Since the mid 2000s a new technology – Unconventional oil and gas – has created a boom in the United States. Today Unconventionals are being talked about as the next major technological revolution.
What is an “Unconventional” hydrocarbon field, and can they have sufficient impact to provide all the required fuel for an increasingly affluent world? In short, can they save us?
- At the end of 2012 the US experienced a supply gain of 1.1 million barrels a day vs. the previous year – a record. OPEC expects US oil & associated liquids supply to rise to 10.59 million barrels a day by 2013, the highest since 1985.
As the name suggests, an Unconventional field is not your grandfather’s oilfield. Conventional oil fields produce oil or gas from porous rock, usually trapped beneath an impermeable layer in a structural closure underground. Wikipedia gives a reasonable description of conventional oil-fields. Another description can be found at Geomore. Conventional oilfields in the US are in production decline.
In contrast, Unconventional oil and gas is produced from rocks that would not have previously been considered an effective reservoir.Unconventional hydrocarbons can be oil or gas. In some cases production is directly from the source rock that creates the hydrocarbons. In other cases production is from a “reservoir” with such a low porosity and permeability that previously it would not have been considered a reservoir at all. A third type of Unconventional is the production of fluids that were previously too viscous or simply too immobile to produce, even from within a good reservoir. Additionally, coal bed methane or coal seam gas extracts gas from subsurface coal deposits. Again, Wikipedia gives a reasonable description of Unconventionals, and a Haliburton report on US Shale Gas provides a bit more detail. The Economist has a series of good articles, if you have access, from 2012:
- An unconventional bonanza
- America’s bounty – gas works
- Fracking – Landscape with well
- Global reserves – a world with plenty
How Did it Happen?
Whilst Shell (and others) took a long hard look at the in-situ surface retorting of shale oil as a response to the 1970s oil shock, conventional exploration success, limited technology, and terrible economics meant that the method was effectively shelved, only recovering at the turn of the 21st century.
The real breakthroughs were not made by the majors, but by small entrepreneurial American firms. Through the 1980s and 1990s, almost completely out of sight from the wider industry, George Mitchell, the boss of an oil services company, and his engineers slowly developed the techniques used to exploit shale gas in the Barnett Shale formation in North Texas. They knew that there was a ” tremendous source bed that’s about 250-feet thick.’ in their acreage, they just needed to get hydrocarbons out of it. It wasn’t easy. George Mitchell saw the potential for improving a known technology, fracking, to get at the gas. Big oil and gas companies were interested but could not make the technology work. Mitchell spent ten years and $6m cracking the problem, whilst everyone told him he was just wasting his time and money.
Today the technology is in use in the Marcellus, Haynesville, Barnett, Utica, Eagleford, Bakken, and other shale beds, for both gas and oil, and increasingly in other shale areas around the world.
Mitchell sold Mitchell Energy & Development to Oklahoma City-based Devon in 2002 for $3.5 billion in cash and stock.
The technology has been so successful that in early 2012 so much gas was produced that prices dipped to less than $2 per million Btu (British thermal units, a measure of heating power). With US reserves in the order of 1,275tcf (37tcm) recoverable, two-thirds of which is shale gas (the rest tight gas and coal-bed methane), many global companies are now moving their international manufacturing or petrochemical plants back to the US to access the cheap energy. Obama has claimed that the US has over 100 years of gas supply at current consumption…
Gas is also beginning to replace coal in the US energy mix, with the knock on effect that the US coal industry is now shipping more of their product to China & Europe. Not only that, but between 2007 and 2012 America recorded the world’s largest decline in greenhouse-gas emissions (450m tonnes, although the failing economy played a role). Despite its far greater effort to tackle climate change the European Union saw its emissions rise, partly because its higher gas prices (linked to oil) led to an increase in coal-fired power generation.
Another Unconventional, not considered to date, but getting press coverage as I write this is the successful extraction of hydrocarbons from gas hydrates. The resource has been known for decades, but the technology of extracting useable hydrocarbons from hydrates is in its very earliest days. It is not clear if the Japanese techniques will work commercially at scale, but a Japanese study estimated that the world has just under 40,000tcf (1.1tcm) of methane hydrate resource.
The oil and gas industry, searching for better returns after their recent success crashed the market value of gas, is now chasing oil-rich shales and the lucrative associated liquids.
The key technological step that opened up the world of Unconventionals was improved drilling & completions technology – the “fracking”. Succesful fracking really boils down to two key engineering requirements:
- Extended lateral drilling – high precision horizontal drilling through a formation – enables more of a selected rock type to be exposed to the drilling pipe. This technology, used offshore in conventional deep-water exploration where each well can cost >$100m, matured through the 1980s and 1990s.
- Fracking – artificial fracturing of the rock – allows the man-made creation of permeability in a previously impermeable rock, through which hydrocarbons can then flow to surface. This was the trickiest bit, and today uses high pressure pumps to push large amounts of water and hi-tech polymers into the formation to hydraulically fracture it, and then fine sand and hi-tech propants to keep the fractures open. Fracking technology continues to evolve today – it’s a fast moving environment, as companies struggle to understand the fracking mechanics of different types of rock.
How Effective is Unconventional Production on a Global Scale?
While the Unconventional story is a significant and impressive technical and industrial achievement, it is not without issues, both environmental and commercial. The technology uses a large amount of water, and has been accused of contaminating drinking-water aquifers and of causing earthquakes near active drilling sites. It is also “activity” rich, with a huge number of active rigs, transport, shipping and other disruption affecting communities. On the commercial side, the large volume of oil that Unconventional technology promises to release will only do so at a significant oil price. Break-even for oil shale is reported to be in the order of $90. Finally, and perhaps most worryingly, it is not clear that Unconventionals will really have the needed impact at the global scale to meet the challenge of 21st century oil demand. As stated in The History of Oil page:
the IEA predicted in 2007 that 64 million barrels per day (mbpd) of new oil capacity will be required to come onstream between by 2030 in order to meet anticipated demand (if demand grows at 1.6% per year & oilfield declines are as expected). In BP’s recent Energy Outlook 2030 they forecast an increased oil demand of 16 million barrels, up to 104 million barrels per day of production, but they do not discuss losses from oilfield decline.
Can Unconventional liquids fill this gap?
- After a very significant ramp up in activity from ~2008, Unconventional oil production in the United States was approximately 2 million barrels a day in 2012.
- It’s not even clear if the huge amount of activity in US Unconventionals has actually offset production declines elsewhere around the world in 2011-2012.
Even if Unconventional production can help the world meet future demand growth in the medium term, we may be storing up trouble for the future. Conventional oilfields have a relatively moderate decline curve. As, in aggregate, this gets worse across the globe, we may have some time to consider this warning and act upon it. Deepwater oilfields often decline more quickly, due to the inability of companies to work over sub-sea wells. Unconventional oil wells decline even faster (gas even more so). Thus it is possible that Unconventionals could be a short-lived resource on an historical scale, offering the illusion of energy security only for production to collapse faster than ever. We could end up with an even shorter “warning window” as the last of the fields deplete. I expect to hear more about Unconventional depletion as the segment matures.
Great, but Maybe not Great Enough
US Unconventionals are an impressive story. They are making some folks rich, and driving a lot of employment through the projects themselves and the cheaper energy that they create. But whilst US may soon even over-take Saudi Arabia as the world’s largest oil producer later this decade, the extra production will not even account for the US’s oil consumption, let alone account for the world’s declining conventional oil fields and future demand growth. For that we will have to apply the technology across the world, and even then it is not clear that it will work to the required scale at this stage. Engineering, shale geology, environmental politics, geo-politics, and commercial considerations will all play a roll. Watch this space.
Some Issues with Unconventionals
Even if Unconventionals are able to flood the world with cheap energy, the industry will not be without its issues, some of which are quite severe. The techniques involved in extracting Unconventional oil are a break from the past in the industry, and come with new challenges.
Water (& Truck Traffic)
Hydraulic fracking of Unconventional reservoirs and thermal production from mining of oil sands both require significant volumes of water.
The water requirement for Unconventional oil and gas is 1-3 orders of magnitude greater than conventional production. Fracking a single Marcellus well may use 2.5 – 8 million gallons of water (up to 220,000bbls) in a single week. This water is mixed with sand, oils, gels, acids, alcohols and various manufactured organics chemicals at the wellhead before injection at high pressure. That can mean 500 or even 1000 truckloads of water for every well drilled.
Somewhere between 60-90% of the water used remains underground, with the rest returning to the wellhead and requiring disposal or re-use.
It’s worth noting that total production from an Unconventional shale play is highly dependent upon the drilling rate, as production from each well declines rapidly. Thus production from shale plays is heavily upon water availability.
Other Unconventionals also use lots of water. Currently, Canadian oil sand mining requires 2-3 barrels of water per barrel of bitumen produced & upgrading of the bitumen to a saleable product takes an additional 1-2 barrels. Steam operations typically require 8 barrels of water per barrel of oil.
Commonly the water used in Unconventional production is from freshwater sources, either local rivers or aquifers. Increasingly Operators are using saline aquifers. They are also reducing their water usage. Average water use per well completion in the Eagle Ford play in West Texas has reduced from 18.5 – 13.6 thousand cubic metres since 2010.
However, water use should be put in context. Unconventional production still uses much less water than livestock or irrigation.
Coalbed methane also creates large volumes of water. For the United States as a whole the EIA & EPA estimated that 47 billion gallons of water was pumped out of coal seams in 2008, equivalent to the water use of San Fransisco. Around 45% of this was discharged to the surface without treatment.
Unconventional oil production from mining sites such as the Canadian oil sands clearly have a large impact on the landscape. However, Unconventional production of Shale Gas and Shale Oil is also more intensive than conventional production, requiring greatly increased drilling and closer well spacing.
Local residents have complained of increased earthquakes near drilling & fracking of Unconventional deposits. Cuadrilla was temporarily suspended from Operations subsequent to series of low magnitude earthquakes in northern England, UK. However, it is not clear if this perception is reflecting a real increase in low magnitude earthquakes.
On June 19, 2012 The United States Senate Committee on Energy & Natural Resources held a hearing entitled, “Induced Seismicity Potential in Energy Technologies.” Dr. Hitzman of the Colorado School of Mines testified that “About 35,000 hydraulically fractured shale gas wells exist in the United States. Only one case of felt seismicity in the United States has been described in which hydraulic fracturing for shale gas development is suspected, but not confirmed. Globally only one case of felt induced seismicity at Blackpool, England has been confirmed as being caused by hydraulic fracturing for shale gas development.”
In contrast the USGS has been investigating the recent increase in the number of >3 magnitude earthquakes in the midcontinental US noting a six-fold increase in 2011 over 20th century levels.