Jul-2009

Future road map for shale gas

As the process industry contemplates future availability of hydrocarbon feedstocks, shale gas could provide an added option to its mix of sources

Chirag Shah and Priyanka Kumar
Evalueserve

Article Summary

The world demand for energy has been rising continuously and, despite the global economic downturn, this demand is expected to only increase in the long term, although at a slower rate than previously estimated for the short term. The increasing concerns about global warming and the drive to reduce carbon footprint would fuel the demand for cleaner fossil fuels such as natural gas, which is likely to outpace the demand growth for crude oil. However, it has been noted that the world’s “conventional” natural gas fields are maturing and that the output from the existing large gas fields such as those 
in the North Sea and the Gulf of 
Mexico is rapidly declining. Natural gas producers across the world have thus started shifting their focus to 
the development of unconventional resources.

A low-permeability (<0.1 millidarcy) reservoir that primarily produces dry natural gas is termed an unconventional gas reservoir. An unconventional reservoir is distinguished from a conventional reservoir on the basis of economics. In other words, a reservoir from which natural gas can be produced at economic flow rates and volumes only after stimulating the well by special techniques such as hydraulic fracturing (a technique used to create fractures that extend from a borehole into rock formations, which are typically maintained by a proppant such as grains of sand or other material that prevents the fractures from closing) or horizontal wellbore (well created through horizontal drilling instead of conventional vertical drilling) is termed as an unconventional gas reservoir. The common examples of unconventional natural gas plays are tight (low- permeability) sandstone formations containing significant volumes of natural gas; shale gas produced from fine-grained rocks known as shales; and coalbed methane (CBM), which is natural gas extracted from coal seams.

The global natural gas demand is expected to increase from 104 trillion cubic feet (tcf) in 2005 to 158 tcf in 2030 (based on 2009 reference case projections). The global natural gas production is expected to rise from 101.9 tcf in 2005 to 158.6 tcf in 2030, growing at an average annual rate of 1.8%.¹ Natural gas consumption in the US alone in the same period is expected to increase from 22–24.4 tcf, while production is expected to increase from 18.4–23.7 tcf. Most of this incremental gas production is expected to be met by higher unconventional gas output, which is forecast to increase from 7.99–13.23 tcf, offsetting the projected decline in conventional gas output from 4.93–2.21 tcf during the same period (Figures 1 and 2).²

Shale gas met 2.2–2.9 tcf, or 10–12%, of the projected 2008 US natural gas demand. Furthermore, US shale gas output is estimated to double over the next decade to 5.5–7.3 tcf, with the total reserve estimated at 250–750 tcf.³ The rapidly expanding shale gas plays are expected to spur growth in unconventional gas output in the US.

In particular, shale gas production is estimated to rise by 5.7% annually over the next ten years to more than 4 tcf. Recent successes in the Haynesville and Marcellus shales have led to a 70% increase in the total US gas resource base available for development, including reserves to 1500 tcf.2

Investments in shale gas
While there is little doubt about the potential of unconventional gas development in the US, the recent fall in natural gas prices has brought 
to question the economic viability of such projects. Production from unconventional gas plays requires new technologies, implying a significant capital outlay. Although rapid technological advancements in shale gas production have allowed producers to tap into the hitherto inaccessible gas resources, these resources have started coming on-stream at a time when the global economy is experiencing a downturn, with the IMF chief Dominique Strauss-Kahn stating that the US, Western Europe and Japan are “already in depression”.⁴ The US energy demand has experienced a definite setback – natural gas prices on the Nymex have dropped by more than 50% from its peak in July 2008. In the backdrop of such an environment, many banks and lending institutions will tighten credit terms, forcing smaller gas producers to limit their capital spending to internal accruals. If prices remain soft (under $5/mmBtu for front-month Henry Hub natural gas contracts), can the investment in unconventional gas plays be justified?
 
Shale gas growth opportunities
Several upstream oil and gas companies have scaled down their capital expenditures on bearish commodity prices and tightening liquidity. High cost ventures such as the Canadian oil sands have already fallen victim to 
the downturn, with international 
oil majors, such as Shell and StatoilHydro, deferring their invest-ments. Speculations abound on the fate of the shale gas industry.

Chesapeake Energy, the largest gas producer in the US, in its 7 December 2008 outlook reduced its drilling capital expenditure budget for 2009 and 2010 by a combined $2.7–3.1 billion.⁵ Further, the company reduced its gas production forecast by 10% for these two years, underscoring the impact of the slowdown. Similar cutbacks have been announced by its peers, Dunbar Resources, Petrohawk Energy, Quicksilver and Sandridge Energy.

However, a closer look at Chesapeake’s forward-looking state-ments indicates the company’s belief in the development of its shale gas plays. In fact, nearly 70% of the firm’s estimated 2009 drilling capital expenditure is to be invested in developing its “Big 4” premier shale assets: Barnett Shale (29%, $1.1 billion), Haynesville Shale (19%, $700 million), Fayetteville Shale (14%, $550 million) and Marcellus Shale (9%, $320 million).⁶

Recently, the Henry Hub natural gas price fell to a six-year-low level of $3.511/mmBtu. John Pinkerton, the CEO of Range Resources, commented that the natural gas production in the US would likely decline for more than a year as the prices fall below the cost of developing new reserves. However, Pinkerton reiterated the company’s plans to double the output from Marcellus shale in 2009 and once again in 2010. Furthermore, EnCana has doubled the 2009 capital spending budget for its Haynesville Shale play to a $580 million, even as it reduces costs in other areas. Other US natural gas producers, including EOG Resources, also see most of their future growth being driven by their shale gas plays.