Unconventional Gas - the "Shale Gale!"

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Tuesday, April 27, 2010
London
The Geological Society

It is impossible to ignore the absolutely stunning transformation that’s believed to be happening in the USA and, potentially, whole North American gas market. It has been suggested, based on authoritative studies that the US has huge unconventional ‘shale gas’ resources – hundreds of millions of Tcf, that can be developed with today’s drilling and completions technologies.

In our Forum, we posed the question as to whether something similar is possible in western Europe? Where could significant quantities of such gas be found; what lessons can be learned from the North American experiences; how would such a source of gas fit into the global flow of gas? Or whether is this all a ‘Shale Gale’ that will blow itself out?

We think we reached four main conclusions:

1. Accessing ‘shale gas’ depends on drilling & completions technology that is available today, whereby large numbers of multi-lateral horizontal wells are drilled into the target horizons and then complex, multi-stage hydraulic ‘fraccing’ is undertaken. In ideal circumstances, the target shale is naturally fractured but is bounded by more competent rocks that resist ‘fraccing’ – to some extent, such targets can be defined by adroit use of 3D seismic data.

2. Costs are quite high – a typical well in the Haynesville play may cost $7.5-10m, with operating costs of around $2.25/Mcf , leading to a production cost of circa $7.5-8/Mcf. Henry Hub prices have been more like $4/Mcf over the last 18 months. In addition, the process consumes large amounts of water: Chesapeake Energy have stated that “drilling a typical Chesapeake deep well requires between 65,000 and 600,000 gallons of water…..Hydraulically fracturing a typical Chesapeake horizontal deep shale gas well requires an average of 4.5 million gallons of water per well.” This water must firstly be made available and then kept clear of aquifers after use as it may be contaminated by acids and propants.

3. The progress of gas-in-place volumes from ‘prospective resource’ to ‘contingent resource’ to ‘reserves’ is much harder to achieve for unconventionals such as ‘shale gas’ than for conventional hydrocarbons, with the first step requiring extensive geological and petroleum engineering data, including convincing flow tests and the second requiring proof of commerciality on a well-by-well basis.

4. For a number of reasons, it is not easy to see a rapid availability of ‘shale gas’ in, or close to, Europe. First of all, the accumulations seem to be much less prolific in terms of Mcf/sq km than their gas-rich counterparts in North America, requiring therefore more wells and more ‘fraccing’. Secondly, suitable rigs and equipment and, most probably, people are an order of magnitude less available in Europe than they are in North America. Thirdly, it is not clear that the environmental issues – density of population, availability of water (and its disposal) can be easily solved. Fourthly, European gas prices are not yet high enough to make ‘shale gas’ economic.

Thus, in terms of investment in active companies, ‘shale gas’ in and around Europe should be seen as a very long-term game, just as ExxonMobil have clearly taken a similarly long-term view with their purchase of the North American unconventional gas player XTO.

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