the shale oil & gas illusion
TRANSCRIPT
-
8/6/2019 The Shale Oil & Gas Illusion
1/46
IS THE SHALE BOOMSUSTAINABLE?
May 15, 2009
By:Matthew R. Simmons, Chairman
Simmons & Company International
-
8/6/2019 The Shale Oil & Gas Illusion
2/46
-
8/6/2019 The Shale Oil & Gas Illusion
3/46
Promotion Of Shale Gas As BridgeTo 22nd Century Everywhere
Wall Street Journal.
Financial Times.
API.
.
The message was heardby everyone: Public policy makers
Oil service industry
Institutional investors
And the message sounded great! We really needed
some good news.
-
8/6/2019 The Shale Oil & Gas Illusion
4/46
U.S. Has Genuine AbundanceOf Shale Gas Basins
Unconventional natural
gas production nowaccounts for 46% of totalU.S. gas production.
Fledgling Barnett Shaleplay in Texas nowproduces 6% of all U.S.
natural gas.
Source: U.S. DOE Modern Shale Gas Development in the U.S.: A Primer - April 2009
-
8/6/2019 The Shale Oil & Gas Illusion
5/46
Conventional Natural Gas FlowIn Serious Decline
Shale Gas was badly needed
miracle. Conventional gas peaked in
1973 at 22.6 Tcf.
,50%.
By 2010, conventional gas flowwill be down to 6 Tcf.
3.5 decades of increaseddrilling could not stabilize thisdecline.
Source: U.S. DOE Modern Shale Gas Development in the U.S.: A Primer - April 2009
-
8/6/2019 The Shale Oil & Gas Illusion
6/46
Unconventional Gas SurgeKept Supply Flatish
Tax credit supported tightgas and started boom, which
continues to be core non-conventional production base.
Then came coal bed methaneboombut its growth petered
--- Projected ---
Barnett Peaks
.
Shale gas represented onlysliver of gas flow through2004.
Then Mitchell Energystechnology created shale gasboom.
By 2009, shale gas flows
equal in size to coal bedmethane.
Source: U.S. DOE Modern Shale Gas Development in the U.S.: A Primer - April 2009
----- ------
Barnett BoomBegins
-
8/6/2019 The Shale Oil & Gas Illusion
7/46
Three factors made shale
gas production economical(and technically) viable:
Advanced horizontal drilling: Late 1990s 40 drillin ri s
Shale Gas Miracle: Result OfTechnology Advances/High Gas Prices
capable of onshore horizontaldrilling
May 2000, 519 rigs can do thisdrilling
Hydraulic fracturing:
Busting rocks with high pressureslurries
Extremely high gas prices
About 80 90% of success was due to high gas prices.
-
8/6/2019 The Shale Oil & Gas Illusion
8/46
Technology Advances Not New
Long-reach horizontal drilling began in late 1980s as UPRCbegan exploiting Austin Chalk.
Giddings Field became Texas 9th largest oilfield before itsflow plummeted.
u t - atera we comp et ons y rau c rac ng create g antgas wells in south Texas from 1996-2002.
But, these ultra-high 80 100 MMCF/D IP flows soonsucked out the remaining gas.
Both these plays were initially described as new oil fieldmiracles.
The miracles were new in 1985 1990. Both petered out.
-
8/6/2019 The Shale Oil & Gas Illusion
9/46
Big Shale Gas FlowsCome Mostly From Barnett Shale Wells
Fort Worth Basins Barnett Shalehas created 80% of all shale gasproduction (3.7 Bcf/day in 2008).
Remainder is mostly Fayetteville,Antrim and Bakken (1 Bcf/day in
. , .
New future shale gas growth estimatedto come from shale plays now barelyunderstood:
Haynesville, Marcellus and Woodfordare biggest future hopes So far, industry has little data to support
future expectations
Source: U.S. DOE Modern Shale Gas Development in the U.S.:A Primer - April 2009
-
8/6/2019 The Shale Oil & Gas Illusion
10/46
Shale Gas Is Not A New Resource
First USA shale gas production was
Devonian aged shale in New Yorkstate in 1821.
First full-scale development was Ohio
Shale in Big Sandy Field in Kentuckyin 1920s.
By 1930s, Michigan's Antrim Shale
experiencing moderate development. Barnett Shale was first success of any sizeable flow (1992).
-
8/6/2019 The Shale Oil & Gas Illusion
11/46
As Barnett Play Matured, Lessons LearnedMoved To New Shale Plays
Second significant shale play with
far greater oil production is BakkenOil Shale (Williston Basin).
.
USGS (April 2008) released updatedassessment of undiscovered
technically recoverable BakkenShale oil at 3.65 billion Bbls oil,1.85 Tcf associated gas and 1,480 MMB/D of NGL.
-
8/6/2019 The Shale Oil & Gas Illusion
12/46
Shale Rocks Are Tight
It was not easy figuring how to bustup shale rocks.
Shale gas is 90%+ methane.
Shale rocks have extremely limitedvertically permeability.
Typical unfractured shale has
permeability of 0.01 to 0.00001 mD.(i.e. almost none)
Source: U.S. DOE Modern Shale Gas Development in theU.S.: A Primer - April 2009
-
8/6/2019 The Shale Oil & Gas Illusion
13/46
So Far, Current Shale MiracleIs All About Barnett Shale
Barnett Shale is located in Fort WorthBasin at vertical depths of 6,500 to
8,000 feet.
With over 10,000 wells drilled(mostly from 2005 to date), Barnett
Shale is dominant modern shaleproduction.
Barnett Shale covers area of 5,000square miles.
Original gas in place estimated is327 Tcf.
Recovered gas estimate is 44 Tcf.
Horizontal well spacing ranges from60 to 160 acres.
-
8/6/2019 The Shale Oil & Gas Illusion
14/46
Fayetteville/Woodford ShaleIs Even Bigger Play
Fayetteville Shale play is nearlydouble Barnett area (9,000square miles). Well spacing is80 to 160 acres/well.
,number of wells drilled annuallyjumped from 13 to 600.
Gas production jumped from
100 MMCF/year to 88.8+ Bcf/year.
Now, production comes from over 1,000 Fayetteville wells.
Source: U.S. DOE Modern Shale Gas Development in the U.S.:A Primer - April 2009
S
-
8/6/2019 The Shale Oil & Gas Illusion
15/46
Haynesville Shale Wells HaveHighest IP Flow Rates (So Far)
Haynesville (or Haynesville/Bossier)
is in North Louisiana/East Texas atdepths of 10,500 to 13,500 feet.
Full extent of play will only be known
after several more years ofdevelopment/well completions.
Thus far, best wells have initial flow
rates of 15 - 22 MMCF/D. Decline rates are very steep.
Dud wells are poor performers.Source: U.S. DOE Modern Shale Gas Development in theU.S.: A Primer - April 2009
M ll Sh l
-
8/6/2019 The Shale Oil & Gas Illusion
16/46
Marcellus ShaleMost Expansive Shale Gas Play
Marcellus Shale gas play spans six north-eastern states. Estimated production
depths range between 4,000 - 8,500 feet.
Area covers 95,000 square miles.- .
Gas content is relatively low.
Average well spacing is about 40 - 160
acres/well. Areas potential being frequently revised
up.
Source: U.S. DOE Modern Shale Gas Development inthe U.S.: A Primer - April 2009
-
8/6/2019 The Shale Oil & Gas Illusion
17/46
Antrim Shale Is Mature Play
Aside form Barnett, Antrim Shale ismost active developed shale gas play(12,000 square miles).
1980s.
From 1998 2008 Antrim gasvolumes have averaged 600
MMCF/day.
Source: U.S. DOE Modern Shale Gas Development in theU.S.: A Primer - April 2009
N Alb Sh l I A th
-
8/6/2019 The Shale Oil & Gas Illusion
18/46
New Albany Shale Is AnotherBig Volumetric Play
New Albany Shale is in Illinois
Basin at 500 - 2,000 feet depths.
Play covers 43,500 square miles.
At 80 acre spacing, area couldtolerate 348,000 individualwells.
To drill these would requiremassive expansion of global onshore drilling fleet.
Source: U.S. DOE Modern Shale Gas Development in the U.S.:A Primer - April 2009
-
8/6/2019 The Shale Oil & Gas Illusion
19/46
Bakken Shale: The Largest Play Of All
Williston Basin (Dakotas and
Montana) have 3.65 billion(3.65 trillion) barrels oftechnically recoverable oil.**
If only 800 billion barrelsrecoverable, it would tripleSaudi Arabias estimatedremaining proven reserves.**
*April 2008 USGS Updated Resource Assessment on Bakken Oil Shale.
-
8/6/2019 The Shale Oil & Gas Illusion
20/46
Amount Of Shale Acreage Is Vast
Plays Sq. MilesBarnett 5,000Fayetteville 9,000Haynesville 9,000
N/A?
arce us 95,000Antrim 12,000Woodford 11,000New Albany 43,500
Total gas plays 184,500Bakken Oil Shale
D illi E i Sh
-
8/6/2019 The Shale Oil & Gas Illusion
21/46
Drilling Experience ShowsShale Basins Vary In Quality
For years, resource assessors assumed tight rock
shale formations had equal disbursements ofrecoverable reserves.
This ended volumetric assessments of resources.
Study in 2003 revealed Green River Basin had highlyheterogeneous resource disbursement.
Barnett Shale Play clearly had sweet spots.
Haynesville also seems spotty thus far.
This makes accuracy of current resource assessment
dubious.
-
8/6/2019 The Shale Oil & Gas Illusion
22/46
Massive Additives Required
-
8/6/2019 The Shale Oil & Gas Illusion
23/46
Water is largest volume of fracing fluid.
Sand/ceramics/walnutshells are next largestfluid additive.
Massive Additives RequiredTo Frac Shale Wells
Acid, biocides,corrosion inhibitors,gelling agents, scaleinhibitors, surfactants,
etc. are also required.
All have messydisposal issues.
-
8/6/2019 The Shale Oil & Gas Illusion
24/46
Water Consumption Is Enormous
Additionally, shale gas wells require great volumes ofwaterTwo to four million gallons per well..But this isnot as much water as America uses in agriculture,municipal drinking water or power generation.
Vacuum trench haulers say Barnett wells usebetween 100,000 - 200,000 barrels per well.
This implies the Barnett, alone, has already consumed
half the bottled water used in USA last year.
Proper charges for water use will soon be an issue.
-
8/6/2019 The Shale Oil & Gas Illusion
25/46
Recycling Frac Water Costly Exercise
Frac flow-back salt content ofBarnett Shale averages 100,000
parts per million. Marcellus is over200,000 ppm (sea water is only33,000 ppm).
barium, calcium, bicarbonate, iron,magnesium sulfate, sodium chlorideand strong _________.
Reinjection ____ saltwater disposal
wells costs approximate $10/Bbl.
Integrity of disposal well segregationfrom useable aquifer is serious local
concern in some areas.
-
8/6/2019 The Shale Oil & Gas Illusion
26/46
Core Area of Barnett (Ft. Worth Basin) Very Tight
Permeability ranges from.00007 to .0005 mD.
Porosities range from 3% to 5%.
Commercial production onlyachieved through hydraulicfracture simulation.
All Shales Are Not Created Equal
-
8/6/2019 The Shale Oil & Gas Illusion
27/46
All Shales Are Not Created Equal(SPE #115258)
Most common fallacy in quest for optimum simulation
in shale plays is to treat them all like granddaddyBarnett.
Reality: Shale plays similar to coalbed methane or tightsands: Each reservoir is unique
Simulation and completion methods should be based onindividual petrophysical attributes.
-
8/6/2019 The Shale Oil & Gas Illusion
28/46
Shale Gas Wells Consume
-
8/6/2019 The Shale Oil & Gas Illusion
29/46
Shale Gas Wells ConsumeVastAmounts Of Energy
The labor intensity to crack shale gas requires hundreds of trucksdriving to well sites daily.
The pumping fuel requirements to force high pressure slurriesinto deep vertical and long reach horizontal wells is ferocious.
Both use up lots of diesel/gasoline. Shale gas exploitation
is extremely energy
intensive.
Americas Reliance On Shale Gas
-
8/6/2019 The Shale Oil & Gas Illusion
30/46
America s Reliance On Shale GasCould Be Dangerous
Shale gas proven reserves are easy to book.
Successful land plays create great value to land owners/lease holders.
Ver hi h as rices make shale as economical but ra id
declines are very real.
Lack of drilling equipment growth is very real.
Shale gas is hard to sustain without exponential growth in morewells and water use.
Shale Gas Boom Collapsed
-
8/6/2019 The Shale Oil & Gas Illusion
31/46
Shale Gas Boom CollapsedNatural Gas Prices
Shale gas also occurs in areaswithout adequate pipelines.
Trunk gas pipelines are inconventional basins which are
Insert rig activity graph
.
Analysts and EIA began assuminggreat growth in supply.
Gas price then collapsed, inducingcollapse in drilling.
Now, industry is exposed to steep
decline rates.
How Fast Will U.S.
-
8/6/2019 The Shale Oil & Gas Illusion
32/46
How Fast Will U.S.Gas Supply Drop?
It took 4-fold increase in gas well completions
to keep U.S. gas supply flat. Now, we are heading towards drilling 60%
fewer wells.
Supply will soon rapidly decline.
Declines will be hard/impossible to stop.
Watch U.S. gas supply drop by 20 - 25%within 24 months or so.
I Sh l G E i ll S t i bl ?
-
8/6/2019 The Shale Oil & Gas Illusion
33/46
Is Shale Gas Economically Sustainable?
If gas prices high enough, pay-back is rapid.
But, at $4 - $5 gas, it take 3 4 years to recapture wellcosts.
O erators are now ur in contractors to shar l lower
costs so economics break-even. Drilling companies, pumping services and vacuum truck
operators now laying off workers to survive the down-
town. Some attractive economics based on very optimistic
ultimate estimated recovery rates.
Scary Consequences If
-
8/6/2019 The Shale Oil & Gas Illusion
34/46
Sca y Co seque cesShale Gas Boom Unsustainable
USA depending on strong growth in shale gasproduction as only substitute for declining conventional
natural gas. Gulf of Mexico natural gas has declined by 60% in past
5 ears.
To sustain current shale gas production, exponentialgrowth in rigs needed, massive labor additions andgrowing water contamination.
This would force costs way up. Cost of gas would need to be very high.
But, without this treadmill, U.S. gas supplies will drop.
An Army Of Rigs,Trucks,Teas And Supplies
-
8/6/2019 The Shale Oil & Gas Illusion
35/46
y O gs, uc s, eas d Supp esNeeded For Shale Gas Exploitation
Assuming full exploitation of 185,000 square miles atwell spacing of 80-acres implies: 185,000 sq. miles = 118,400,000 acres
118,400,000 acres 8 = 1,480,000 shale gas wells
, ,rig years of drilling.
Assuming current rates of water use per well (4 milliongallons), 5,920,000,000 gallons of contaminated water( 6 trillion gallons).
None of this is remotely possible. It is a conceptualdream.
Bakken Oil Shale Enormity
-
8/6/2019 The Shale Oil & Gas Illusion
36/46
yIs Beyond An Illusion
While Williston Basin is vast, knowledge of extent ofBakken Shale is limited.
The shale is deep. Horizontal wells are long.
Wells can initially flow up to 1,800 B/D, but they soondrop to 100 200 B/D.
Wells are complex to drill and take skilled geo-steeringoperators.
What Motivates USGS Claims?
-
8/6/2019 The Shale Oil & Gas Illusion
37/46
What Motivates USGS Claims?
Why USGS makes such exaggerated claims aboutBakken (3 times Saudi Arabias remaining oil) ispuzzling.
But, public policy leaders hear the message and arerelieved.
Investors read the hype and invest.
Service companies relish the coming boom.
There Is Precedent For These Illusions
-
8/6/2019 The Shale Oil & Gas Illusion
38/46
There Is Precedent For These Illusions
For 50 years, everyone assumed Middle East residedover giant ocean of cheap oil.
Austin Chalk (first use of horizontal drilling) was goingto stretch across most of Texas.
High volume deep gas wells were going to lastforever.
Deepwater Gulf of Mexico oil fields were all going toproduce at far higher peak rates for long time.
None of these hopes panned out.
Utah/Colorado Oil Shale (Kerogen)
-
8/6/2019 The Shale Oil & Gas Illusion
39/46
Is Harshest Illusion
Shell Oil and Schlumberger are promoting the viabilityof oil shale in Western Slope of Rockies and Utah as
our answer to oil scarcity.
Concept to retort kerogen involves freeze zones tocrea e ce- oxes o cap ure ea a na y urnskerogen out of shale.
Water and energy intensity of this concept not yet
known. Many powerful believers now know that oil shale can
also solve Americas energy problems.
Oil And Gas Industry Needs To
-
8/6/2019 The Shale Oil & Gas Illusion
40/46
Learn From Past Mistakes
For decades, leading industry spokesmen haveoptimistically promoted vast resource endowments.
This created sense that oil and gas prices would alwaysstay low.
Both were illusions.
Supply of oil and gas in USA and world is declining.
Price of both needs to soar.
Gas is in worse shape than oil.
Do Not Blame Obama Or The Greens.
-
8/6/2019 The Shale Oil & Gas Illusion
41/46
We Created This Ourselves.
New Administration has few supply concerns.
They heard the industrys message.
The Greens have no time for access to offshore.
They are also appalled by water disposal problemscreated by shale gas production.
There is no reason for anyone to question industrysoptimistic supply growth for all shale resources.
What Are Real Economics Of Shale Plays?
-
8/6/2019 The Shale Oil & Gas Illusion
42/46
What Are Real Economics Of Shale Plays?
Given extreme decline rates, simply recovering total
well costs will capture high amount of high productionvolumes.
initial flow, critical to know how long small tailproduction will flow.
Hard to get real data to address these importantquestions.
-
8/6/2019 The Shale Oil & Gas Illusion
43/46
Drilling Contractors And Service Companies
-
8/6/2019 The Shale Oil & Gas Illusion
44/46
Are Industrys Saviors
These companies were not gouging their customersin 2008.
They were out of spare capacity and experiencedheavy people shortages.
Their assets are too rusty.
Low day rates made sorely needed new assetsunaffordable.
Suppliers did not have capacity to expand.
But, shale gas play required more of everything.
Industrys Dilemma
-
8/6/2019 The Shale Oil & Gas Illusion
45/46
Industry s Dilemma
America imprisoned by need for rapid growth in shalegas:
Conventional gas in steep decline Best-in-class shale gas wells in steep decline
Service and drilling companies in crisis: No one can afford the tools
Service companies cannot cut costs by 20 50%.
E&P companies have to drill more wells to offset rapid
declines. None of this works unless natural gas prices soar and
stabilize.
The Gas Model Has BeenU i bl F Y
-
8/6/2019 The Shale Oil & Gas Illusion
46/46
Unsustainable For Years
Been there, done thator Cest la vie.all over again.
As conventional gas supplies dropped, salvation alwayscame from new places:
Rise in Canadian im orts
Deep gas in south Texas Associated deepwater gas
LNG surge supply
Finally, shale gas, which could last for a century.
Few examined the detailswhere the devil lurked!