For six years Russia was the world’s largest producer of natural gas. Now the USA has overtaken Russia to again become the world’s largest producer. The US is also the largest consumer of natural gas while Russia is the second largest. It is estimated( by industry and by the governments of the US and Russia) that over the past 12 months US production was about 22 trillion cubic feet (Tcf), an increase of 3.7% over the previous 12 months while Russian production was about 20.5Tcf, a decline of 12% as both Russian GDP and industrial output fell sharply.
The US natural gas industry has grown steadily and powerfully over the past 10 years in terms of expanding the resource base, the reserve base, production and logistical capacity and in actual production. The chief drivers have been technological and business process innovation, risk capital, the imagination and entrepreneurship of the independent E&P company, start ups, attractive business models, the substantial and continuing expansion of field and take away infrastructure, and very recently the substantial commitment of majors and mini-majors to the upstream natural gas industry.
Over the past 10 years proven US natural gas reserves have risen by nearly 50% and are now the highest in a generation, at about 250 Tcf (estimated as of mid 2009). The highest level reached was 293Tcf in 1967. This level is likely to be exceeded within 12 months, given the most recent pace of reserve additions. The US is embarked on multi-year period when annual net reserve additions could, on a sustained basis, be the greatest ever attained in the history of the US natural gas industry.
In just the past 3 years resource mapping and delineation has accelerated so much that US Government statistics are obsolete as soon as they are published and far lag reality. For example, as recently as Jan1, 2007 the US Government estimated that TOTAL gas resources (not reserves) from shale in the US were 267 Tcf. In December 2009, industry experts operating in the Marcellus play were estimating that the resource endowment of just that one shale basin was well in excess of 500Tcf. The author is of the view, based on industry reports, presentations, discussions and company specific conversations that the total US technically recoverable resource base is north of 2,000 Tcf (about a third greater than the published US Government estimate) and that, should current industry efforts to map and delineate the resource base continue, the total technically recoverable resource base will increase dramatically in the next 5 to 7 years.
Shale certainly captured the imagination of the industry and investors alike in 2009 and is the main reason for the recent growth in reserves and production. However, over the next 5 to 10 years, growth will be augmented by important contributions from other types of natural gas plays, even as several more shale basins becoming commercially notable.
These other plays are Coal-bed methane (CBM), tight sands (TS), ultra-deep water gas (both associated and non-associated) and shallow water, ultra deep (SWUD).
Industry investment in each of these is likely to expand over the next few years as operating experience accumulates and technology advances reduce risk while increasing both initial production (IP) and total lifetime recovery.
To the Big 4 shale plays, industry added the Eagle Ford (South Texas) play in 2009. The population of producers investing in the Eagle Ford is growing apace. For example, Murphy Oil recently announced that its first Eagle Ford well had an IP of 7.5 million cubic feet per day (mmcfd), which is certainly very good. The Eagle Ford gas is rich in liquids which immediately enhances producer economics. Pioneered by Petrohawk Resources in October 2008, the play rapidly enticed other independents, including such well known companies as Anadarko (NYSE:APC), ConocoPhillips (NYSE:COP), and Pioneer Natural Resources (NYSE:PXD).
The Barnett, the senior and most acclaimed shale play in the world, continues to deliver superior results as producers advance and refine technology and techniques. The suite of technologies that is propelling the industry is: multiple wells from a single pad, multiple hydraulic fracture stages and longer horizontal laterals from a single vertical well. Chesapeake Energy (NYSE:CHK) just applied this suite to a well drilled in Arlington in south Tarrant County, Texas. The well had an astonishing IP of 13 mmcfd in October, 2009 which makes it the most prolific well ever drilled in the Barnett based on the average daily production for a month. There are nearly 14,000 wells producing in the Barnett. Of the almost 93,000 active gas wells in Texas, only 125 produce more than 5mmcfd. In the Barnett, wells that produce in the 4 to 5mmcfd range are considered exceptional. The estimated total recovery for this well is 10 billion cubic feet (Bcf) or about 4 times the figure for the typical Barnett well. Industry executives believe that the advanced technology suite, sophisticated operator processes and increasingly skilled crews may make the Arlington well the prototype for the next generation of shale gas wells, which represents a dramatic increase in productivity and consequently much improved cash flows and rates of return.
The same technological, management and risk capital success factors that have propelled US shale to global prominence will also drive growth in TS production. The TS play known as the Granite Wash (Texas panhandle, Western Oklahoma) is a compelling example of how the E&P industry is transporting its technology, experience and business model to TS, which is geologically more challenging than shale. However, the TS resource potential is vaster even than shale which implies that the growth trajectory experienced by shale could, if political and business conditions permit, be replicated within just a few years by TS.
Plays such as the Eagle Ford and Granite Wash are especially attractive because they combine high IP with high liquids content and are in Texas. Both the shale gas and TS gas E&P industries are still in the pre-adolescence stage in terms of life cycle and several major shale and TS plays in the US have yet to be developed. With productive lives in the 30 to 50 year range, shale and TS wells will be producing long after the current, pioneering, generation of industry executives and professionals are gone.
Conventional gas plays also show innovation and promise, particularly in the Gulf of Mexico (GOM). In addition to the important new fields being developed by the majors, mini-majors and the very largest independents in ultra deep water GOM there is an emerging and perhaps significant play in the Shelf of the GOM in very shallow waters.
This is the SWUD play where ultra deep subsurface wells are being drilled in water depths of only 20 feet. McMoRan Expolration (NYSE:MMR) is the pioneering independent in this play. It recently drilled a well to a measured depth of 28,263 feet and plans to deepen it to 29,000 feet. The well, in the Davy Jones prospect on South Marsh Island Block 230, encountered four distinct hydrocarbon zones with 135 feet of net pay. McMoRan believes the well is significant for two reasons. It may be one of the largest GOM Shelf discoveries ever made. It is also, more strategically, helping the industry define with some clarity the geologic characteristics below 20,000 feet in the Shelf and develop a new frontier E&P play for both oil and natural gas.
The idea that the US could double is Proven Reserves of natural gas, from all sources, within 7 years and more than triple them within 15 years is no longer a romantic fantasy to a small but growing set of industry professionals and executives. By the early 2020s, the US may be the domicile of proven natural gas reserves that exceed the combined proven reserves of Canada, Australia, Indonesia, Malaysia, Algeria, Nigeria and Turkmenistan…..all significant natural gas provinces with great exploration potential and important natural gas exporters.
The US natural gas industry has the potential to double production within 10 years. The resource base is enormous and growing, management and engineering capabilities exist or can be enhanced, the risk capital can be forthcoming, the business models are correct, the logistical infrastructure to serve domestic and export markets can be deployed in time and the fuel is attractive to users.
Should the industry be allowed to accomplish this quite astonishing feat, it will add hundreds of billions of dollars annually in real value to the American economy, create hundreds of thousands of new, good, jobs, dramatically enhance the energy security of the Nation while significantly improving the trade balance and profoundly change the geo-politics of global energy. However, at present, public policy is acutely hostile, capital markets unfriendly (except to the very largest oil and gas companies), most Americans uninformed about or uninterested in this transforming domestic resource (except in Texas and Louisiana) and of course, natural gas prices are very low in real terms. The chances that the US natural gas industry will remotely attain its potential over the next 10 years, especially the next 3 to 4 years, are tragically minimal. Were China, India or Brazil to find them blessed with such a tremendous natural endowment and such broad and deep industry strengths they would hasten to seize the transforming opportunity. Not so the USA.
Disclosure: The author owns stock in companies active across the entire US natural gas industry value chain. No positions in the E&P companies mentioned.