US gas' unconventional future
Studies suggest the US has significantly larger recoverable natural gas reserves than previously estimated. The future for the industry looks bright, write Rick Smead and Gordon Pickering
Two recent studies of the US' natural gas resources have given a boost to the industry, with reserves estimated to be vastly higher than the proved-reserves figure recognised by Cedigaz of 238 trillion cubic feet (cf).
In June 2009, the Potential Gas Committee (PGC), a voluntary group of gas-industry experts, released its study for 2008, which placed the US' remaining gas resources (using available production technology) at 2,074 trillion cf – a 35% increase over the PGC's previous study, for 2006. This translates into more than 100 years of supply based on historic US production rates of 19-20 trillion cf/y.
The PGC's estimate is in line with the results of another recent industry survey, which was the first to recognise a substantial increase in recoverable reserves. In July 2008, a study performed by Navigant Consulting and released by the American Clean Skies Foundation (ACSF), a gas-industry-funded research group and think tank, placed recoverable gas in a range of 1,680-2,247 trillion cf.
With PGC's estimate falling well above the midpoint of this study's range, most industry analysts now acknowledge a significant shift in US gas reserves. Contrary to the previous, widely held belief, the US has sufficient domestic gas resources to meet demand for many decades, possibly into the next century. The future of the US gas industry is brightening, not diminishing.
A dramatic revision
So how is it possible for the long-term forecasts of the resource base to change so drastically in such a short period of time? The main reason is the rapid ascendancy of unconventional gas – reserves different from the traditional oil-associated fields that have historically supplied the industry. There are three primary sources of unconventional supply, which combined have overtaken conventional supplies to constitute more than 50% of US gas production:
- Tight gas is produced from wells with low-porosity sandstones and carbonate reservoirs;
- Coal-bed methane wells produce gas from coal seams; and
- Shale gas is produced from low-permeability shale formations.
To date, the largest volumes of unconventional-gas production have come from tight-sands development. But over the last decade, and more specifically the last two to three years, shale has been the truly dramatic story. It is primarily the re-evaluation of shale-gas resources that constitutes the large increase in the PGC estimate, and it is the recognition of this resource that made the study's findings so groundbreaking. The PGC estimate includes 616 trillion cf of shale resource, while the ACSF study's high-end estimate included 842 trillion cf, which would constitute 30-37% of US gas resources (see Figure 1).
The development of shale reserves has grown at an impressive rate. From 1998 to 2008, production from shale basins accelerated from negligible amounts to around 10% of total US gas production. One of the largest shale plays, Haynesville, in northern Louisiana, was virtually unknown at the beginning of 2008, but could prove to be one of the biggest gas basins in the world.
The successful development of unconventional gas in the US (all of it onshore) has resulted in two impressive statistics, both compared with the US onshore daily gas deliverability during the period immediately before Hurricane Katrina, in September 2005 (see Figure 2):
- In July 2008, onshore deliverability alone exceeded total deliverability, from the pre-Katrina period; and
- The onshore deliverability added between 2005 and 2008 (9.76bn cf/d, or 1.67m barrels a day [b/d] of oil equivalent), exceeds the total thermal content of all US crude oil and refined products imports from Saudi Arabia (1.5m b/d).
The first statistic accounts for the following phenomenon: in 2005, two hurricanes took the bulk of the US offshore natural gas supply off line. The result was tripling of market prices. In 2008, two hurricanes again took the bulk of the US offshore gas supply off line, but, this time, gas prices fell. Because onshore supply was relatively unaffected by the hurricanes, the bulk of the market was supplied by onshore production and the loss of demand from the shutdown of chemicals and power-generation facilities on the Gulf coast exceeded the net supply shortfall.
The second statistic is a measure of how significant the growth in onshore deliverability has been, as well as how valuable this energy source might be in altering the US balance between domestic and imported fuel sources. However, one of the gas industry's impediments to demand growth was that recognition of this robust increase in supply has happened so fast. Having taken many analysts by surprise, the additional production has not necessarily been factored into most forecasts.
The sudden, substantial growth in both available supply deliverability and the recoverable-resource base resulted from a combination of technological advances and enhanced expertise in using those advances. Technological advances in shale-gas recovery include three critical technical elements: horizontal drilling, hydraulic fracturing, and extremely sophisticated geoscience and petrophysics.
Advances in expertise came about because high gas prices enabled a number of large, independent producers to assemble integrated, state-of-the-art teams of experts and research facilities. And, while high gas prices enabled the assembling of these teams, now that they are firmly in place, the prices needed to continue the rapid development of shale gas are now much lower than the price levels required to initiate their development.
Gas-bearing shale formations have been familiar to the industry for decades. Often deeper than conventional gasfields, these formations are characterised by very dense rock with tiny pockets of methane spread over large geographic areas. The traditional approach of drilling a vertical well straight into a formation to flow a significant amount of gas was extremely inefficient and recovered only low volumes.
Using horizontal drilling and hydraulic fracturing techniques, wells are now drilled vertically into the formation and then turned horizontally along the formation – reaching far more of the formation's area than the end of a vertical pipe ever could. Next, the horizontal casing is perforated and fluid – primarily water – is pumped in under extremely high pressure. The fluid exits the casing through the perforations and pries apart the non-porous shale rock. Granules of various materials (often sand) are included in the fluid as proppants to hold the tiny fractures open to allow the gas to flow more freely. These tiny fractures can extend up to 100 feet from the casing, creating a local cylindrical area of high porosity for the length of the portion of the casing chosen for the fracture operation (see Figure 3).
Both horizontal drilling and hydraulic fracturing have been available to the industry for decades. But using them in unison and combining them with better-targeted development through greatly improved understanding of the formations – resulting from advances in geosciences and petrophysics – has allowed for the rapid expansion of deliverability and the recoverable resource base.
US shale-gas basins
So far, the US has seen development in six large shale-gas plays, with a seventh emerging rapidly (see Box). Of these, Antrim is the most mature and shallow, while Barnett is the most prolific to date. Haynesville, with development just beginning in earnest during 2008, is expected to be the largest. Together, these six existing shale-gas plays have provided the exponential growth in deliverability.
However, these are not the only large shale plays in North America. In the US alone, more than 20 big plays have been identified. Meanwhile, in Canada – primarily British Columbia – plays with the potential to reverse the longstanding decline in gas production from Western Canada have been identified.
The Barnett basin – the grand daddy of US shale plays – was discovered in 1981. With the technological advances of double-pronged horizontal drilling and hydraulic fracturing, more than 10,500 wells have been drilled at Barnett so far – defining it as the US' most prolific shale play.
Producers estimate that the 5,000 square miles in the Fort Worth and eastern region of Texas that makes up the Barnett Shale holds more than 44 trillion cf of technically recoverable resource. According to recent production reports, Barnett produces 4.6bn cf/d (7.4% of US Lower-48 states production, according to Lippman Consulting). As early as 2007, the government's Energy Information Administration ranked Barnett as the second-highest producing US gasfield. In 2008, the Barnett Shale provided 21% of Texas' dry gas production, according to the Texas Railroad Commission.
The development of the Barnett Shale paved the way for the shale industry – other US shale-gas basins have been developed applying the lessons learned and technologies used in the Barnett basin.
Haynesville, the newest of the large US shale plays, gained recognition only in late 2007. With the same areal extent as other big plays, such as Fayetteville and Woodford, the Haynesville Shale play holds the promise of becoming one of the most significant shale plays in the country. With estimated technically recoverable resources of 251 trillion cf, Haynesville has the potential to rival the world's largest gasfields in Qatar, Iran and Russia.
In the US northeast, near areas of dense population and historically high gas consumption, the Marcellus Shale is the least developed of the large US shale plays (less than 300 wells drilled). But with estimates of technically recoverable resources of 262 trillion cf and total gas estimates as high as 1,500 trillion cf, the Marcellus could hold the potential to reshape certain historical flow patterns of the US pipeline industry, as well as support new gas demand. Like the Haynesville, resource estimates of this magnitude are exceeded by only a handful of gasfields in the world, and given the infancy and resource patterns of Marcellus, it is likely that the reserves estimate will increase over time.
There is a remarkable synergy between the basins and the existing long-haul interstate and intrastate gas pipeline network (see Figure 4). All but one of the main shale-gas basins lies relatively close to existing pipeline infrastructure. The exception is the plays of northeastern British Columbia, where significant pipeline capacity has yet to be built to deliver shale gas to local markets.
In some cases, additional regional pipeline capacity may be required, but to a large degree, the shale-gas basins are well placed to deliver gas to market quickly and economically without the need for large, new pipeline projects. Additionally, with declines from conventional and offshore production on the Gulf coast, the increase in shale gas output will close the usage gap of otherwise underutilised pipelines and, in some cases, underutilised processing capacity.
Last year, as the global economy went into a near meltdown, the US, and the world, faced a situation unlike any other. The US upstream gas industry has not escaped unscathed. A notable effect has been a sharp decline in drilling activity – a leading indicator of future production levels. US vertical gas-drilling activity has declined dramatically: during the week ending 4 July 2008, 781 wells were drilling, compared with 262 wells drilling during the week ending 24 April 2009. However, while vertical gas drilling has declined by more than 70% from last year's peak, horizontal gas drilling has declined by only 40%.
And despite the decline in drilling activity, US gas production is holding relatively flat at around 55bn cf/d, according to both Lippman Consulting and the US government's Energy Information Administration (see Figure 5). This is the result of the increase in shale-gas output making up for decreases in production from conventional and unconventional wells.
Several reasons exist for continuing strong US gas production rates and shale-gas drilling. Hedging programmes that sold forward a portion of producers' 2009 gas production last Autumn, while prices were high, will sustain the level of activity during the rest of 2009. As these programmes begin to expire this year and into 2010, market prices will more clearly determine the level of future drilling activity.
The price levels required to sustain continuing shale development are uncertain and vary by each play and basin, as well as by each producer. The economics required to sustain continued development is also a moving target given that advances in drilling (such as multiple wells being drilled from a single pad) and additional knowledge generally help to lower costs.
But challenges still exist for shale-gas development, including technical challenges related to assuring ground water is protected during drilling and completion; and minimising air emissions. Compared with other obstacles the industry has faced these do not appear to be insurmountable, but will require careful and diligent effort by producers.
As the North American unconventional-gas sector begins to redefine the gas industry as a whole, it faces several challenges resulting from its own success. New markets are required to balance supply and demand and help control price volatility. The industry hopes that as the abundance of the resource is recognised, a consensus will emerge regarding the fundamental qualities of natural gas as both an environmentally clean fuel and a domestic resource with broad national economic potential.
Natural gas is well positioned to play an increasing role in the transition to a low-carbon energy future and in providing prosperity for future generations. The quantity of natural gas resources around the world, including shale-gas in North America, is truly astounding. It is now up to the US to decide how and where this resource will be further developed – the US' political and regulatory process must develop a clear policy that takes advantage of the abundant resources within its own borders.
Rick Smead and Gordon Pickering are directors of Navigant Consulting: http://www.navigantconsulting.com/industries/energy/