.  If these trends continue at recent rates, they could dramatically alter the energy relationships between North America and the rest of the world.   

Due largely to the contribution of liquids-focused shale developments  such as the Bakken shale in North Dakota, the Eagle Ford in Texas, and the Niobara in Colorado, Kansas, Nebraska and Wyoming,  US oil production increased by 6% between 2009-11, with output this year averaging 6.2 million barrels per day (MBD) through May. That is more than 25% above the 2008 low point for US field production. Together with reduced demand from the weak economy and improved energy efficiency, shale oil has helped reduce US oil imports from 60% of total supply in 2005-6 to 46% last year.  In its latest forecast the US Energy Information Agency (EIA) projects that these trends would drive net oil imports down to just 36% of supply by 2035, even with oil production only growing to 6.7 MBD in 2020 before declining again.  Yet that production forecast looks conservative compared to others, including a recent forecast from Citigroup, which suggested that US liquids output--including natural gas liquids but excluding biofuels--could grow from 8 MBD in 2011 to 14 MBD by 2020, based on shale development and expanded deepwater production. 

Many uncertainties govern global oil markets, including significant uncertainties about the future pace of US and international shale oil development, so the ultimate effect of these new supplies on future oil prices is unknown. Still, they seem consistent with a lower oil-price future than would have been credible just a few years ago,  while indicating that the expected shift in market power and geopolitical influence toward OPEC and away from major consuming countries such as the US and China could be postponed or at least diluted for years to come.  That would have profound consequences for the US and global economies and for the geopolitics of energy.

Meanwhile, shale gas has not yet reached its maximum output in the US and is still in its infancy elsewhere.  The EIA forecasts a further 22% growth in total US gas production from 2011 levels by 2035. Production would exceed domestic demand by 2022, despite further inroads by gas in power generation to provide 28% of electricity, largely at the expense of coal.  Shale output is expected to account for roughly half of US natural gas production by 2035.  Even after compensating for declining US conventional gas output, this should be sufficient to jump-start new gas demand sectors, including in transportation and for exports of liquefied natural gas (LNG).  

The US is expected to become a consistent LNG exporter even before the point of net exports is reached, for two reasons.  US gas will be available for export before then, because significant quantities of Canadian gas are likely to continue flowing to the US due to infrastructure and other logistical factors.  At the same time, the wide gap between international LNG prices, often linked to oil prices, and most domestic gas markets provides an economic incentive for exports.  This switch from LNG imports to exports is already reshaping international LNG markets.  Nor is this the only important shift, globally. In its "Golden Age of Gas" report in 2011, the International Energy Agency proposed that global gas production could grow by more than 50% over 2010 levels by 2035, with the share of unconventional gas "rising from 12% in 2008 to nearly 25% in 2035."

Not long ago, US oil and gas production appeared to be in a permanent state of decline, leading to serious concerns about growing import dependence for both.  Many regarded renewable energy sources such as wind, solar and geothermal energy and biofuels as the only solution, even though it was clear to most experts that it would take decades for them to reach the necessary scale.  Yet in just a few years shale development has emerged to provide a robust bridge between declining conventional hydrocarbons and expanding renewables, if not a new base supply altogether.  The resulting reduction in energy dependence might not entirely insulate the US from future oil price spikes, but it will mitigate their impact on US trade and fiscal deficits.  Other implications of the shale revolution are just beginning to be felt, both in the US and globally.

by Geoffrey Styles, Managing Director of GSW Strategy Group

With superlatives and extreme descriptions so common today, it would be tempting to dismiss references to a "shale gas revolution" as just more hype.  Yet if any recent energy trend merits being called revolutionary, it is surely the large-scale extraction of natural gas--and increasingly oil and other liquid hydrocarbons--from shale, for at least the three reasons described below.  Its emergence in a decade when both governments and the public have increasingly looked to renewable energy technologies to meet our future energy needs challenges the notion that oil and gas are "yesterday's energy."  
 
Like most revolutions, the origins of the shale revolution seem obvious in retrospect but went largely unnoticed outside a  circle of visionary technologists and investors, until recently.  The key enabling development was the novel joint application of two well-established oil and gas technologies,  hydraulic fracturing and horizontal drilling, to resources that were previously known but that could not be produced economically with standard techniques.   Hydraulic fracturing, often referred to as "fracing" by engineers or "fracking" by the media and public, stimulates production by overcoming the relative impermeability of these rocks , which as Mr. Rozenfeld explained in another posting on this site are often not true shales.  This technique has been used in other formations since the late 1940s.  However, without the addition of horizontal drilling to enable a single well to drain a much larger area, fracking alone would typically not provide sufficient contact with a shale reservoir to yield attractive production rates.  The insight to meld these techniques, widely credited to Mitchell Energy and further refined by dozens of other companies, has unlocked the equivalent of more than 80 billion barrels of potential resources just in North America.  The global potential looks even larger.

Another reason that shale extraction merits being called revolutionary is more widely appreciated:  It has reversed the costly decline of US natural gas production that set in during the previous decade.  Based on figures from the US Energy Information Agency of the Department of Energy, between 2001 and 2005 US marketed gas production fell by 8%, contributing to annual average wellhead prices rising from $4 per million British Thermal Units (MMBTUs) to over $7/MMBTU.  Thanks to the upsurge of shale gas, output subsequently recovered and last year surpassed previous US record gas production from 1973 by nearly 7%.  An estimated 30% of 2011 gas production was attributable to shale gas.  As a result of expanding supplies, in conjunction with weak economic growth, average wellhead natural gas prices averaged below $4/MMBTU last year and have traded at or below $3 throughout 2012, to date.  That is the equivalent of less than $18 per barrel, in a period when crude oil has averaged nearly $97 per barrel.  
  
The third and most important accomplishment of shale gas is the impact of expanding energy supply and lower prices on the economy beyond the oil & gas industry.  Domestic US petrochemical activity is increasing again, after significant episodes of  "offshoring" due to high domestic gas prices during the 2000s. Lower energy prices are also contributing to a resurgent US manufacturing sector, after many years of decline. And perhaps the biggest impact is found in the electricity sector, where power generation from natural gas has grown from 19% of total US electricity in 2005 to 25% in 2011.  In the process, gas displaced higher-emitting fuels from the generation mix and facilitated the integration of intermittent or cyclical renewable energy sources such as wind and solar power, which would have faced higher barriers to their growth and acceptance without the flexibility and back-up generation provided by large numbers of gas-fired power plants.  
 
So shale development emerged from relative obscurity to transform the energy sector and reduce energy prices and feedstock costs across large segments of the US economy.  Those  are solid qualifications for a technological and economic revolution.  In common with other revolutions, it has also altered the status quo, especially in regions with little recent experience of energy production on this scale.  Revolutions are rarely comfortable, but the rapid dissemination of best practices among both operators and regulators, as recently suggested by the International Energy Agency, should go a long way to alleviating the sharpest concerns, particularly when combined with forthright engagement with affected stakeholders.  I plan to address some of the potential longer-term consequences of this revolution in my next posting here.

Geoff Styles

Mr. Styles is well-respected strategy consultant, advisor and commentator in the energy industry.  His views on energy have been quoted frequently by the Wall Street Journal, the Financial Times, and the Washington Post. Mr. Styles is the author of Energy Outlook, which was named one of the "Top 50 Eco Blogs" by the Times of London.

For my first blog post, I thought it would be useful to introduce some basic geology. Hopefully, this will be helpful in increasing readers’ general understanding of the modern oil industry.  
 
The energy industry has had a great deal of change in the past twenty years with the introduction of the concept of shale plays. Resource plays (which include shale plays) are defined as oil and gas projects where there is low geologic risk in not finding hydrocarbon and are generally statistically repeatable for a large number of wells. Often times, the word is used for all forms of resource plays which is not accurate. 
  
Shale is a sedimentary rock which is composed of clay and silt sized particles. Shales and other mudstones actually are the most common sedimentary rocks present in the geologic record. One would expect that since shale is found in almost every single well ever drilled there would be a huge number of successful shale plays in the U.S. The reason why that is not the case is twofold. The first reason is that most shales do not have a large kerogen (organic) content which is necessary to make oil and gas. The second reason is that shale is ductile. Due to the large amount of clay in the rock, it does not frac well. Even if you are capable of fracing the formation, your fracture ends up closing due to the rock being so plastic. 
  
So what is one of the main factors that differentiates a successful shale play from a failure? The rock is not a true shale! If you look at the most recent successful shale plays in the U.S. (such as the Eagle Ford, Barnett, Niobrara, Bakken), they have almost all been either carbonates (often marly) or very silica rich mudstones. Many times these rocks were misnamed shales due to their black coloration (due to organic content) and higher gamma ray measurements. Due to their extremely low clay content and large mature organic content, these rocks previously thought of as shales are now some of the biggest and most prolific reservoirs in the U.S.  Unfortunately, the original names have stuck through time and the rest is history. So in the future, when you hear about a new shale play, be sure to ask the deeper question as to what the actual play is.

Michael Rozenfeld, P.E.
Mr. Rozenfeld is a licensed professional engineer in the State of Texas

Today we have announced the closing of the merger with Blast Energy Services (read our press release).    As a result of the merger, our stock is now publicly traded on the OTC Bulletin Board under a temporary ticker symbol BESVD (a new ticker symbol will be assigned and announced in 20 business days) and we are known as PEDEVCO Corp. (also doing business as Pacific Energy Development).
 
This is an exciting event to us at PEDEVCO, as it provides us an opportunity to rapidly expand our shareholder base and provides access to additional funding opportunities, which we believe will help us fund and accelerate our existing drilling operations and other new acquisitions that we are currently pursuing. 
 
There have been other exciting developments along with this great news: we have successfully drilled our first well (FFT2H well) in our Niobrara asset in Colorado, and have recently started production from this well.  On our Eagle Ford acreage in Texas, a third well (Peeler EFS #1H) has completed fracking operations and reported an IP rate of 1,262 BOEPD (read operator’s press release).  We have also successfully closed our Series A Preferred stock financing offering, which was oversubscribed and raised more than $11.5 million.
 
We are excited about all of these recent developments and believe that the organic growth from our currently producing assets, combined with our efforts to identify and capitalize on new acquisition opportunities through our strategic relationships with our partners in the U.S. and China, will continue to provide a solid foundation for our future growth and enhanced shareholder value.

Frank Ingriselli - President and CEO