Natural Gas from Shale: Emerging Plays

A decade ago natural gas from shale was just becoming significant but hardly anyone fathomed its tremendous potential or its parabolic growth. Today natural gas from shale is an essential and rapidly growing part of the E&P portfolios of independents and majors alike in the US, Canada and Australia. The number of productive basins is proliferating. Both interest and exploratory investments in natural gas from shale are spreading worldwide. There is growing recognition that natural gas shale basins are widely dispersed globally and several of these basins may well rival or exceed the most famous shale play in the world: the Barnett in Texas.

The author has in previous articles discussed shale gas, deep gas, and ultra deep water gas (and noted the almost unimaginably vast energy content of methane hydrates in US waters) in the US and commented on the tremendous geo-strategic consequences of huge US natural gas resources and the rapidly growing US proven and probable reserve base. This brief essay is a synopsis of emerging shale plays in the US, Canada, Eastern Europe, and Asia. These plays reinforce the notion that the natural gas resource base, worldwide, is magnitudes greater than the received wisdom estimated just a few years ago and Big Gas has the potential to not just rival Big Oil as a global industry but surpass it well before the middle of this century.

In the US, the Eagle Ford shale has become the latest area of excitement and attention. As usual with shale, it was pioneered by a small independent (in October 2008) . Larger independents rapidly followed. The location, prolific well productivity and cost structure have also attracted the investment attention of at least one Major. At present, less than a dozen companies are significant producers but their ranks will expand significantly in the next 12 months. The flat ranch land, friendly and knowledgeable landowners, a business environment conducive to energy risk capital and easy access to field services and take away infrastructure add to the attraction. There is concomitant entry by natural gas transportation and NGL processing companies. The Eagle Ford gas is unusually rich in NGL, which enhances its value.

The Eagle Ford is located in the South Texas counties of McMullen, LaSalle, Maverick and Dimmit. It is a formation directly underneath the well known Austin Chalk shale and is the source of the Austin Chalk gas. The shale is up to 250 feet thick and production is from various depths between 4,000 and 12,000 feet. Resource delineation is in the very early stages but the reserve base is already estimated to be well over 10 trillion cubic feet (Tcf).

The breakeven price, according to producers active in the basin, is $3.88 per million Btu compared with $3.74 for the Marcellus (which is why drilling activity and new entry there increases apace), $4.49 for the Haynesville and $5.18 for the renowned Barnett.

The Horn River Basin in Northeastern British Columbia is the site of the most remarkable natural gas field (or rather set of related shale fields known as the Horn River Formation) discovered in Canada. It may well be one of the most immense natural gas resources in the world. While much more exploratory work remains to be done, the resource base is already estimated at 500 Tcf ( double the estimate from two years ago), with recovery rates ranging from 15 to 25% with current best technology and expectations that, with the next generation of technologies, recovery could exceed 40%. Horn River has the potential to be one of the world’s most important natural gas producing areas for the next 30 to 50 years.

The major drilling is between the Kotcho and Maxhamish lakes. Again, pioneering work was done by a small Canadian independent but already many of the significant operators in the Barnett have established a presence in the Horn River Basin. The play is so vast that virtually every company with experience in shale gas production or a desire to gain exposure and experience is likely to invest in the opportunity.

Wells are expensive and the cost structure substantially higher than in the Barnett. A typical recent experience is $10million to drill and complete a horizontal well including hydraulic fracture with initial production of 8 million cubic feet per day, stabilizing at around 5 million cubic feet per day. Operators believe that the stable level can be maintained for long time turning each well into a multi-decade annuity. The Horn River Pipeline, which already has initial firm capacity commitments of over 375 million cubic feet per day, is expected to be operational by mid 2011, providing market access for the gas.

Outside North America, Eastern Europe is emerging as an area of rapidly increasing interest and mounting investments in exploring for shale gas. The economic and strategic consequences of finding and developing large amounts of gas within the ambit of the EU are obvious and important. Shale research and exploration in Europe is about 20 years behind the US. Natural gas shales exist in several European sedimentary basins. The two major topics of research are: compiling a black shale database for Europe with the Barnett as the reference and conducting basin and reservoir specific studies.

Industry participation is growing fast as are expenditures. Many of the largest European E&P companies including those that are gaining experience in the US are involved together with several US independents, mini-majors and majors who anticipate translating their North American shale experience and competence into commercial success in Europe. E&P companies have selected about a dozen basins in Europe for initial exploration.

They include the Cambrian Alum in Southern Sweden, the Vienna Basin in Austria, multiple locations in Poland(especially the promising Gdansk Basin), the Weald Basin in England, the East Paris Basin in France(as well as two other locations in France), the Lower Saxony Basin in Germany and the very large Mako Trough in Hungary. Multiple shale basins in Europe though much smaller in size than in the US are far thicker in potential pay zones, which means that if commercial discoveries are made they could be in the scores of Tcf of producible gas in each basin.

Poland and Hungary are attracting the most activity and companies, including US majors, mini majors and highly specialized independents are accumulating substantial prospecting acreage in Poland (the Baltic Basin in the north) and Hungary. The most scrutinized activity is the Foldeak-1 Well in the Szolnok Formation in the Mako Trough. The well( the first such in Hungary) is being drilled by a joint venture amongst a small US independent, a medium sized Hungarian oil and gas company and one of the largest and most technologically sophisticated energy companies in the world. The work budget is $50 million. Two fracture simulation tests have been completed. The results are mixed. Gas flowed in encouraging amounts but the well also hit a natural fresh water reservoir. Initially the partners decided to terminate well operations but after further study have concluded that a third fracture is warranted.

China is another very important frontier area for shale natural gas. Exploration for shale gas in China is a generation behind the US but the Chinese have ambitious plans. Western, especially experienced American, E&P companies are welcome and are responding with enthusiasm. The Chinese are using the Barnett as their research and commercial development model. US Majors are actively investigating opportunities and a joint venture between a European mini-major and one of the largest and most experienced US independents has been formed to build a position in Chinese shale. This venture builds on a very positive and large relationship between the two energy companies in the Marcellus Basin. Both Chinese and American geologists working for E&P companies believe that China’s shale gas potential is massive and that basins which not only rival but greatly exceed the resource and reserve base of the Barnett will be found in China.

China is modeling its nationwide shale research project on basins that have geologic characteristics similar to US hydrocarbon provinces. The Chinese have selected four large provinces for study and development. The South China basin with a maturity similar to the Appalachian ; the Zhungaer and Tuha basins similar to the Rocky Mountains, and the Qadam and East China basins similar to the Michigan basin.

India, too, is becoming a frontier area for shale gas exploration but the effort lags China in both money and ambition. However, industry companies are beginning to commit money and talent, although in modest amounts. The Barnett, again, is the reference basin for Indian efforts. Field experiments have been conducted in the Gondwana and Gambay Basin. Initial results are promising and reported to be comparable to producing US shale basins.

Geostrategic forces, national ambitions, risk capital and US industry technological advances and E&P management process are turning the quest for shale natural gas into a global opportunity. If the North American success with shale gas is even partly replicated in Europe, China and later maybe even in India, world energy physical and financial markets will be transformed in remarkable and positive ways. It all began because a few small American E&P independents had the creativity, imagination and will to do what government experts thought was ridiculous and what Big Oil executives thought was an impossibly romantic but implausible treasure hunt.

Disclosure: The author has investments in E&P companies active in shale basins.

Comments

[UK Gas Guru:]

I've been trying to cover shale from a UK and European perspective for over a year at nohotair.co.uk, and your last sentence about ridiculous and improbably romantic resonates with what I've been seeing here. The entire UK and EU energy policy is built on the assumption of gas as a finite resource.
We're now moving from the disbelief to denial stage where we'll tarry a while longer while some players quietly buy up acreage ready for the acceptance stage. What we now see is an identity of views between green carbon purists, and groups seeking similarly vast levels of public investment in Clean Coal and nuclear tech, that is now being re-badged as no carbon generation.
Let's remind ourselves that all the various government strategies are for a low -carbon economy, not no-carbon. No carbon can still be the ultimate destination, but we can start the low carbon journey now using gas as a bridge fuel. Bridge to where? Hydrogen or fusion or both, along with wind and solar are my bets. But could we afford a no carbon world by investing in CCS or nuclear today?
CCS and nuclear are dead ends in a gas abundant world.
Excellent article, a kind of Gas Grand Tour, learnt a lot about China for example.
A company that bears looking at is Toreador Resources, simply by how uncoventional they are acting. They started out in the Barnett and Haynesville but earlier this year moved the HQ from Dallas to Paris. How many other companies move from the heart of the energy world to land of the cheese eaters? They recently divested Polish and Turkish operations to concentrate on their French acreage. Either they are mad as loons, or some crazy coyotes. Worth keeping an eye on.

Oct 16 08:57 AM

[Brahm:]

Natural gas is perhaps the new frontier now, more than any other form of fossil energy. As you note extensively, shale is going to be too big soon -- almost unimaginable five years ago! Perhaps. has tremendous global warming solution potential in the intermediate term. However, Governments including our US Dept of Energy, appears to be too lethargic about it. Perhaps, the ideology and lack of imagination of Dr. Chu and the likes of others in this present Administration, are the main hurdles in the immediate term.

Excellent brief review! Brahm

Oct 16 09:44 AM

[Ferdinand E...:]

Gee, I'll have to get a good book on shale gas, because about 25 years ago I told a very successful American business executive that shale oil was going to save us from OPEC, and he called me a fool - or something like that.

I wonder what he thinks about shale gas. I know what I think about it and it's not what the above author thinks. By the way, didn't anybody read that article by Marc Anthony?

Oct 16 10:09 AM

[Spicer:]

On Oct 16 08:57 AM UK Gas Guru wrote:

> I've been trying to cover shale from a UK and European perspective
> for over a year at nohotair.co.uk, and your last sentence
> about ridiculous and improbably romantic resonates with what I've
> been seeing here. The entire UK and EU energy policy is built on
> the assumption of gas as a finite resource.
> We're now moving from the disbelief to denial stage where we'll tarry
> a while longer while some players quietly buy up acreage ready for
> the acceptance stage. What we now see is an identity of views between
> green carbon purists, and groups seeking similarly vast levels of
> public investment in Clean Coal and nuclear tech, that is now being
> re-badged as no carbon generation.
> Let's remind ourselves that all the various government strategies
> are for a low -carbon economy, not no-carbon. No carbon can still
> be the ultimate destination, but we can start the low carbon journey
> now using gas as a bridge fuel. Bridge to where? Hydrogen or fusion
> or both, along with wind and solar are my bets. But could we afford
> a no carbon world by investing in CCS or nuclear today?
> CCS and nuclear are dead ends in a gas abundant world.
> Excellent article, a kind of Gas Grand Tour, learnt a lot about
> China for example.
> A company that bears looking at is Toreador Resources, simply by
> how uncoventional they are acting. They started out in the Barnett
> and Haynesville but earlier this year moved the HQ from Dallas to
> Paris. How many other companies move from the heart of the energy
> world to land of the cheese eaters? They recently divested Polish
> and Turkish operations to concentrate on their French acreage. Either
> they are mad as loons, or some crazy coyotes. Worth keeping an eye
> on.

Toreador sold their assets in Turkey and Hungary, they've never held any acreage in Poland, Haynesville or Barnett.

Oct 16 10:36 AM

[Giulio Negrini:]

Shale natural gas can become:
Autogas is the common name for liquefied petroleum gas (LPG) when it is used as a fuel in internal combustion engines in vehicles. The same equipment is also used for similar engines in stationary applications such as generators.
Autogas is widely used as a "green" fuel as it decreases exhaust emissions. In particular, it reduces CO2 emissions by around 20% compared to petrol. It has an octane rating (MON/RON) that is between 90 and 110 and an energy content (higher heating value—HHV) that is between 25.5 megajoules per litre (for pure propane) and 28.7 megajoules per litre (for pure butane) depending upon the actual fuel composition.
Autogas enjoys great popularity in numerous countries and territories including Australia, Bulgaria, Croatia, European Union, Hong Kong, India, the Philippines, Republic of Macedonia, South Korea, Serbia and Turkey. It is also available at larger petrol stations in several countries. The Republic of Armenia may, however, be the world leader in autogas use. The Armenian transport ministry estimates as much as 20 to 30% of vehicles use autogas compared with traditional gasoline, once again due to the fact that it offers a very cheap alternative to both diesel and petrol, being less than half the price of petrol and some 40% cheaper than diesel. The recent rises in oil-derived fuels has sharply raised the difference.

Oct 16 12:13 PM

[carbonates:]

I think your article sums up the potential fairly well. I see shale gas as a game changer that changes several things. It has already had an effect on world gas prices for NGL, because the US import market is failing to materialize. Europe and Japan are indirectly reaping the benefits of US shale gas in the form of lower prices for imports. At some point many shale gas plays will become NGL sources, and I think this is already being planned in the Canadian plays. Shale gas is likely to change markets for gas on most continents, and has potential to create industrialism in currently underdeveloped countries that have limited know resources at present. Because natural gas requires pipeline infrastructure, many companies are currently pipeline prospecting, to find gas in places where it can be marketed easily. That's one reason I don't think the Alaska gas pipeline is going to get built anytime soon.

There are risks, and many companies in the gas shale market are probably doomed to failure in the present market. That does not mean there will not be winners, but not everyone in the game will win. Drilling costs and initial investments in gas shale plays can be huge. Compared to conventional drilling where a well might drain a square mile of land (~260 hectares), many gas shale wells only drain 80 acres (~32 hectares). If short-term gas prices are high enough they can recover drilling costs in a year or two, but the capital to drill enough wells to ramp up production is significantly higher than the cost of a big-hit conventional gas well. Anachronistic leasing practices and bad regulatory policies abound in the gas shale plays that create another problem. Issues with public policy (NIMBYism), reliable sources of water for fracturing, and possible regulatory restrictions coming from the anti-carbon movement are other issues.

By the way, the Middle East is not without its own potential shale gas and the Saudis are already at work.

Overall, I totally agree that gas shale is already a game-changer, but its going to be a wild ride, and without major changes in consumption (demand) patterns natural gas is doomed to be highly cyclical as gas shale players react and over-react to market prices and other forces that keep them drilling even when the economics of individual wells don't make sense. There will be losers, and a few big winners from an investors standpoint.

Oct 16 05:30 PM

[Gassy:]

Interesting slide in latest CHK presentation, making a case for growing shale with $1/mcf f&d replacing the conventional gas with $3-4/mcf f&d. that gives a massive opportunity for shale.

Haven't seen an investing opportunity outside the US. there are cbm plays but not shale. there was a company called falcon looking in hungry - not sure it is still at it.

Oct 16 06:48 PM

[Vegasbill:]

The article is very short on specific companies that are involved and also short on backup for stated claims. Sorry, but this is not what I rely upon for investment ideas. More specifics are needed. Actually, to the contrary, if there is so much gas so easy to find,, it is not a good investment. What if 100 companies found huge deposits of gold, it would be a bad idea to invest in.

Oct 18 12:59 AM

[dano123:]

That's one way to look at it. On the other hand, you could ask yourself, 10 years from now, who is going to own all these deposits? Would you like to be owner or the consumer?


On Oct 18 12:59 AM Vegasbill wrote:

>
> The article is very short on specific companies that are involved
> and also short on backup for stated claims. Sorry, but this is not
> what I rely upon for investment ideas. More specifics are needed.
> Actually, to the contrary, if there is so much gas so easy to find,,
> it is not a good investment. What if 100 companies found huge deposits
> of gold, it would be a bad idea to invest in.

Oct 18 08:46 PM

[Alex Lann:]

The whole shale story is such good news. The Saudis are already talking about going on welfare.

Oct 18 09:35 PM

[Shaker:]

Talk of CCS being a dead end is so far from the truth.
It figures huge into NG as I am heavily invested in a Canadian Co. called Petromin Resources ( petromin.ca ) that is using CO2 sequestration in China for ECBM or enhanced coalbed methane. They are partnered with the Alberta Research Council ( arc.ab.ca ) who are the best in the world at this, see their previous test pilot in the Quinshi Basin from 1998 and you will see why the Chinese want these guys. (amazing numbers in increased recovery)

Only problem they have run into (the greatest kind of problem) is one of their CBM properties called the TerrWest property which is in the Junngar Basin (production sharing contract with PetroChina),
They were drilling CBM last year and the Geologists discovered that the entire property (655 sq km) is covered in shale gas, so now they have done an about turn and are in the process of proving up the shale gas opportunity.
They have already shown that the play averages 750 metres thick which could make it the largest shale gas play in the world.
Jury is still out as they are about to start a core drill program to further prove it all up.
Best of all, they have a 48"NG pipeline freshly built crossing their property, also the property is only 15 km away from their end market, the city of Urumqi (Pop. of 4 or 5 Million people)
Also a good source of CO2 to bring back to the property for ECBM purposes and maybe even ESG (enhanced shale gas)
They are also partnered Enviro-Energy Holdings limited out of Hong Kong (ticker is 8182)
Principals in both companies are on and the same.
Petromin trades in Canada on the Venture exchange under the same ticker as their partner PetroChina, which is PTR

Do your own DD but I really like my chances on this one.
Regards from Canada

Oct 24 11:27 AM

[Shaker:]

Further note.
The curent deal PTR.V has also involves great incentives from the National Reform & Devlopment Committee for development of unconventional assets in respect to technology transfer.
One of those incentives other than tax advantages offered is they are to receive $1.00 U.S. over and above the current Asian spot price of natural gas.
Talk about sweet!

Finally PTR.V has current growing cashflow from Canadian oil & gas properties (approx. 300 BPD)
Kenny Chan is a current director and former CEO of PTR.V and now the CEO of Enviro Energy in HK and lives there full time now to build Asian operations, thus far he has sucsessfully raised $65,000,000.00 to date
Visit stockhouse.com where I provide lots more info on these guys.

Kind regards
Shaker

Oct 24 12:24 PM