December 2010 insight 9

Chattanooga

Eagle Ford

Rio GrandeEmbayment

Texas-Louisiana-

Mississippi Salt Basin

Uinta Basin

Devonian (Ohio)

MarcellusUtica

Appalachian

BasinAntrim

Barnett

Bend

New Albany

Woodford

Barnett-Woodford

Lewis

Hilliard- Baxter-

Mancos

Excello-Mulky

Fayetteville

Floyd-Neal

GammonCody

Haynesville-Bossier

Hermosa

Mancos

Pierre

Conasauga

Pearsall-Eagle Ford

MichiganBasin

Ft. Worth Basin

Palo DuroBasin

PermianBasin

IllinoisBasin

AnadarkoBasin

Greater Green

River Basin

Cherokee Platform

San JuanBasin

WillistonBasin

Black WarriorBasin

Ardmore Basin

Paradox Basin

RatonBasin

Maverick Sub-Basin

Montana Thrust

Belt

Marfa Basin

Valley and Ridge Province

Arkoma Basin

Forest City Basin

PiceanceBasin

Shale Gas Plays, Lower 48 States

0 200 400100 300

Miles

±Stacked Plays

Shale Gas Plays Basins

Deepest / Oldest

Shallowest / Youngest

June 2008: The NYMEX natural gas futures contract rolls off the board at its highest closing price ever, $12.753/MMBtu. Summer heat coupled with the annual hurricane threat to Gulf of Mexico production spooks a North American market where gas demand has outstripped gas supplies for more than a decade. Applications for dozens of LNG terminals crowd the US regulatory dock-ets at the state and federal levels. The state of Alaska renews its push to build a $40 billion pipeline to carry gas from the North Slope to the Lower-48 states, alleviating a shortage in the world’s larg-est gas-burning market. Despite stiffer royalty taxes, drillers in the Canadian province of Alberta punch ever more holes in the ground to satisfy the gas behemoth to the south willing to pay more than $10/MMBtu for the supply.

June 2010: The NYMEX contract rolls off the board at $4.804/MMBtu, a 62% drop in two years. The gas futures contract will fall below $4/MMBtu as the summer progresses without a ma-jor storm, while the rig count falls as US gas drillers further reduce activity in reaction to low prices. Gas produc-

tion grows anyway, reaching an all-time high of 26.2 Tcf for the year. The list of canceled LNG terminals grows almost monthly. New terminals along the Gulf Coast fi le for permits to export gas rather than import it. International engineering giant Fluor says that with US gas prices forecast to be low for the

natural gas

Shale: the Great American

Gas RevolutionBill Holland, Associate Editor, Platts Gas Daily

Built on advances in drilling and information technology,

shale gas has transformed the United States from a growing

importer of LNG to a potential exporter. The country’s

recoverable gas resource estimates have ballooned, and

despite growing environmental concerns, shale gas

technology is going global.

Source: US Energy Information Administration, based on data from various published studies,

updated March 10, 2010

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10 insight December 2010

2011 global energy outlook - natural gas

next ten years, nuclear power plant proj-ects will start to be canceled, unable to compete with gas on price. Questions re-surface as to whether the Alaska pipeline is economically viable, or even needed.

What Happened? In a Word, Shale “Simply the most signifi cant energy

innovation so far this century,” IHS Cambridge Energy Research Associates Chairman and author of the oil history, The Prize, Daniel Yergin told audiences at a conference in March. A sedimentary rock, shale was formed 300 to 400 mil-lion years ago as oceans withdrew from low plains throughout the world, leav-ing behind a mixture of sand and plant material that under pressure and heat became thick layers of impermeable rock one to two miles below the earth. Indus-try thinking for a long time was that gas from shales was unrecoverable. The rock was too deep and too hard. While plank-ton and the accumulated organic matter remaining after oceans receded millions of years ago left the rock rich in gas, it remained impervious to extraction.

Solving that problem required three el-ements that would turn a US gas indus-try away from chasing declining conven-tional fi elds into a gas factory that, for the fi rst time in 40 years, produces more gas than can be consumed. Two of those techniques—horizontal drilling and hy-draulic fracturing—came from a 20-year quest by a stubborn Texas oilman, who, watching oil output on his leases near

Fort Worth decline, wanted to get more hydrocarbons out of the ground.

Horizontal drilling and hydraulic frac-turing have drillers sinking a well ver-tically more than a mile underground, then, using motors, turning the drill bit 90 degrees along the horizontal plane and drilling another mile through the shale rock. Horizontal drilling was the fi rst of Mitchell’s tools. The horizontal well bore exposed far more rock to the well than a simple vertical shaft.

The second technique was hydraulic fracturing, better known as “fracking”: pumping fl uids down the well under ex-tremely high pressures to crack the rock, creating fi ssures in the previously imper-meable formation. To hold those fi ssures open and allow gas to fl ow continuous-ly, proppants—sand and silicas—were added to the mix. Through 30 wells and nearly ten years, Mitchell pumped fl uids and gases (and, some said, dollars) in various combinations down the well to crack the rock and hold it open: water, nitrogen, carbon dioxide, various gels, silica, even propane.

The third development came from information technology. The geologi-cal structure of the Barnett Shale was relatively well-known from decades of oil and gas activity in the area, but how could producers map the extent and thickness of shale layers in areas that weren’t well-defi ned? Three-dimension-al seismic surveys, initially developed by ExxonMobil, use seismic data to cre-

Slant-hole well Horizontal well

Lenticularreservoir

Blanketreservoir

1. Slant and horizontal drilling.

Source: US Geological Survey

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December 2010 insight 11

2011 global energy outlook - natural gas

ate a three-dimensional map of tight reservoirs such as shale. Processing and manipulating the huge amounts of data collected from seismic surveyors didn’t become economical until computer pro-cessing speeds increased exponentially during the high-tech revolution of the 1990s. Armed with cheaper, heavy-duty microprocessors, gas producers of all siz-es were able to map the earth.

Developing ReservesIndependent producers such as Oklaho-

ma City-based rivals Chesapeake Energy and Devon Energy (the latter purchased Mitchell Energy in 2002 for $3.5 billion), took up the tools, trained in the Barnett and then found shales across the US. In 2008, Chesapeake announced it had as-sembled acreage in the “next” big shale play—the Haynesville around Shreveport, Louisiana. Chesapeake now rivals BP as the US’ biggest gas producer on the strength of new hydrocarbons coming from shale plays it operates across the country.

But the Haynesville was only the “next” play if you were Chesapeake. Smaller inde-pendents were already developing profi t-able shale plays across the country: South-western Energy in Arkansas’ Fayetteville Shale, Devon in Oklahoma’s Woodford, Range Resources in the Marcellus Shale that stretches from New York south through Pennsylvania into West Virginia and Ohio, and Petrohawk Energy in the Eagle Ford Shale south of San Antonio, Texas.

Although it was the pioneer in the Haynesville, Chesapeake has assembled the leading land position in the Marcel-lus and holds lots of acreage in all the major shale plays. Chesapeake was also the fi rst to establish joint ventures with international oil companies including BP, Statoil and, most recently, the China Na-tional Offshore Oil Corp. Typically, Chesa-peake sells a minority share of its acreage in a play and the international fi rm pays most of the drilling expenses for a year or two. In return, the internationals get their share of the gas sales revenue and admis-sion to Chesapeake’s “Shale Academy” in Oklahoma City, where they learn how to locate and exploit shale.

In every case, geologists and engineers have had to change their estimates of the gas that could be recovered as drillers got more effi cient and the size of the shales became clearer from drilling. The Barnett Shale, the “granddaddy,” is now estimated to contain 26 Tcf of gas and has already produced more than the 5 Tcf originally forecast. The biggest revision to date came at a Platts conference in Pittsburgh in 2008. The Penn State University geologist who spent his career researching the Mar-cellus Shale, Dr. Terry Engelder, revised his original 15 Tcf of gas in place in the Marcellus to nearly 500 Tcf after seeing the fi rst results of drilling by Chesapeake, Atlas and Range Resources.

The end result of all this activity had the Potential Gas Committee, a group

200

400

600

800

1000

1200

1400

1600

1800

Tcf

2000

2002 2004 2006 2008

shale other

39% increase;85% of that shale

19% increase;65% of that shale

2. Technically recoverable US natural gas reserves.

Source: Potential Gas Committee, Colorado School of Mines

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2011 global energy outlook - natural gas

12 insight December 2010

of geologists, academics and industry representatives that meets every other year at the Colorado School of Mines, reporting in 2009 that potential gas in the US, which for years had hovered around 1,000 Tcf, had nearly doubled to 1,836 Tcf.

Fracking ConcernsHowever, as gas drilling moves out of

the lightly populated areas of Texas and Oklahoma, where it has operated for years, into the more densely populated areas of the Northeast US, the industry’s common practices are getting a skeptical look. Fracking requires millions of gal-lons of water for each well, and roughly half that water comes back to the surface, polluted and requiring treatment.

Where the fresh water for fracking will come from and where it will be disposed of after it is used have become hot-button issues as the industry moves closer to the political and media centers of the North-east US. Although water use and disposal is regulated in the US by each individual state, the federal Environmental Protec-tion Agency was ordered by Congress this year to investigate the effects of the practice on drinking water.

The industry’s image has also been hurt by the inevitable accidents that oc-cur among the thousands of wells drilled annually: gas migration into the water

table from poorly cased well bores, well blowouts and chemical spill on the sur-face. Each accident creates a headline, and the headlines add up in the more densely populated Marcellus Shale, now thought to be the world’s second largest gas fi eld (behind Iran’s South Pars).

Going GlobalDespite the diffi culties, exploration for

shale gas is poised to expand worldwide in the coming year. Already, Hallibur-ton has spudded two shale wells 75 miles south of Warsaw, Poland. India plans to hold its fi rst auction of shale leases in three states in August, 2011. China and India are signing agreements that will have the US Geological Survey examine their geologic data for signs of shale.

A US State Department global shale conference held in Washington, DC, in August drew representatives from 20 countries, their interest spurred by two factors: independence from outside sup-pliers of gas, and meeting greenhouse gas emission goals by fueling coal and oil-fi red power sources with cleaner burn-ing natural gas. Already, the techniques used by George Mitchell, now 91, are be-ing exported around the globe through joint ventures in US shale plays between independents and global majors such as BP, Norway’s Statoil, France’s Total, In-dia’s Reliance and China’s CNOOC. ■

3. Hydraulic fracturing.

Source: Chesapeake Energy

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