Not all so rosy for shale gas … …

A rosy scenario has been painted about the emergence of natural gas as a major fuel source.  This was contributed in part by an increase in unconventional gas supply – in particular coal bed methane, tight gas and shale gas. Coal bed methane production is growing but is expected to be important in countries with large coal reserves – Australia and Canada.

Shale gas boom:

Of this natural gas boom, shale gas share of supply has increased to 40% in 2011 from 10% in 2005 in the United States alone. Dick Cheney in 2005 then Vice-President exempted gas drilling from federal regulations. This led to advances in horizontal drilling and hydraulic fracturing and the subsequent boom in shale gas revolution in the United States. Shale gas is expected to contribute to ~13% of total gas volumes in 2035 worldwide under the Golden Age of Gas Scenario (GAS).

Much of the shale gas drilling techniques were attempted by small independents initially. This has contributed to recent boom in shale gas investments in particular with large foreign entities for ‘technological transfer’:

1. in Dec 2011, a $2.3b joint venture between Total S.A. (25% stake), and Cheaspeake Energy and EnerVest to develop the Utah Shale in Ohio
2. in Dec 2011, a $0.9b joint venture between Sinopec and Devon Energy for shale gas development in the United States.
3. in Jan 2012, Marubeni $1.3b joint venture with Hunt Oil to develop Eagle Ford shale resources

This shale gas revolution has spread worldwide. Below is a figure showing the shale gas reserves estimated by the Energy Information Administration.  Presently countries that are investing heavily include China, Argentina and Poland whilst licensing rounds have started in India and Israel.

Figure 1 : World shale gas reserves estimate by EIA

Environmental considerations for shale gas:

However, not all is rosy in this shale gas scenario – in particular environmental and costs considerations have surfaced. Scientists have speculated the following environmental concerns:

1. Hydraulic fracking possibly causing two separate earthquakes in Ohio and Blackpool, UK, although the link has not been confirmed.
2. Fracking chemicals leakage to the water aquifer in Wyoming as detected by the Environmental Protection Agency, (EPA). Again the evidence is not conclusive, but this has led to legislation requiring drilling companies to publicise the content of their proprietary fracking liquids. Many in the industry advocated tighter regulations and casings on the drilling as enough to prevent such leakages.
3. Huge amount of water resources needed for the fracking process. Total volume pumped into a well is from 7500-20000 cubic metres. (source: IEA GAS report)
4. From well head to burner, shale gas production is also more emissions intensive relative to conventional drilling – although only marginally at 3.5%¹ higher than conventional gas production if modern techniques are used. (source: IEA GAS report)

Already, these environmental concerns have led to bans and moratorium in Europe – in particular France, Germany and Britain. Only Poland has been going ahead in the environmental conscious continent.

Project economics:

There is also a lack of price projection and its effect on project economics. With estimated break even costs for shale gas production at about $4 mmBtu2 and present Henry Hub prices at $3 mmBtu3, present production is at a loss. The shale gas revolution is a victim of its own success in the United States. Supply glut is only expected to clear in 2015. A key reason investments still keep flowing is technology transfer and realising that shale gas could be a future revolution.

Notwithstanding these, production over the past 3-4 years is still shedding light on the reserves profile. Presently, a hyberbolic decay profile is assumed whilst in a study an exponential decay is found more appropriate. Total recovery is reduced by half consequentially. Given the short life of existing wells, costly re-fracking may also be needed later. These have important impacts on project economics. Already, reserves estimation in the large Marcellus shale resources has been reduced in a new USGS survey to 84 tcf from a previous 264 tcf by the Department of Energy.

Implications: Higher costs and lesser abundance

The overall implications of these environmental considerations and project economics are potentially higher costs and lesser abundance. However the cause and effect may not be linear. Potential factors include the fast development of LNG infrastructure to link world markets3, and the de-linkage of gas to oil prices outside of the Americas. Maintaining gas prices linkage to oil indices will de-link its own supply and demand fundamentals to gas prices. The construction of LNG terminals will facilitate the export of the gas to markets in Asia, priced at >$10/mmBtu. See the author’s earlier article on a trading hub in Asia. The consequential development of any protocol post 2015 will have a bearing on the relative emissions advantage of natural gas to its substitutes, fuel oil and coal.

1 – Other study reports highlight shale gas emissions (including the higher GWP of methane) to be much higher. This remains a subject of debate.

2 – This estimate figure varies greatly among different well and reports – $2-$6 per mmBtu.

3 – This is progressing at a fast pace worldwide, but still faces obstacles – for example the recent aborted Hess Fall River project.