Nowadays, the topic of resources, reserves, production has become widespread shale gas. It worries many people, not only from an economic point of view, but also from the point of view of its impact on the environment.
What are shale anyway?
Shales are sedimentary rocks that have gone through certain stages of transformation. First, loose sediments form in reservoirs, which gradually become compacted - sandstone is formed from loose sand, then sandy-clay shale, and finally we get gneiss.
How is shale gas produced?
Gas concentrations in shale deposits are low. The reservoirs in which it accumulates are dispersed throughout the entire rock thickness. Individually they have small volumes of gas, but their combined reserves are huge.
How is shale gas produced?
Shale gas production technology involves several extraction methods: horizontal drilling, hydraulic fracturing and seismic modeling. The horizontal drilling method is based on the use of special drilling rigs and is the main method of gas production. Creating a highly conductive fracture in the target formation in order to extract shale gas - hydraulic fracturing technology (allows you to “revive” wells where gas production by conventional methods is no longer possible).
Modern technology for shale gas production includes the construction of a drilling rig, which includes one vertical well and several horizontal ones. Their length can reach 3 km. They are filled with a mixture of water, sand and chemicals, creating a water hammer and damaging the integrity of the gas collectors. The released gas is then pumped out.
In the process of horizontal drilling, seismic modeling techniques are used. It combines geological research and mapping with computer data processing, including visualization.
In gas fields there is a natural movement of gas depending on pressure. Shale gas also has this feature, the extraction technology of which involves the creation of areas with variable pressure. For this purpose, horizontal wells are used that have multiple branches at the same depth, or such wells are made multi-stage with a horizontal branch up to 2 km long.
Shale gas production scheme
Schematically, the process of extracting shale gas can be divided into several stages:
- Wells are being drilled: vertically to the depth of shale deposits and then horizontally along them.
- Installing a pipe into a well.
- Strengthening the pipe with cement. Holes are made in the resulting structure using a special puncher.
- Injection of water and sand into the pipe, under the influence of which the shale is gradually destroyed.
- Collecting gas from cracks and fractures in rock and pumping it through a pipeline.
After the gas pressure drops, the shale formation destruction procedure can be repeated.
American experience in developing shale basins shows that each such deposit is characterized by completely unique geological parameters, operational features, and production difficulties. And in each case an individual scientific approach is required.
Impact on the environment
Top view of shale gas production
There are detrimental consequences of shale gas extraction. And the first thing it affects Negative influence shale gas - ecology. After all, when extracting it, carcinogenic liquids are used that poison environment: soil, groundwater, rivers and much more. Moreover, shale gas production technology involves the use of hydrocarbons, which can lead to a deterioration in the permeability of earth rocks to water. Therefore, the question of how shale gas is extracted worries many environmentalists.
Now, due to the problems associated with the production of traditional gas, the possibility of shale gas production in Russia is being considered. However, this is opposed by many politicians and economists who fear that extracting shale gas is not economically profitable due to the high cost of drilling a well and short term its operation.
It follows that before mastering the technology of shale gas production, it is necessary to carefully consider the impact this will have on the economic and environmental situation in the country.
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Myth 2: Shale gas is one third nitrogen, is not transportable, and has little energy use.
Myth 4: Shale gas is very, very expensive to produce.
Disclaimer 1. Shale gas is more difficult to extract than traditional gas
First, it’s worth figuring out whether this shale revolution even exists or is it the fruit of an information war?
Myth 1: The shale revolution is a donut hole. It actually doesn’t exist and it’s an overblown “canard”.
We will try to use fewer words and more facts and quantitative data. The easiest way to assess the relative scale of the shale revolution is through comparison with the production of other countries:
As you can see, shale gas production in the United States is second only to one country in the world - Russia. US shale gas is at least twice as high as all other gas-producing countries, and this has been achieved in just a few years. US tight reservoir oil (which is mistakenly called “shale”) is in fifth place, ahead of even such oil-producing countries as Iraq and Iran:
The erroneous thesis about the insignificance of the shale revolution comes from ignorance of the simple parameter- volume of production of shale energy resources. A quick glance is enough to see how enormous the scale of shale hydrocarbon production is in just one country.
Myth 2: Shale gas is one-third nitrogen, non-transportable, and of little energy use.
It is difficult to say where the myth about the huge amount of non-hydrocarbon impurities in shale gas, which should lead to the mentioned phenomena, came from. Let's look at the composition of produced natural gas in the USA and evaluate the content of impurities:
The shale revolution began in 2005-2008 and by the end of 2012 the share of shale gas in gas production was 35%. The graph shows that the share of non-hydrocarbon gases (nitrogen, carbon dioxide, etc.) has not changed at all from 2005 to 2013 and methane + homologues still make up 97% -97.5% of the produced gas, and impurities - 2.5-3%. Those. During the shale revolution, the composition of gas did not change in any way, because it is identical to the traditional one in the USA. It is worth noting that 2.5% -3% of non-hydrocarbon gases is very good result. For example, the “Caspian” field in the USSR was developed despite the fact that the gas there contained 23% toxic hydrogen sulfide and 20% carbon dioxide, and, for example, at the largest European natural gas field “Groningen” (10th place in the world) the share of non-hydrocarbons is 15 .2% At the same time, no one has heard about the bad composition of Groningen (which does not bother anyone), but half of the RuNet thinks that it is terrible about the good composition of US shale gas.
Myth 3: Shale gas/oil wells empty very quickly and therefore contain less gas/oil.
Their flow rates (production) are falling really quickly. But the conclusion drawn is incorrect, at least for the United States. As an example, let’s look at the averaged well curves of some US fields:
The well curve is its productivity (flow rate) over time. The horizontal axis shows the months of well operation, and the vertical axis shows production. If you take the Haynesville field (in green), you can see that it has the fastest decline in production rates. About once every five years. However, its initial flow rates are much higher. As a result, due to higher initial flow rates, the accumulated production of such a well (i.e. over its entire life) will be higher than that of wells in other fields. The cumulative production of a well on the graph has geometric meaning area under the curve.
You can consider Fayetteville (in red). It has the smallest drop in flow rates, only two times in a year. It would seem - a reason for rejoicing. However, the least amount of oil will be produced from such a well. Simply put, there is no connection between drops in flow rates and cumulative production of a well, which is usually assumed there. Yes, flow rates are falling faster, but also from larger values. As a result, over the entire lifetime, such wells produce more production. Therefore, a rapid drop in flow rates in itself is not a factor on the basis of which one can draw conclusions (especially about low production) and is generally confusing, because in reality, there is an inverse relationship - the more the flow rates fall, the greater the accumulated production of the well. We made a small comparison of accumulated well production here: (table below)
Myth 4: Shale gas is very, very expensive to produce.
According to the International Energy Agency (IEA), the cost of conventional gas in the US is $3-7 per MMBtu, and shale gas... drum roll... also $3-7 per MMBtu. In Europe, by the way, the cost of traditional gas is $5-9 per mbtu.
For people dealing with the shale industry, this data is not something unusual. Everything is within expectations. The same data from with a pure heart The domestic Gazprombank also uses it. At the same time, somewhere, of course, traditional gas will be cheaper than shale gas - for example, in the Middle East or in our old fields. But, for example, the sensational new Shtokman field will not be cheaper than the shale one.
Therefore, shale gas production in the USA is economically no worse than the traditional USA. In fact, it’s even better: this is why gas producers stop producing traditional gas and switch to shale (today 50% of US natural gas production is already shale) - His Majesty’s “experiment” has put everything in its place.
Myth 5. Shale gas is an economic bubble.
Profitability depends on two parameters - the cost of shale gas and gas prices. We sorted out the cost of the previous myth and it became clear that if shale gas is unprofitable, then traditional gas in the USA will also be unprofitable, because they have similar costs. But it’s better to go straight to the root of the problem - the price of natural gas. Where did the theses about unprofitability come from? The fact is that the shale revolution was akin to a gold rush: between 2007 and 2008, gas prices in the United States doubled, this served as a good incentive for mining companies to invest in relatively new technology horizontal drilling and hydraulic fracturing.
Because the technology was available to many and the fields were so vast, so much natural gas came onto the market in such a short time that gas prices in the United States actually fell below economic levels. All mining companies tried to get to the market first in order to get the maximum benefit from high prices. As a result of this race, prices collapsed very quickly and latecomers paid for it, but since then prices have returned to a more or less acceptable level that allows them to work normally.
To be more specific, gas prices on HH:
Pay attention to the level of $2-2.5 per mbtu around 2012. At such low prices, traditional US and European gas will be unprofitable. Those. The reason for a certain period of unprofitability of shale gas is not in the shale gas itself, but in ultra-low gas prices in the United States.
For comparison, in Europe prices for LNG and pipeline gas are about $10 per mbtu (including from Gazprom), in Asia they are $13-16 per mbtu, that is, many times higher. Current prices in the US are $4.6 per mbtu, which is already higher than the production costs of some major fields. The situation today is such that even outsiders in the gas industry, at a relatively low $4.6 per MMBtu, show reasonable results: http://rusanalit.livejournal.com/1867077.html
Myth 6: Shale has a terrible energy return on investment (EROEI)
Let's get you up to speed. There is economic profitability - shale gas production in monetary terms divided by monetary costs. But because energy resources serve humanity not as sources of money, but as a source of energy, then in a number of cases (non-commercial) it is logical to evaluate energy resources and energy profitability, i.e. shale gas production in energy equivalent divided by costs in energy equivalent. “Experts” on the Internet often lower the EROEI of shale below seven or even five, and when asked how they know this, they are usually silently offended.
Let's say without undue modesty, no one except us considered the EROEI of modern US oil and gas (i.e., including shale) to be normal according to generally accepted methodology, and therefore stories about the low EROEI of shale are always speculation. In the world, only a few are dedicated to EROEI of US oil and gas research work and all of them are based on data from the period before the US shale era. Almost all the works are written by or refer to a small group of researchers, the main ones being Cleveland and Hall (the author of the EROEI concept). It is not possible to isolate the shale sector from the US oil and gas sector using the methodology of these authors, however, it is known that shale occupies a large share of the US oil and gas sector and the poor energy profitability of shale would be reflected in the overall EROEI of the US oil and gas sector. As a result, we took the generally accepted methodology of the mentioned founders and added calculations based on modern data. Result:
As you can see, after the shale revolution, the energy profitability of US oil and gas not only did not fall much, but rather stabilized and began to grow slightly. Therefore, the conclusions about shale's terrible energy return on investment (EROEI) are incorrect.
Myth 7. Shale gas production is only possible in the USA
Myth 8. Shale gas is produced solely because of huge subsidies
Firstly, it is difficult to prove that you are not a camel. Secondly, there are a lot of words about subsidies for shale gas production, but there are no facts or data. From the specifics, there is a reference to Section 29 credit from the Windfall Profits Tax Act of 1980, which actually subsidized the production of unconventional gas. Everything would be fine, but this holiday is in 2002.
There are no federal benefits or subsidies for shale gas/oil specifically. However, there are benefits for the entire oil and gas industry, the largest and most famous of which is Intangible drilling costs. Those. It relates only marginally to shale gas/oil, because applies to all production - both gas and oil, traditional and unconventional, and its size amounted to... a measly $1 billion in 2013. Let’s add that in the US oil and gas industry the bill is hundreds of billions a year, and for ExxonMobil alone it’s already in the tens. In total, these benefits amount to $4 billion.
The second nuance is an exclusively political squabble about benefits for the US “big oil” (BP, ExxonMobil, Shell, etc.), which was not particularly noticed in shale production, because prefer traditionalism. In short, the essence is that the five largest oil companies were “included” by the Republicans, who do not care about the federal budget and advocate maintaining benefits, while the Democrats, who bear all the burdens of optimizing the federal budget, were not “included.” As a result, Obama is asleep and sees how to cancel the benefits of Big Oil, which is not particularly suffering in conditions of high oil prices. The nuances of these srachas can be gleaned from any major US publication. However, for unknown reasons, journalism on the RuNet calls the benefits of the Big Oil Company subsidies for shale gas (example). Whether this happens out of ignorance or outright propaganda is another question. In any case, the benefits for Big Oil amount to about $2.5 billion, which again is not comparable to the scale of the industry.
Maybe we missed another billion, but the scale is obvious.
As you can see, “myths” are either based on incorrect data (usually they are not based on any data at all) or make errors in reasoning. Therefore, the endless stream of myths will be reinforced by new fantasies and new mistakes. To refute everything, of course, is not possible and generally pointless, but we tried to figure out the main thing.
Let's move on to the second part - realities.
Disclaimer 1. Shale gas is more difficult to extract than traditional gas.
Based on the amount of gas produced, then, as economic and energy profitability has shown, US shale gas coincides with conventional US gas. If calculated per well (which is not entirely correct), then shale gas is more difficult to extract. The fact is that shale deposits lie deeper than traditional ones and, in addition, it is necessary to do hydraulic fracturing and drill a horizontal trunk. Of course this complicates the well. But on the other hand, the productivity of shale wells (flow rates and cumulative production) in the USA is much higher than that of traditional ones (in the USA). As a result, greater well production compensates for the complexity of production and the economic/energy profitability is at least as good as traditional gas.
Disclaimer 2. Special environmental risks from shale gas production
This conclusion is usually drawn from a feature of shale gas production - hydraulic fracturing. But there is a problem: on the one hand, hydraulic fracturing is a mandatory technology for shale production, on the other hand, hydraulic fracturing in modern oil and gas is also the norm in the production of traditional oil and gas. Those. Hydraulic fracturing is not specifically a shale technology. The fact is that the production of traditional oil is not always a fountain (in the literal sense), as it happens in new good fields. As a traditional field is depleted, it is necessary to use technologies to stimulate production, and therefore hydraulic fracturing is an extremely banal thing. Therefore, it is surprising to hear stories that a thousand hydraulic fracturing per year in Pennsylvania at the largest Marcellus shale gas field on the other side of the earth is the end of nature and environmental horrors, while for some reason no one notices 605 Tatneft hydraulic fracturing operations. discusses and is not indignant about the terrible fate and environmental situation of Tatarstan from hydraulic fracturing. It is worth noting that, of course, there are environmental risks from oil and gas production, no one says that they do not exist. But here's something fundamentally special because shale production and linking these risks specifically to shale production is wrong, because Hydraulic fracturing has become a harsh reality in the world when developing old conventional oil and gas fields, when more simple methods uncomfortable. Hydraulic fracturing is even used in the extraction of coalbed methane, which is much closer to the surface (up to a kilometer) and, accordingly, to aquifers. But no one cares. The only concern is hydraulic fracturing on shale gas at a depth of 2-4 kilometers.
Water resources
As always, you can find a lot of words on this topic in RuNet, but no quantitative data. How debaters reach conclusions about water resources without using quantitative data remains a mystery to us. Specific figures can be found, for example, in this report from MIT (Massachusetts Institute of Technology). Columns are industries and the share of water consumption is indicated, rows are states of four shale deposits
columns: public needs, industry, irrigation, livestock, shale gas (highlighted in blue), total consumption.
It can be seen that shale gas production in the main fields takes up a tiny share in the consumption of water resources. Less than 1%.
There are other nuances of the environmental issue, smaller in size, but we will leave them behind.
Bitter truth. Shale gas is more expensive and more difficult to extract than modern traditional Russian gas.
There is no doubt about it. The cumulative production of US shale gas wells is much less than the cumulative production of conventional gas wells in Russia. Therefore, the production of shale gas or anything else of similar value is irrelevant for Russia today and in the medium term. However, over time, our reserves of cheap gas will be depleted and somewhere by the end of the 2020s or later we will have to start making full use of offshore projects in the Arctic or something difficult to extract in Western Siberia. However, in the USA, Canada and other countries, shale gas production is justified and is already underway.
Therefore, it is necessary to handle theses about the inadequacy of shale gas production very carefully (methodologically). For Russia this is inadequate; for the USA, Canada and China, as facts and data show, shale gas production is a good and convenient satisfaction of their own needs, which they use with success and joy. Simply put, if you compare shale gas with traditional gas, you must always indicate with which traditional gas the comparison is being made (domestic, USA, Canadian, new or old fields), because the results of the comparison will vary. Compare US shale gas with traditional domestic gas? Shale gas is bad. With traditional USA, Canada, etc.? Shale gas is good.
It’s more difficult with data sources here, because we couldn’t find reliable and accurate data on wells and fields in Russia in the public domain. However, if we compare Russia’s production and the number of wells that provide this production, we can see a gigantic positive gap between Russia and the United States (dozens of times), which clearly indicates a huge difference in the accumulated production of wells in favor of Russia. Russia has accumulated production of traditional gas wells of the order of a billion cubic meters or more, while the United States has 30-100 million cubic meters. But the United States does not have such good traditional gas (and never had one), so they switched to shale gas.
Shale gas is a type of natural gas. It consists mainly of methane, which is a sign of a fossil fuel. It is extracted directly from shale rocks, in deposits where this can be done using conventional equipment. The leader in the production and preparation of shale gas for use is the United States, which relatively recently began to exploit these resources for the purpose of economic and fuel independence from other countries.
Oddly enough, the presence of gas in shale was first discovered back in 1821 in the bowels of the United States. The discovery belongs to William Hart, who, while exploring the soils of New York, came across something unidentified. They talked about the discovery for a couple of weeks, after which they forgot, since oil was easier to extract - it poured out onto the surface of the earth itself, and shale gas had to be somehow extracted from the depths.
For more than 160 years, the issue of shale gas production remained closed. The reserves of light oil were sufficient for all the needs of mankind, and it was technically difficult to imagine extracting gas from shale. By the beginning of the 21st century, active development of oil fields began, where oil had to be literally pulled out of the bowels of the earth. Naturally, this has significantly influenced the development of technology, and now it is possible to extract gas from strong shale rocks and prepare it for use. In addition, experts began to say that oil reserves were running out (although this was not the case).
As a result, in early 2000, Tom Ward and George Mitchell developed a strategy for large-scale natural gas production from shale in the United States. The company DevonEnergy undertook to bring it to life, and it began with the Barnett field. The business got off to a good start and technology needed to be further developed to speed up production and increase mining depth. In this regard, in 2002, a different drilling method was used in the Texas field. Combination of directional development with horizontal elements became an innovation in the gas industry. Now the concept of “hydraulic fracturing” has appeared, due to which shale gas production has increased several times. In 2009, the so-called “gas revolution” took place in the United States, and this country became a leader in the production of this type of fuel - more than 745 billion cubic meters.
The reason for this surge in the development of shale production was the desire of the United States to become a fuel-independent country. Previously, it was considered the main consumer of oil, but now it no longer needs additional resources. And although the profitability of gas production itself is now negative, the costs are covered by the development of unconventional sources.
In just 6 months of 2010, global companies invested more than $21 billion in assets in the development of technology and shale gas production. Initially, it was believed that the shale revolution was nothing more than an advertising ploy, a marketing ploy by companies to replenish their assets. But in 2011, gas prices in the United States began to actively fall, and the question of the veracity of the developments disappeared by itself.
In 2012, shale gas production became profitable. Market prices, although they did not change, were still lower than the cost of production and preparation of this modern type of fuel. But by the end of 2012, due to the global economic crisis, this growth stopped, and some large companies that worked in this area simply closed down. In 2014, the United States underwent a complete reorganization of all equipment and a change in production strategy, which led to the revival of the “shale revolution.” It is planned that gas will become excellent by 2018 alternative fuel, which will allow oil time to recover.
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Destruction of the myth of the shale gas revolution
Moscow, July 6 - "Vesti.Ekonomika". Shale gas production was not a revolution. It simply brought a higher cost structure and a wider resource base than conventional gas production.
The marginal cost of shale gas production is $4 per million Btu (British thermal units). The average spot gas price was $3.77 as shale gas became a strong factor in US supplies (2009-2017). Prices in the medium term should be around $4 per million Btu.
Nevertheless the most important point there will be a supply of capital. Credit markets have been willing to support unprofitable shale gas drilling since the financial crash of 2008. If this support continues, prices could decline over the medium term, perhaps to $3.25/MMBTU. The average spot price over the last 7 months was $3.13.
Gas supply models have been wrong over the past 50 years. During this period, experts agreed that existing conditions of abundance or scarcity would be the determining factor for the foreseeable future. This has led to billions of dollars of investment being made in LNG import servicing facilities, all for nothing.
Today, most experts believe that gas abundance and low prices will define the next few decades due to shale gas production. This has led to large-scale investments in LNG export facilities.
Historical background
The last 40 years have been characterized by two periods of normal gas supply and two periods of gas resource shortages. Supply volumes were quite low from 1980 to 1986, and gas prices averaged $5.57/MMBtu. Normal supply was restored from 1987 to 1999, and gas prices averaged $3.24/MMBTU.
Shortages returned from 2000 to 2008, with prices averaging $7.72/MMBtu. Shale gas production began in the Barnett field in the 1990s. The development of other shale gas fields—culminating in the giant Marcellus field—has completed the return to normal gas supplies. Prices since 2009 have averaged $3.77/MMBtu.
Because prices have fallen by about 50% as shale gas production has increased, many believe shale gas is inexpensive. This is only true in comparison to the previous period of high prices caused by resource scarcity. But this cannot be compared with regular prices for gas during periods of normal supply volume.
The 40-year average gas price since 1976 was $4.70/MMBtu. Excluding periods of resource shortage, it was $3.40. Average cost of regular gas from 1987 to 2000. was $3.42/MMBTU. During the period of shale gas dominance (2009-2017), prices averaged $3.77.
Gas supply models are wrong and LNG is the wrong solution
History teaches that the situation with gas supplies to the United States is very uncertain. The normal supply volume has been 60% since 1976, with shortages characterizing the remaining 40%. During each period of either normal or reduced supply, experts agreed that existing conditions would determine the long-term outlook. And they were constantly wrong.Cheap natural gas was abundant in the 1950s and 1960s, and most analysts believed that this situation would continue for decades. Abundance and low prices led to a 283% increase in demand between 1950 and 1972.
Supply could not keep pace with the level of demand, and in the winter of 1970 there was a severe gas shortage. By 1977, the deficit had reached critical levels. Few people understood this, partly due to incorrect reserve estimates.
Experts agreed that shortages will persist for decades and that importing LNG is the only solution. Between 1971 and 1980 Four LNG import terminals were built. Limited gas supplies led to a golden age of nuclear and coal-fired power plants, which largely rebalanced the electricity market.
1980s and 1990s were a period of great stability in natural gas prices. Rising pipeline imports from Canada have created the false impression that cheap and plentiful natural gas supplies will continue for decades to come. All LNG plants were closed and some were used for gas storage.
Gas production in Canada and the United States peaked in 2001, and by 2003, LNG import terminals were re-opened and production expanded. In the period from 2001 to 2006. More than 42 additional import servicing facilities were planned. 7 were built. Experts agreed that importing LNG is again the only solution to the gas supply problem.
The first long horizontal wells were drilled in the Barnett field in 2003. By the end of 2006, shale gas production from the Barnett and Fayetteville fields and other shale gas fields exceeded 4 billion cubic meters. ft/d and has thrown not only the US LNG import market but also the global LNG industry into disarray.
In each supply cycle, major investments in LNG production were either undertaken or abandoned. The total installed volume of LNG imports reached 18.7 billion cubic meters. feet per year, but imports averaged 1.3 billion cubic meters. feet per day from 2000 to 2008 and never exceeded 2.1 billion cubic meters. feet per day. The average utilization rate was 7% and maximum 11%. The initial cost of the terminals was about $18 billion.
Experts now agree that, thanks to shale gas production, gas will always be plentiful, and it will also always be cheap. LNG exports began in early 2016, and the United States became a net gas exporter in April 2017. Seven previously failed import servicing facilities will become LNG export servicing facilities, with an estimated cost of approximately $48 billion. Three other export terminals have been approved by the Department of Energy.
Applications for the construction of 42 export terminals and capacity expansion were also approved.
The volume of approved export applications is more than 54 billion cubic meters. feet per day – 75% of dry gas production in the United States. Daily dry gas production in the United States in 2016 was 72 billion cubic meters. feet per day. Are LNG import mistakes being repeated?
Marginal cost of shale gas
Shale gas producers have made exaggerated claims for low-cost supplies for so long that markets now believe them. Sell-side analysts believe the breakeven price is $3, despite corporate earnings statements and balance sheets that show otherwise.The number of rigs is a direct indicator of how oil and gas producers choose to allocate capital. The number of shale gas rigs remained flat in 2014, when gas prices fell from more than $6/MMBtu to $4. However, rig counts fell as prices dipped below $4.
In February 2016, the weekly gas price was $1.57/MMBtu, and then increased until the end of 2016. The number of shale gas rigs doubled amid expectations of a $4 price, but stalled when prices did not reach this threshold . The implication is that the marginal cost of shale gas production is approximately $4/MMBtu.
"Bear" scenario
Most gas market observers expect a supply glut and lower gas prices later in 2017 due to the new bandwidth pipelines in the Marcellus-Utica fields. Gas from oil fields, particularly in the Permian Basin, is expected to prolong this bearish scenario for the next few years.Forward curves reflect this outlook. Their time structure is inverted. This means that short-term futures prices are higher than long-term futures.
Market traders are betting that winter gas prices will peak in the range of $3.25 to $3.50/MMBtu and fall below $3 in early 2018. May 2018 contract volume is nearing zero, so The picture of worsening prices is considered purely theoretically, even next year.
The bearish scenario would be detrimental for producers, whose stock prices have fallen by almost 30% already in 2017.
While investors have been willing to fund the money-losing efforts of these companies for years, their patience is running out.
Some analysts mistakenly believe that shale gas producers have already greatly reduced costs through technology innovation, so gas prices in the $3 range will become the new norm. Although it is true that costs have fallen significantly due more to deflationary pricing by the service industry and to a lesser extent due to technology and innovation.
In fact, technology that enables unconventional oil and gas production has led to a 4-fold increase in oil and gas drilling costs from 2003 to 2014.
Lower demand since 2014 has led to a 45% reduction in drilling costs, which explains the large savings.
Gas price pressures will ease in the near future, but we won't see US dollar prices becoming the new norm. Producers have take-or-pay agreements with pipelines that will carry new supplies from the Marcellus and Utica fields. Some of these projects will likely supply gas to Canada and LNG export markets, which have limited impact on domestic supplies. Likewise, gas from the Permian Basin is likely to go to Mexico in the future.
New volumes entering the domestic market must first overcome the current supply shortage.
Gas production fell by more than 4 billion cubic meters. feet per day from February 2016 to January 2017.
The EIA predicts that production will increase by 4.7 billion cubic meters in 2017. feet per day and only 1.9 billion cubic meters. ft/d in 2018. EIA expects average monthly prices to exceed $3 in 2018, ending the year at $3.66/MMBtu.
This is just a forecast and certainly not correct in detail, but the EIA's gas forecasts have been fairly reliable over the past few years. Increased consumption and exports should keep supplies relatively low and prices fairly strong.
Since the beginning of the 2000s. Producers and analysts said shale gas would be a "disruptive change." From now on, natural gas will be abundant and cheap. Before 2009, the US had very little natural gas, but now it can afford to export it to different countries peace.
In late March, Morgan Stanley analysts wrote that the Haynesville breakeven price would "fall below $3/MMBtu" and the Marcellus-Utica breakeven price ranged from $1.50 to $2.50/MMBtu. However, with gas prices averaging above $3 over the past 7 months, none of this good news can be reflected on the balance sheets and income statements of major producers.
Shale gas companies spent an average of $1.42 for every dollar they earned in the first quarter of 2017.
This average excludes Gulfport and Chesapeake, which had capital expenditure to cash flow ratios of 10.7 and 5.4, respectively. Including these two operators spent $2.12 for every dollar they earned.
This is because Bernstein Research has made a technically sound resource estimate. However, the report does not say anything about the volumes of gas that can be produced for commercial purposes at a certain gas price.
To accommodate this and other reports, consider the Bureau of Economic Geology's (BEG) production forecast for the Barnett field, published in 2013. The BEG study identified well reserves for 15,000 Barnett wells at $4.
Barnett's actual production volumes are significantly behind BEG's forecast and will likely result in a significant reduction in the recovery. It's not that the BEG study was wrong, it's that gas prices were lower than the $4/MMBtu price assumed in their forecast.
If Barnett's production volumes differ so greatly from BEG's careful analysis and forecast, how can we trust less rigorous analyst reports that claim decades of cheap shale gas?
The Barnett and Fayetteville shale reserves are dead at current prices because their core areas have been completely depleted. The rig count reflects this inescapable reality.
There are still significant resources, but they are not lower than gas prices of $4. Marcellus and Utica will inevitably suffer the same fate.
Few analysts seem to view the economics of shale gas as a limiting factor in production and therefore supply. Perhaps they truly believe in a fake economy that results in supposed breakeven prices for Marcellus and Utica ranging from $1.50 to $2.00.
But prices and production growth slow price changes by about 10 months. Gas prices fell below $4 at the end of 2014, and about 10 months later production growth slowed from nearly 7% to 1%.
Gas supplies are tight today because year-on-year production growth has been negative for 14 straight months.
Gas production has increased since January, and the EIA predicts this will continue through 2018. However, the EIA data also points to continued uninterrupted supplies. This is because demand is growing while LNG exports are also growing.
Most analysts believe gas prices will collapse in early 2018 as the new Marcellus and Utica fields bring new supply to the market. This may only last for a short period of time, but evidence suggests that gas prices will recover and remain fairly high in the medium term. After one of the most mild winters historically, gas prices remained in the $3/MMBtu range and inventories fell within three weeks.
Production growth, rig count data and company balance sheets suggest the marginal cost of shale gas production is around $4/MMBtu. However, most analysts say this is not the case. For five decades, gas supply patterns and prices have been consistently wrong. But this time everything will be different. LNG import terminals have been an investment fiasco, but LNG exports will be a big success.
All dominant theories are sooner or later replaced by new paradigms. It is unlikely that shale gas will be an exception.
Increased gas production from oil fields, especially in the Permian Basin, could provide several more years of shale gas proxy supply.
Credit markets are another pattern. Investors were ready to see evidence that shale gas was unprofitable. This is based mainly on the expectation that the negative cash flow is normal during mining and that profits will be realized later.
History puts shale gas in the right perspective. It is not cheaper than regular gas. It's simply inexpensive compared to higher prices caused by the depletion of conventional gas supplies in the early 2000s. Shale gas is not a revolution, but it bought the US for a decade or so, ensuring a normal supply before another period of gas shortages occurred.
The industry has abandoned the early Barnett and Fayetteville shale gas plays because their core areas are completely depleted and resource development costs are higher than the core Marcellus and Utica plays. So expect the same pattern of growth, peak and slow decline as with Barnett and Fayetteville, since they all have a long history in oil and gas industry.
The history of shale gas shows success based on the size of resources, but not reserves. It emphasizes production volumes, but not the cost of these products. Its champions focus on the technology that makes games possible, but not the cost of that technology. Break-even prices are discussed, not profits. No smart investor invests his money in break-even projects. When it comes to the economy, analysts and the industry exclude important items that we are told can be ignored.
The history of shale gas production paints a picture that suits US aspirations for energy independence, political power and economic growth.
And if history repeats itself often enough, perhaps it will become true.
18OctWhat is Shale Gas
Shale Gas is natural gas that is extracted from shale wells, namely from gas-rich rock - shale.
What is Shale gas - in simple words - briefly.
In simple words, shale gas is almost the same natural gas as that which is removed from more conventional gas deposits, but it is produced in a different way, which we will discuss later.
What is Slate.
Before you start brief description Before you know how shale gas is extracted, you need to figure out what exactly the shale from which the gas is extracted is.
Slate is a very common form of sedimentary rock that is found almost throughout the world. This rock is formed from sand, mud, clay and other small mineral particles such as quartz. Over time, this mixture settles and is highly compressed, forming shale deposits. Similar strata are found in rocks of the Paleozoic and Mesozoic periods, which leads us to believe that they are on average 500 to 700 million years old. In addition to the fact that shale contains natural gas, this rock includes a whole range of useful organic matter, which can be used by people for various purposes. Quite often, slate is used for various industrial purposes as a filler for concrete or brick. Also, shale formations serve as an invaluable source of scientific information about the ancient era of our planet. The fact is that shales contain a huge number of various fossils that can provide information about different times in the geological history of the Earth.
Shale gas extraction - how shale gas is extracted.
As with many other mining methods, shale gas extraction technology consists of several critical steps:
- Intelligence service;
- Drilling a network of wells;
- Installation of gas collection equipment;
- Creation of hydraulic fractures;
- Collection and sorting of products obtained from wells.
Intelligence service.
On at this stage a company that plans to produce gas evaluates profitability and other indicators related to production and the impact on the environment. If environmental standards comply with the legislation of the region, the process of drilling several test wells begins. Samples will be taken from them to determine the amount of gas contained in the shale. If everything is in order, then the company proceeds to the next stage of work.
Drilling.
The process of drilling wells for shale gas extraction is quite different from the standard one - “just drill a deep hole in the ground.” The thing is that, unlike the traditional method of extracting gas from gas deposits, this scheme does not work with shale. The main difference is the fact that shale gas is not located in a so-called “gas bubble underground.” It is contained in tiny pores in the shale formation, located horizontally below the surface. Thus, having drilled a vertical well to a certain depth, it is taken to a horizontal plane and drilled further as long as necessary. Thus, several (possibly dozens) of similar wells are created at the production site.
After the actual drilling process, the wells are sealed. This is necessary in order to prevent the uncontrolled release of gas and other chemical materials associated with mining. In simple words, the inserted pipes are insulated with various hermetic seals that do not allow gas to escape to the surface.
Installation of gas collection equipment.
In simple words, equipment is installed on the pipes that will receive, sort and send the resulting product further to its destination.
Creation of hydraulic fractures.
This is the most unique part of the shale gas extraction process. The fact is that, as we already know, the required gas is contained in the “pores” of the formation, and naturally it is not going to come out on its own. In order for it to begin to be released, miners need to destroy the structure of the formation and release the gas trapped there. For these purposes, a special pyrotechnic charge is advanced almost to the very end of the pipe. It shoots in the right place, creating holes in the pipe and breaks the structure of the formation, creating cracks in it. Field this into the pipe under high pressure a special mixture of water and sand is pumped in, which actually fills the created cracks. Sand, in turn, prevents cracks from closing back and allows gas to pass through perfectly. A similar procedure, if necessary, is repeated throughout horizontal plane wells.
Collection, sorting, storage and delivery of gas.
As has already become clear from the last stage, after manipulations with hydraulic fracturing, gas, water and other materials contained in the subsoil begin to flow into the pipes. On the surface, specially installed sorting plants separate gas and water. The gas is sent to special collectors, and the water, in turn, is recycled and used again to create hydraulic fractures. This is exactly how shale gas is extracted.
