Jack H. Barnes, Confessions of a Macro Contrarian | Feb. 5, 2011,
The natural gas cartel, a dream of Russia’s just a few years ago, is dead. It died when a natural gas revolution broke out and Gazprom lost. Energy importing nations around the world are evaluating their own geology, currently, to see if they have shale reserves that can be tapped. Nations like Argentina, Germany, Poland, France, and Sweden are looking into their national shale reserves.
The shale gas revolution is changing the world we live in, and the power structures of the past. It is also quickly changing the politics of future energy relationships. Nations that had to be nice to an exporter, due to energy supplies, will be freed of their need for discretion.
Shale gas is quite simply changing the whole energy paradigm in real time. The unlocking of source rock, has altered the future history of mankind. The world has discovered and unlocked its newest true world changing source of stored energy.
In the 1700’s, the world used wood for its energy source. The great mansions were heated with wood.
In the 1800’s, coal provided the go-to source of transportable fuel. It allowed railroads to rapidly move people at a pace faster than a horse. Coal powered the Industrial Revolution.
In the 1900’s, crude oil became the primary fuel. It was refined into fuel for aircraft, for ships at sea and into gasoline and diesel. Crude oil provided the necessary cheap energy to fuel the rapid expansion of civilization to the rest of the world.
The 2000’s arrived with the onset of peak light sweet crude oil. The US had peaked in overall oil production decades before, and as the new century started its reserves in both oil and conventional natural gas where shrinking.
It was in this situation, that a group of small O&G companies, starting with Mitchell and working separately to start, but building on knowledge learned in the field, figured out how to unlock the natural gas in the Barrett shale formation in Texas.
The technology was soon adapted to oil shale wells in the Bakken formation along the Montana/North Dakota border. These two events have changed how the oil & gas industry looks at resources today. Shale, depending on type, can be a provider of long life high flowing oil wells, or it can produce as much natural as from one shale well, as a small conventional field would produce. The dynamics of on-shore energy production has been the biggest change in the underlying economy unnoticed by most people.
In simple terms, a natural gas or oil well is engineered to have an extremely long horizontal leg. The idea is to provide as large of a circular surface as possible in the productive zone. They are drilling these legs a mile long or more now. The long horizontal leg is stimulated with extremely high pressured water, sand and proprietary particles into the zone around the pipe.
This process opens up crevices in the rock, opening up cavities with larger surface areas than you would get normally around the pipe. This allows the hydrocarbons to be pulled into the well at higher than normal flow rates for the type of rock. The combining of long legs with extremely high pressure multi stage fracturing unlocked the hydrocarbons bound in the rock itself. Normally, fields are traps with accumulations in a sandy area. That is the oil or gas can be trapped in a location that allows it to move. The shale rock is called a source rock because the hydrocarbons found in those other pools may have leaked out of it and moved hundreds of miles laterally.
The world has shale fields spread around the globe in locations famous for oil production, and some not so famous. The new technology will change the basic political power structures that exist today. The era of Russia controlling Europe’s natural gas future is drawing to a close.
“The size of reserves is mind boggling,” he said. “It makes a huge argument for a gas economy going forward.”Annop Poddar, Partner, Energy Ventures
If the shale fields in Poland and Germany can be brought online at the same level of production seen in the US, Europe on shore will be energy independent via their own production. France has shale oil and shale gas locations.
The good news about the geology of shale is that a zone is productive typically over extremely large area’s covering tens or hundreds of miles in different directions. This means that wells are almost never dud’s. The actual hit rate on the new shale wells is extremely high. This is because the horizontal leg allows the whole length to be produced as a whole.
Exxon realized this technology had the capacity to change the world. They purchased the largest player in the new techno revolution. XTO has given Exxon a significant new position in the US, the new technology, and view towards changing the world’s energy view.
The current strangle hold on hydrocarbons by national oil companies is coming to an end. New large pools of hydrocarbons are being released in the middle of western nations with hydrocarbon reserve ownership available for commercial exploitation.
The US has grown its own internal natural gas supplies to the point that it is now the largest producer of natural gas in the world. The renaissance in production shows no signs of slowing down. In fact, the US is trading the same BTU content as a barrel of oil, for less than the equivalent of $30 per barrel.
In natural gas terms, 1 MCF of NG is worth less than $5.00 in the US. That same MCF is worth $14 or so on the world market. This is a price differential caused by a surplus of NG in the US, without the capacity to export it easily. We’ve built a number of LNG importing facilities, but the only exporting location for LNG is Alaska.
The US is now growing its overall hydrocarbon production profile again. This is after many years of “experts” pontificating that the US was always going to be an importer of energy. The US was supposed to be trapped importing larger levels of energy from abroad forever. No one expected the US to quickly become the largest producer of natural gas in the world.
Currently, companies like LNG are looking to spend billions of dollars converting LNG import plants into export plants. The US could, once again, become a major exporter of hydrocarbons. This is not a joke. The era of the US being dependent on Middle East oil, is also ending.
Exxon is quietly buying up shale rights in Germany, as is Shell in Poland. Australia and Argentina both have massive potential new reserves. In short, there appears to be the equivalent of new Saudi Arabia’s in BTU totals now popping up in western nations. The US natural gas reserves are thought to be equal to 2x new Saudi Arabia’s. It will take decades to unlock this gas, and make it commercially viable in the market place.
The EIA, a US Government organization that tracks energy statistics, reports that the US total reserves of oil increased by 8.6% in 2009. The natural gas reserves of the US increased by 11.3% in 2009. The official natural gas reserves of the US as of Dec 31st, 2009 were 283 TCF.
Shale gas development in Louisiana, Arkansas, Texas, Oklahoma, and Pennsylvania drove the increase in proved reserves of natural gas. Louisiana led the nation in wet natural gas proved reserves additions with a 77 percent net increase of 9.2 Tcf owing primarily to development of the Haynesville shale. Both Arkansas (Fayetteville shale) and Pennsylvania (Marcellus shale) nearly doubled their reserves with net increases of 5.2 Tcf and 3.4 Tcf respectively. Shale development in Texas and Oklahoma wasn’t far behind, giving these two States proved reserves increases of 3.2 Tcf and 2.1 Tcf. These increases occurred despite a decline in natural gas prices relative to those used in assessing reserves at the end of 2008. This underscores the role of more efficient and effective shale gas exploration and productive technologies such as horizontal drilling and hydraulic fracturing.
The US currently consumes about 23 TCF per year for context of total US demand. The above 283 TCF includes the very first of the new shale gas, helping to increase total national reserves.
The increase in total potential reserves based on shale development is expected to be upwards of 1500 – 2000 TCF, once the shale basins have been fully developed.This gives the US a century at current energy consumption levels.
In locations like Argentina, mature developed basins are now being relooked at as a possible source for cheap NG to be exported for industrial use. While the world is watching Egypt, and the Suez Canal, the era of oil fears from the Middle East is drawing to a close.
Natural gas is significantly cleaner, and now that it is about to be available in very significant quantities in the developed world, the emerging markets will be impacted too.
Jack H. Barnes is a former trader and hedge fund manager who blogs at jackhbarnes.com