Shale Play

I just read an interesting interview from The Oil Drum with Matt Simmons, the president of Simmons & Company, Int’l, a firm that finances international oil and gas exploration. Simmons has given a number of prescient warnings about fossil fuel supply and price hikes. One thing he discusses is so-called shale gas. I’d like to discuss shale gas, its implications for our everyday lives, and the realities of the situation.

First, understand that an underground oil or natural gas deposit is not like a buried fuel tank. The resource isn’t in a big open pool. It’s more like an underground sponge, the sponge itself being rock and the pores filled with oil and/or natural gas. The bigger the pores in this sponge the more oil it contains per cubic whatever. The better connected the pores, the higher the permeability, and the more easily the oil or natural gas will flow through it to a drilled well.

The most commonly exploited oil and gas containing rock is sandstone. Here’s your insider term of art for the day: The unit of permeability of oil bearing rock is the Darcy. (Jane Austen would approve) An easy flowing sandstone formation in the Middle East might have a permeability between 1 and 5 Darcies. By comparison, a shale formation in the U.S. might have a permeability of 0.5 milliDarcies, or thousandths of a Darcy. Tough to pump gas through that. This used to be a huge barrier to exploiting shale gas.

The other barrier was the thinness of the shale layers. The Bakken Shale formation that underlies the north-central U.S. and southern Canada is about 200,000 square miles in size, but only 10 to 150 feet thick. Imagine a sponge about 1/16” thick and the size of two football fields and you’ll get an idea of the proportion. Drilling standard vertical wells into this was essentially useless. A few feet of the well would be exposed to nearly impermeable shale, yielding no commercial quantities of natural gas.

The two interlocking solutions to this problem are horizontal drilling and hydrofracturing. The drillers have figured out how to steer the drill bit so that they can drill down to the shale and then sideways through the thin shale layer, exposing more of the well to the gas bearing rock. Then they open up cracks in the shale by pumping a mixture of water and sand into the well under extremely high pressure, forcing apart the rock and propping the cracks open with the sand. The increased permeability means that the natural gas comes flowing out of the well at a commercially viable rate.

Here's an animation of horizontal drilling, minus the hydrofracturing:

There are problems with this. It is expensive. The price for a thousand cubic feet of gas has to be up around $6 or $7 for the drillers to break even. Right now, due mostly to the economic downturn, it is floating around half that. Also, the wells are short lived. Where a traditional gas well might produce at a viable flow rate for years, a horizontally drilled and “fracked” shale well might only last months. Then the well has to be capped, the area remediated, the equipment transported to a new site, perhaps only a mile or two away, and the whole process started again. Each well is a big faucet on a small bucket.

Here I’ll quote a section of the interview by Steve Andrews of ASPO-USA (Association for the Study of Peak Oil) with Matt Simmons, from the April 20 Peak Oil Review:

Q: My last question: have you been surprised by the gas industry’s growth in shale gas?

Simmons: I’ve been surprised by the hype that assumes there’s been major growth in shale gas. I don’t think there has been any data of any reliability that proves we’ve actually had the growth in shale gas that we think we have.

Q: Some people here in the industry in Colorado are promoting it big time. They see it as a game changer. Couldn’t they be right?

Simmons: I’ve never seen the industry hype something crazier. Here are some numbers that I find enlightening. Of all the shale plays, the only one that we have significant production history on is the Barnett Shale. In the Haynesville, I think there are around 20 or 30 well-tests so far, and I don’t know that there are that many in the Marcellus. Consider these figures in the March 22 Barnett Shale Newsletter. It shows Barnett Shale total natural gas production by year, 1982 to 2008, all counties and fields in the Fort Worth Basin. In 2004—3890, then 4973, then 6542, then 9180, then finally 12104; and I thought, gee, we increased production X%, but then I realized that’s the number of wells! In 2008, we went to 4.8 Bcf a day, from 3.56 the year before—or up 1.24 Bcf/day. We’re looking for an increase of 8 Bcf, according to the EIA numbers, so the Barnett Shale did 1/6th of that.

Here’s another interesting set of numbers. All the big natural players have all now reported their results. The top 10 players increased their production in 2008 over 2007 to the tune of 685 mmcf/day. Unfortunately that was mostly offset by the top 10 gas decliners, led by ExxonMobil, BP, ConocoPhillips, Chevron, RoyalDutch/Shell, Marathon, Newfield, Hess, and they dropped 601 mmcf/day. So we netted out a plus 84 mmcf/day. Then you have about another 800 coming from about 40 individual reporting companies, but none of them are big enough—even if they tripled their production—to really make a difference. So that means that to match the growth that the EIA believes happened, then the residue—these hundreds and hundreds of mom-and-pop operators—would have to have grown their cumulative production twice as fast as the top 10, which obviously didn’t happen.

The EIA started reading the hype. And even though they probably have been puzzled that the number of gas wells completed went from 8,000 to 10,000 a year up to last year’s 33,000, and all we did was tread water for nine years. So right at the end of the year last year they started showing month-to-month growth year-over-year of 5%. Then in January they knocked their model up to 9%, so every month it was up 9%, year-over-year. They just knew, because they read the hype. We won’t have any real numbers until the states report what they collect, in the 3rd quarter of 2009. But I think we have the numbers in [from the companies] to say that we barely grew supply. Too bad we destroyed the industry.

Barnett Shale also has a production profile where peak initial production happens virtually when you come on stream, because of the way you frac the wells. By the end of the first year you’re down 70%.

Q: So you thing that the shale gas story is the most hyped story…

Simmons: It’s the most hyped play since Kashagan, which was later derisively called “Cash is gone.”

So what does this mean for you? For a while a lot of people were thinking that our natural gas troubles had been pushed out a few decades into the future by a glut of shale gas. 52% of American homes are heated by the stuff. Most of the peak period electricity that we use comes from natural gas fueled power plants. The retail price of electricity faithfully tracks the price of natural gas. It seems that happy days are not here again on the retail electricity front. The price will stay depressed for a while, but once the economy starts to pick up the supply will tighten. There will be a lag while exploration and drilling try to catch up. As I noted in a previous post, there is roughly a two-decade lag between the discovery of conventional natural gas and its peak production.

The other important thing to consider is that companies are going after this stuff at all.

A few years ago there was a big hoo-ha over a well in the Gulf of Mexico called Jack #2, drilled in 7000 feet of water and through 28,000 feet of rock, which produced 6,000 barrels a day. A huge expense and brilliant technical feat to get 0.03% of our daily needs.

The shale plays are similar. Gas companies are spending big dollars on complex processes to extract expensive gas from marginal sources. It means that all the easy, cheap stuff is gone. It may be futile. In the end, geology trumps technology. Or, as Wendell Berry wrote, “Nature bats last.” So don’t bank on cheap natural gas or cheap electricity five years down the road, whatever the hype.