Tight Sands Natural Gas: An Ignored and Promising U.S. Energy Frontier

Natural gas resource optimism is now at the highest level in the history of the US (and Canadian) natural gas industry. Four simultaneous frontier natural gas plays, at different stages of development, have emerged and are rapidly unfolding in the US and to a much lesser but still important extent, in Canada. The US, written off as a mature natural gas province 30 years ago is, in fact, a young, vigorous and potentially gigantic natural gas province. The US natural gas industry is not senescent, as thought by many self anointed experts even in the 1990s but barely in its adolescence. Its greatest growth period, again potentially, is still ahead. The US is turning into one of the world’s premier natural gas resource domiciles, largely because of the pioneering efforts of independent oil and gas E&P companies.

The 4 frontier plays are coal bed methane, shale gas, ultra deep water and tight sands (TS) gas. Together these plays account for nearly half of all gas produced in the US and it is expected that they will account for the decisive majority of US gas production as the next decade begins. The first three were discussed in previous articles by the author. This short essay focuses on TS gas, which is gas contained in sandstone, siltstone and carbonate reservoirs of such low permeability that it will not naturally flow when a well is drilled. TS gas production is already close to 6 Tcf/year.

There are about 20 TS gas basins in the US. There is an overlap but no coincidence of TS and shale gas basins. Much of the resource delineation work has been concentrated in the Great Plains, Rocky Mountains, the Four Corners region, onshore Gulf Coast and Arkansas/Oklahoma (i.e. the usual gas provinces). However, with the dramatic growth in the knowledge about the vast Marcellus shale basin in Appalachia, resource delineation for TS gas in Appalachia has also begun.

Resource delineation is still in its early stages, even though TS gas production in the US, at low levels, has been undertaken for 40 years (in Colorado, for example). Even so, the DOE, USGS and various other organizations estimate that the in-place resource base is about 6,000 Trillion cubic feet (Tcf). Doubtless, this number will increase as resource mapping proceeds apace over the next 10 years. If, over the next 30 to 40 years, about 20% of this resource in place is converted into reserves, it would mean a reserve base of 1,200Tcf. In comparison, the shale gas resource in-place estimate (also rising sharply with each new assessment) is about 1,700Tcf. The current US proven natural gas reserve base is close to 250Tcf with annual production of about 20Tcf. incidentally, at the end of the 1990s, when natural gas resource pessimism was again the intellectual fashion in the US, the proven reserve base was under 170Tcf.

The astonishing success of the energy industry in turning natural gas into a major National strategic advantage is unknown to maybe 90% of Americans because it has been ignored by the MSM, which would much rather peddle the narrative of global energy crisis, fossil energy resource exhaustion and, therefore, the need for socializing the US energy industry and appeasing despots in the Middle East, Eurasia and Latin America. Geostrategically transforming methane abundance in North America and the remarkable success of American energy technology and entrepreneurship would shatter this narrative.

TS gas is difficult to produce. The technology suite is broad and sophisticated. The front end costs are high. Project and compliance management must be skillful. Wells usually have complex geometries because of reservoir features and have to be close spaced. Once a field is developed, initial production and hence first cash throw off is high but within 18 months, well productivity drops dramatically. However, after that TS gas production turns into a manufacturing operation. Wells will produce reliably and steadily for 30 to 40 years, which justifies large investments in field services and take away infrastructure and creates post production annuity financing opportunities and financing structures.

The technological challenges arise from the fact that TS reservoir rocks are around 250 million years old: typically much older than the “conventional” gas reservoir rocks which, being younger, are far more permeable. TS rocks have subject to tremendous compaction, cementation, recrystallization and chemical changes over the ages. The initial technologies for detecting, predicting and stimulating reservoir fracture systems were largely developed with considerable skill and ingenuity over many years by independents, who continue to important and valuable participants (as well as avenues for the deployment of sizable amounts of private equity and special purpose fund money). In a conventional gas field, fracturing to optimize production may involve only 4 or 5 hydrocarbon zones. With a TS gas field up to 50 zones may have to be fractured. TS gas production is both a quantitatively and qualitatively different business from conventional gas production.

Now, however, it is the majors who are becoming the loci of technological and management excellence. This is the usual lifecycle of pioneering plays. The independents lead and prove the attractiveness of the resource. Then, the majors, mini majors and the largest independents establish large and rapidly growing business positions in basins so reserve development and production capacity can be scaled using the money( billions of dollars), organizational capacity , technology R&D and strategic horizons that only large to very large E&P companies possess. The strategic horizon is particularly important when developing fields that may produce over decades and face volatile tax, regulatory, price, interest rate and cost environments. By definition, individual investors, independent E&P companies and energy or natural gas funds have considerably shorter strategic horizons.

The majors are now rapidly building on the technological foundations established by the independents and creating and deploying the next generation of technology families and project management processes. The majors have two drivers: first, the North American resource is vast and worthy of their attention. Second, the global potential is also enormous and the technologies and skills developed in the US can be migrated and adapted to operations in several parts of the world. Indeed, TS rocks are found pretty much in all petroleum provinces in the planet where conventional gas is found. Advanced proprietary TS gas technologies and project management and financing capabilities may thus bestow a formidable new global competitive advantage on the majors in the emerging era of Big Gas, which is likely to eclipse Big Oil within 2 decades.

Some of the key areas where the majors are leading is in seismic mapping (4-D seismic surveys), reservoir “illumination to identify, with considerable precision, “sweet spots” to optimize drilling productivity, remote reservoir resistivity mapping (R3M) using low frequency electromagnetic waves, directional drilling, water detection and prediction, new fracing fluids and proppant materials and advanced fracing techniques. While any one part of the technology chain is in itself important, it is excellence and dominance over the entire technology value chain and management system that the majors are counting on for a sustainable and potent competitive edge.

The TS gas resource base is so large and resource delineation is progressing so well that a quadrupling or quintupling of TS gas reserves in the US is a distinct prospect by the end of the next decade. Unfortunately, it is highly unlikely (virtually impossible) for the US to even triple the production capacity of TS gas in the 10 to 12 years given the current political, regulatory and business environment.

The four frontier plays noted in this essay have the potential certainly to add another 15 to 20 Tcf/year to US gas production by 2020, when the frontier plays of 2009 could account for 80 to 90 % of all US gas production, if the US had the national will to foster this tremendous growth. Today it manifestly does not. The resource prospects for US natural gas have never been better: the public policy hostility at the Federal level to natural gas E&P has never been greater. The rest of the world finds this not merely bizarre but pathologically self destructive. The capital formation and price environment is also deeply constraining for independents and regulatory caprice and volatility deters independents and majors alike from notably expanding production capacity.

Over the next 20 to 30 years, US natural gas could be a major force in reordering, for the better, world energy markets, US trade imbalances and domestic wealth and job creating capacity. American citizens seem oblivious to this and the US Government, at present, is the biggest obstacle to natural gas delivering on its manifold promises. It is within the grasp and ability of our country to enter the age of Methane Superabundance in the 21st century. In 2009 we have no will or even desire to do so.

Disclosures: The author has investments in several natural gas companies, including E&P.

Comments

[chap08:]

As I said on another thread, my understanding is that shale gas production currently requires a prohibitive volume of water for super large scale production. I don't know anything about TS but it sounds as though it suffers from the same drawback. Is that the case?

Also, it sounds (guesswork from what you've written) that TS gas would be more expensive than shale and certainly coal bed methane. In which case, given the other reserves available, why bother (yet)?

Aug 04 08:32 AM

[flipdog1:]

Why do folks become idiots when elected to Washington?
Why do enviro-nuts put humans lower on the scale than minnows?
Why are producers punished ?
Because we allow it to occur.
Drill Here,Drill Now,transition from oil to gas over 20 years,and live happily ever after.
Have you seen the Google map of the city our money built in the desert ?(Palm near Dubai ,on the sea)
They would have been smarter to have built a greenhouse and a nuclear reactor , because the oil will run out.Then What?

Aug 04 09:01 AM

[RWM:]

This is true. In the early 80's I drilled a shale well in my front yard, received a tax credit and became energy independent. I also hit an artesian water source on the way down and obtained an unlimited supply of clean pressurized water.
Nat Gas is our best, immediate and sustainable resource for energy independence with nuclear supplementation.

Aug 04 09:35 AM

[Ferdinand E...:]

Interesting. In my book on natural gas, and maybe my recent energy economics textbook, I mentioned tight sands. I don't remember making heavy weather of the subject however because the simple truth is that tight sands DO NOT have the kind of capacity that you evidently think that they do. And I hope that the readers in this forum, and especially the movers and shakers in Washington understand that US natural gas IS NOT GOING TO BE A MAJOR FORCE IN REORDERING " WORLD" ENERGY MARKETS.

Aug 04 09:36 AM

[bobbobwhite:]

Something else has to be working in the "drill oil, forget NG" scenario, as "follow the money" dominates the energy business just as much as it does anywhere else in business and gov't. Obviously, there is more money to be made in the oil game than in NG at present. Oil will most likely have to be more nearly depleted and have a predictable endgame for NG to rise to the top, so to speak.

That's a few decades off yet, and as we care more about today than future planning, the transition will not be be gradually and efficiently developed over the years but approached in a hurry-up, "why didn't we see this coming", thus outrageously more costly scenario that will reek of gov't incompetance and its typical catering to very profitable special interests much more than serving the public good. Business As Usual, as always.

Aug 04 10:10 AM

[square to t...:]

Ferdinand,

How can it natuaral gas not be a major force in reordering the world energy markets? I can't speak about TS specifically, but I certainly believe that the US's NG resources are impacting the market and certainly have geopolitical considerations. From a market pricing perspective, we are already there. It's more than just TS, I surmise. The prospect of the US and world being awash with NG is priced into the markets today.

I believe that the US has the 2nd highest natural gas reserves in the world, next to Russia. (Maybe 3rd next to Qatar?) Consider energy resources from a geopolitical perspective. Russia, with the largest NG reserves in the world, supplies 25% of Europe. Last Summer, it thumped its chest by supporting the revolts of S. Ossetia and Abkehzia. Its jets dropped bombs within meters of the BTC pipeline. (They missed, either by accident or on purpose to send a message. I believe the later.) Their geopolitical muscle flexing is a result of their resentment of the BTC pipeline is one of many perceived Russian grievences. The Nabucco pipeline will only make things harder for Russia to extort Europe as well. Russia with its largest reserves have these types of impacts on geopolitics. Why wouldnt the US's improved utilization of natural gas have an impact of some scale? Natural gas is cheaper than oil on a BTU basis and is cleaner. However, the investment infrastructure, storage and transport that would be required to have millions of cars powered by natural gas, for example, would reduce that disparity. We all know that burner tip to burner tip comparisons are not realistic, and natty gas will always trade at a discount.

Finally, I agree with T. Boone Pickens in a lot of ways. We dont need to be completely energy independent. That is not realistic. But we need to stop buying oil from places that use that money to harm US interests and citizens such as Nigeria, Venezuela, Russia, Iran, and Saudi Arabia. On the short term, it is not realistic to do so. But we should wean ourselves off the taps of these countries specifically. (Most people dont know that Nigeria and Venezuela are top 5 exporters to the US.) On the intermediate term, we can buy oil from Canada and Mexico and develop our own resources like NG. Canada and Mexico are also top 5 exporters. In my opinion, the US NG resources are a huge piece of the puzzle that will help solve our energy problems on the interim. On the long term, we should continue to develop and increase utilization of other alternative energy resources.

So, Ferdinand, explain to me how better utilizing the natural gas in the US cannot impact the markets.

Aug 04 10:16 AM

[Giulio Negrini:]

Nat Gas is our best, immediate and sustainable resource for energy independence
gnpimb.com

Aug 04 11:17 AM

[realityrese...:]

The MOR approach is what makes the most sense; with an existing NG infrastructure and an established domestic market it makes no sense to IMPORT NG when we have Exxon drilling for it in the Piscean Basin in Colorado to use an extreme example. These are reserves found by the USGS years ago, and as mentioned above there are others within our continental borders. Political morons will come and go but these reserves will be there for decades.

Aug 04 11:45 AM

[realityrese...:]

web link : 64.23.12.69

Aug 04 12:30 PM

[Joe H.:]

Natural Gas will be produced anywhere and everywhere when all the crooked politicians palms are greased suficantly;and the greenie blowhards are minized!

Aug 04 01:55 PM

[SteveB/Colo...:]

Well, this is an interesting thread. Unfortunately, Mr. Dar's commentary about a lack of political will in D.C. & public policy hostility is not supported by objective evidence. One only needs to count the leases granted to energy companies here in the West in the past 8 years. Drilling isn't happening; wells are being capped and rigs idled; because we are in a recession and demand is way down.

Joe H. referenced "greenie blowhards" and FlipDog wrote "why are producers punished and 'drill here, drill now." Sorry guys, but you're both guilty of not doing your homework. As of June, 2008, energy companies held over 67 million acres of undeveloped oil & gas leases; onshore, mostly here in the West, and offshore (source: Republicans for Environmental Protection). It's not the environmental lobby stopping production; it's the companies themselves. And the June, 2008 figure comes from just before the recession fully kicked in. My thought is to grant no more leases of public land until the companies get the backlog down below 10 million acres.

Aug 04 02:10 PM

[User 45281:]

They don't become idiots, they become deceitful and very very $$$$$ hungry,


On Aug 04 09:01 AM flipdog1 wrote:

> Why do folks become idiots when elected to Washington?
> Why do enviro-nuts put humans lower on the scale than minnows?<br/>Why
> are producers punished ?
> Because we allow it to occur.
> Drill Here,Drill Now,transition from oil to gas over 20 years,and
> live happily ever after.
> Have you seen the Google map of the city our money built in the desert
> ?(Palm near Dubai ,on the sea)
> They would have been smarter to have built a greenhouse and a nuclear
> reactor , because the oil will run out.Then What?

Aug 04 03:06 PM