Foot off the gas pedal

This is an abridged version of the full article from Gordon Cope, which was published in the November 2012 issue of World Pipelines, available for subscribers to download now.

Investors in natural gas companies have been greeted this year with an almost unprecedented sight; the write-down of billions of dollars in unconventional gas assets. BG Group booked a US$ 1.3 billion noncash write-down, BHP Billiton announced a US$ 2.84 billion write-down of its US assets in the Fayetteville Shale formation, and Encana slashed Cdn$ 1.7 billion of unprofitable proven reserves. “Given the current pricing environment, the company expects that further declines in 12 month average trailing natural gas prices will likely result in the recognition of future ceiling test impairments,” said Encana officials.

The correction is long overdue. Ever since the early 2000s, when explorers in Texas figured out how to release the huge volumes of natural gas trapped in the tight Barnett Shale reservoir, gas production in North America has boomed. The Barnett Shale now produces approximately 5 billion ft³/d. Several other new plays, including the Haynesville Shale in Louisiana, the Marcellus in Pennsylvania and the Utica Shale in New York have shown equally tremendous potential, and the US Energy Information Administration (EIA) says that shale gas now accounts for 15 billion ft³/d, or 25% of all US gas production.

In Canada, the Horn River Basin’s Ordovician Muskwa formation in northwest Alberta and northeast British Columbia has an average of 175 m of play and over 130 billion ft³/mile² of gas in place. The Montney Basin shale has over 150 m of play and up to 90 billion ft³/mile². These two targets alone hold over 600 trillion ft³ of gas in place.

Pipeliners rushed to connect production. The EIA estimates that the midstream sector built 2400 miles of new intrastate and interstate lines in 2011, adding 13.7 billion ft³/d capacity, well above the decade-long annual average of 10 billion ft³/d. In Louisiana, ETP’s 42 in., 175 mile Tiger pipeline, capable of handling up to 2.4 billion ft³/d of Haynesville shale output, came onstream. Enterprise and Duncan Energy are expanding their 2 billion ft³/d regional network to accommodate Haynesville production as well.

Unfortunately, the huge influx of gas has produced a tremendous glut in the market. Natural gas consumption has traditionally been split among home heating, commercial, industrial and utility consumption. Since the 2008 recession, housing growth, energy consumption and industrial activity have been stagnant. As a result, gas storage has reached record levels, virtually filling the 4 trillion ft³ of available space. By April 2012, NYMEX spot prices fell below US$ 2/1000 ft³, and in Canada, spot prices were at Cdn$ 1.56/GJ.

Not dead yet

Natural gas is not expected to remain in the dumps forever; the petroleum industry and other sectors are working hard to reduce the over-supply. Electrical utilities, for instance, are switching from coal to natural gas to supply baseload needs. Historically, US utilities have relied on coal to meet half of all demand, but now gas-to-power (GTP) has surged from under 20% of that share to over 25% in 2011. Recently, the EIA reported that GTP electricity generation reached 32% during the month of April, matching coal’s contribution.

Petrochemical plants are relocating to North America to take advantage of low feedstock prices. Ethane (which makes up about 5% of natural gas) can be converted to ethylene, a highly valuable building block for a wide variety of plastics and industrial chemicals. Dow Chemical, for instance, has announced that it will invest US$ 4 billion in two new petrochemical plants at its Gulf Coast facilities (and restart two mothballed plants), over the next five years.

Producers are also considering converting gas to liquid natural gas (LNG) and exporting it to more lucrative markets. Several groups have advanced plans to liquefy stranded gas in northeast British Columbia and ship it from the deepwater port at Kitimat, British Columbia, to Asia. Cheniere Partners has been contracting with various international firms to ship LNG to Europe from its LNG import terminal in Sabine Pass, Louisiana; BG recently announced it will purchase 3.5 million tpy over a 20 year period. Construction of Cheniere’s US$ 6.5 billion liquefaction train is expected to be finished by 2015, with the initial phase to consist of two trains capable of producing up to 9 million tpy from Louisiana’s Haynesville shale gas. Recently, a bipartisan coalition of Republicans and Democrat Congressmen from shale gas producing states sent an open letter to US Secretary of Energy, Steven Chu, petitioning him to facilitate approval of LNG export terminals around the country. “Building the energy infrastructure necessary to allow market-based exports of [LNG] will not only add stability to the energy production cycle in our region, it will also allow our area to quickly adapt to the new dynamics of gas production and marketing,” they stated.

Foreign investors are also showing a heavy appetite for natural gas. Japan-based Sumitomo Corp. has agreed to spend US$ 1.4 billion for 30% of Devon Energy Corp.’s interest in 650 000 acres in the Permian Basin. Total will invest US$ 2.3 billion to acquire a 25% stake in Chesapeake Energy’s Utica Shale properties. SandRidge Energy is selling a 25% interest in its Mississippian horizontal plays to Repsol for US$ 1 billion. Mitsui & Co., based in Japan, agreed to spend up to US$ 680 million on SM Energy’s Eagle Ford Shale drilling and completion programme in exchange for a 12.5% interest. In all, PricewaterhouseCoopers, a consultancy, estimates that 191 M&A deals worth US$ 187 billion involving unconventional gas and oil assets were announced in 2011.

Shale gas exploration is also spreading widely outside of North America. The Office of Gas and Electricity Markets (Ofgem) estimates European shale gas resources at around 1250 trillion ft³ in place. Poland is reckoned to have the largest shale gas reserves, with total gas in place ranging up to 350 trillion ft³. GlobalData, a consultancy, estimates recoverable reserves of up to 27 trillion ft³; PGNiG, Poland’s state petroleum company, already has shale gas production on an experimental scale. Other countries, including the Ukraine (which holds around 80 trillion ft³), are pursuing shale gas exploration programmes to reduce their reliance on Russian gas.

In South America, the EIA reckons that Argentina could contain over 700 trillion ft³ of recoverable shale gas. Apache, ExxonMobil, EOG Resources and independent South American companies have been rushing to develop the Vaca Muerta Shale in the southern Neuquen Basin. In February, Apache initiated a long-term flow test in the Vaca Muerta, perforating 360 ft of the 1750 ft thick shale.

Problems

Shale gas, however, faces significant challenges. There is alarm in many jurisdictions regarding hydraulic fracturing. During the process, several million litres of water are forced at high pressure down the well. The water itself is often treated with proprietary chemicals in order to decrease the viscosity (and thus increase penetration) of the water. The public and politicians are concerned that these chemicals could leak into adjacent groundwater aquifers and contaminate drinking supplies. Some US states (as well as the province of Quebec, and France) have emplaced moratoriums on hydraulic fracturing until more is known. Should bans become widespread, future gas production would be seriously compromised.

In the short-term, shale gas faces a rocky future as over-supply combines with a stagnant economy to gut the commodity’s price. In the longer-term, however, shale gas and its liquid cousins promise the opportunity to liberate North America from import dependency. Petroleum companies are taking the first important steps to curtail production, but it will take a concerted effort from government, regulators and consumers to ensure that the shale gas bounty is not squandered.

This is an abridged version of the full article from Gordon Cope, which was published in the November 2012 issue of World Pipelines, available for subscribers to download now.

Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/01112012/foot_off_the_unconventional_gas_pedal/