Shale gas development has been slow out of the starting blocks in Europe, for reasons that have been widely discussed. These include differences in mineral rights ownership, smaller onshore oil and gas service sectors, and significantly fewer onshore wells drilled in the past, compared to the US. Local opposition to hydraulic fracturing also plays a role in some countries. The UK government has announced
new proposals intended to address some of these challenges and make shale gas more attractive to produce there. The stakes are large.
The UK's natural gas market has been experiencing problems similar to those in the US in the last decade, prior to wide-scale development of shale gas resources. Natural gas production from the offshore fields of the UK sector of the North Sea, which provided an energy surplus until about ten years ago, has declined rapidly
. As a result, the Interconnector UK
, a bi-directional gas pipeline linking Britain to continental Europe, has recently operated
mainly in import mode. UK natural gas prices have been correspondingly high and volatile, spiking briefly to around $17 per million BTUs this March
. Prices in excess of $10/MMBTU are typical
Against this background, the UK government is understandably interested in pursuing the exploration of the country's potentially enormous shale gas deposits. Last month the British Geological Survey released
its detailed estimate
for the Bowland shale in the north of England. With a range of 822-2,281trillion cubic feet (TCF) of gas-in-place, and a "central estimate" of 1,329 TCF, this looks like a significant resource. Even at the low end of the BGS assessment , and using a conservative figure of 15% recovery based on relevant US shale gas recovery rates
, the Bowland could provide 120 TCF or more of technically recoverable gas, the equivalent of over 40 years of current UK consumption
Two aspects of the government's proposals caught my attention. First, the Chancellor of the Exchequer indicated his plan to make development attractive for producers with a new tax structure that he intends to be "the most generous for shale in the world
." Earnings from shale would be taxed at 30%, compared to 62% for other hydrocarbon projects. With only a few companies currently exploring for shale, that should attract additional drillers, along with the service companies that perform many of the key activities at the well site.
I was more intrigued by the proposal--apparently originating with industry--to provide local communities with a benefit of at least £100,000 per well-site
that is hydraulically fractured, or "fracked", plus a small share of gas revenue. In a country where the government owns the sub-surface rights, this could be a crucial step in gaining local support for projects that, in addition to significant economic activity and eventually local employment, will also result in unavoidable increases in noise, traffic and other intrusions in daily life during the weeks or months in which each site is being prepared, drilled, completed and brought on-line, and for the longer periods that crews would be operating in the area.
We've certainly seen the importance of local benefits in promoting receptiveness towards gas drilling in the US, where most shale development has occurred on private land, and where royalties from production provide regular payments ranging from helpful to lifestyle-altering, depending on production rates and the ownership shares of property owners. Sharing financial benefits from shale production at the community level, rather than with individuals, might even galvanize broader-based support than in some parts of the US. Much will depend on whether communities consider the offered compensation sufficiently generous.
UK shale development still faces significant above- and below-ground uncertainties that only time and drilling can resolve. Nor is it clear whether development of the Bowland shale would have as large an impact on the UK gas market as shale gas has had here. Skeptics can be found among opposition politicians
and respected energy analysts
, though I must say their arguments about high costs and low production rates sound very similar to those that I heard in energy conferences in the US not many years ago. Signposts to watch include the number of drilling companies moving into the north of England and emulation of the UK government's pro-development policies by other countries.
The Energy Information Administration (EIA) of the US Department of Energy released revised estimates
of global shale oil and gas resources this week. The new figures represent a significant increase over the EIA's 2011 estimates
. Technically recoverable shale oil (tight oil) grew more than tenfold, due to the inclusion of formations outside the US, while estimated global shale gas resources
rose by 10%. With these revisions, shale formations now constitute 10% of global crude oil resources and nearly a third of global natural gas resources, although the actual impact of these resources on production and markets is still likely to vary greatly from region to region and country to country.
This year's report reflects a greater focus on tight oil, incorporating insights from the significant development of US tight oil resources that has occurred since the previous report was published. Tight oil development is largely responsible for the 19% increase in US crude oil production
from 2010 to 2012. The smaller adjustment to shale gas is the net result of downward revisions for some countries assessed in 2011, such as Poland and Norway, together with the inclusion of resources in additional shale formations and countries, including Russia, Indonesia and Thailand.
The EIA and the consulting firm that prepared the report were careful to differentiate the technically recoverable resources (TRRs) identified in this data from the more restrictive categories of economically recoverable resources and proved reserves
. In other words, these figures represent the quantities of oil and gas that could be recovered if prices justified development and infrastructure was available to carry them to market, not the amounts that producers currently plan to develop. At the same time, these estimates constitute only a small fraction of the oil and gas thought to be present in the assessed shale deposits. Further improvements in technology could substantially increase future TRRs.
It's interesting to note that although the US leads the world in production of both tight oil and shale gas, it ranks second and fourth, respectively, in global resources of these fuels. The report
also indicates that estimated US tight oil resources of 58 billion barrels (bbl) are more than double current proved oil reserves, which represent just under 7 years of current production. That's significant, because a sizable fraction of the 139 billion bbls of US conventional
unproved TRR--non-shale crude oil not currently included in proved reserves--sits in onshore and offshore areas currently off-limits to drilling
. So shale provides a pathway for US oil production to sustain higher output than in the recent past, without having to overcome barriers such as those impeding development offshore California or in the Arctic National Wildlife Refuge.
Or consider Russia, for which the report cites proved reserves equivalent to 21 years of production and slightly exceeding tight oil TRRs. Russia possesses many of the factors conducive to shale development, including a large drilling fleet and an oil industry accustomed to drilling large numbers of wells, along with oil-transportation infrastructure. It remains to be seen whether Rosneft and other producers will choose to develop
the Bazhenov shale
and other deposits rapidly, to increase total output and exports, or more gradually, to offset declines in mature fields and maintain current production rates.
The EIA also reported 32 billion bbls of tight oil TRR in China. Conventional reserves are comparable to those of the US, supporting current production less than half America's. Without tight oil, China's economic expansion and the rapid growth of its vehicle fleet put it on track
to displace the US as the world's largest oil importer within a few years. China-based companies are seeking oil in Africa, South America and North America, so it's hard to envision them leaving their own shale resources undeveloped.
The situation is more complicated for shale-rich OPEC members like Libya and Venezuela. For example, aside from its current political instability, Libya has nearly 90 years of conventional oil reserves at its current OPEC quota
of around 1.5 million bbl/day, before considering the 26 billion bbls of tight oil identified by the EIA.
On balance, the latest EIA shale resource assessment presents a wider and more realistic view of shale outside the US than in 2011. That includes tempering some of the previous report's enthusiasm for shale gas prospects in places like Poland, where few wells had been drilled until recently. The new element is the report's portrayal of the tight oil resource base as broad and deep, centered mainly on countries likely to be motivated to develop it. The shale gas revolution may be slow to spread globally, due to much-discussed differences in the conditions for development, compared to those in the US. By contrast the development of shale oil, or tight oil, faces fewer obstacles and an eager market.
Recently, across the US, there has an outpouring of hate for fracing. From movies, such as Gasland and Promised Land, to local communities banning tight oil and gas operations, the issue of fracing has become a cornerstone of the environmental movement. There are people claiming that “Big Oil” is out there to pollute the water of America and destroy the earth. Of course, the reality is far from that. It has always been interesting that anything that is “big” in America is automatically considered bad as if the people that work in these companies are inherently trying to do something evil because they work for a successful business someone built. No one I have ever worked with in the oil industry has ever told me that they got into the business of energy production to engage in a Machiavellian scheme to destroy the earth. With that stated, it is important to look at the facts around fracing and to understand what the true risk factors are without all of the hyperbole surrounding it.
Fracing was first developed in the 1940’s as a method to increase the production in oil and gas wells. Over a million wells have been hydraulically fractured worldwide since then. The technique involves pumping water and sand down a wellbore inducing fractures in the reservoir to open up the rock to flow more easily. These fractures are incredibly small with most of them being significantly less than an inch in width. They typically extend upwards up to 300 feet and can extend laterally from between 100 to 2000 ft. The reason why they do not extend upward for very large distance is due to them having to overcome the thousands of feet of rock weighing down creating pressure on the reservoir. Most reservoirs are located at thousands of feet of depth and are not located anywhere near where usable water aquifers are. In fact, using seismic technology, the government and oil companies have monitored numerous fracing jobs and have shown no growth of fractures anywhere near fresh water. In areas across Texas, such as Ft. Worth where hundreds of wells have been drilled in the middle of a city, millions of people have lived for decades next to oil wells with no ill effects. In terms of composition, 99% of frac job fluids are composed of water and sand. The majority of the remaining chemicals are items used daily in many consumer products such as cosmetics, soap, and food. Additionally, there are layers of steel and cement set between the producing zone that isolate and further protect fresh water zones. In conclusion, there are numerous safe guards, historical data, and scientific reasons why fracing is not harmful to anyone’s health, safety, or the environment.
Hydraulic Fracture from Sandia Labs
Breakdown of Frac Fluid Composition (click to enlarge)
Graphic showing fracture height growth and distance to water table (click to enlarge)
Fracing is the reason why today the US is moving to energy independence. As a result of horizontal drilling technology and fracing, the US has seen record growth in production in both oil and natural gas. By replacing coal fired power plants with natural gas, the environment is becoming cleaner due to decreases in emissions. Energy prices have stabilized or dropped as a result of this technology allowing everyone a better quality of living. More jobs are being created in America in a down economy. It seems like a bad idea to ban something that has done so much for the country and that has been proven safe and proven for many years.
Chart showing growth of shale gas in the U.S. (EIA)
The ongoing displacement of coal by natural gas in the US electric generating sector was neatly illustrated in two articles published this week. The Washington Post
examined it from the perspective of utilities faced with expensive decisions about which fuel to bet on for the future, while the Wall St. Journal
looked at the resource and tax implications of this trend for states. The intensity of competition between coal and gas would have been hard to imagine just a few years ago, when the price and energy security advantages of the former seemed insurmountable. The shale gas revolution continues to upend conventional wisdom on energy.
It's worth recalling that coal was once a widely-distributed fuel, powering homes, businesses, trains and factories, as well as power plants. Most of its decentralized applications yielded to competition from the post-World War II oil boom, resulting in a nearly 40% decline
in US coal demand between 1945 and 1960, on a BTU basis. Coal got its second wind in response to the energy crises of the 1970s, when its promise of more than a century's worth of secure, low-cost supply trumped concerns about the environmental impacts of its extraction and consumption. From 1972 to 2000 coal, together with nuclear power, displaced roughly two-thirds
of the petroleum used in US power generation. That freed up oil for other, more valuable uses and solidified coal's energy security benefits in the minds of the public and policy makers. In the process, coal's share of generation expanded from 44% to 53%
Much has changed in the last few years. From 2007 to 2011 a weak US economy and the rapid expansion of natural gas and oil production from unconventional sources shrank net US petroleum imports
by nearly 30%, while increasing the country's effective energy independence
--domestic production of all energy sources as a fraction of total consumption--from 70% to 80%. That lessens the salience of energy security, for which the gas and renewable energy sources perceived to be competing with coal can claim comparable benefits, along with domestic job creation. And the gas supplies that constitute the main competition for coal are, in contrast to earlier gas booms, backed by resources
with useful lives that could rival those of the nation's coal deposits.
Based on recent gas prices
, the cost of electricity produced by high-efficiency gas turbines now rivals coal-fired power from existing power plants and beats it for new capacity
, and with fewer drawbacks. Based on data
from the Department of Energy for the 12 months ending this September, natural gas now commands a 30% share of the electricity market, having reduced coal's share from 43% to 37% in just the last year.
That's the context for the lengthy Washington Post article
, which in the Sunday print edition was entitled, "The Coal Killer." As an example of that premise, it highlights the impending retirement of the 745 MW coal- and oil-fired Salem Harbor, MA power plant
that Footprint Power purchased
from Dominion last year. Footprint intends
to shut down the remaining two operating units, demolish the facility, and replace it with a 630 MW state-of-the-art combined-cycle gas turbine plant. The article goes on to mention several other cases of coal plants being replaced by gas units. The quoted comments from various observers also underline the tension between views of natural gas as a bridge to a cleaner energy future and gas itself as that future.
As Monday's Wall St. Journal article
makes clear, the consequences of this trend extend upstream and downstream of the utilities and their power plant portfolios. The surge of shale gas production since about 2006
has reduced both gas and coal prices, resulting in lower energy costs for consumers and industry. That has led to a revival in some US manufacturing sectors, including petrochemicals and steel
. However, it has also resulted in coal mine closures and reductions in taxes derived from coal production. This is felt most acutely in states like West Virginia and Wyoming, where both state and local budgets have been affected.
It's premature to extrapolate the ultimate outcome of this competition. Large uncertainties could affect its course, including environmental regulations, future demand--including gas exports--and advances in technology such as carbon sequestration. This is especially true globally, with shale gas outside the US generally at a much earlier stage of development. Where conventional gas remains expensive, coal use is still rising
. In any case, the history of past energy transitions suggests that old energy sources never entirely fade away; coal may continue to lose market share in the US and become more of an export
commodity, but it's unlikely to disappear entirely. Meanwhile, shale gas looks like a classic disruptive innovation, the implications of which will play out over many years in ways we might not imagine today, near its start.
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
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.
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.