Shale Gas
Memorandum submitted by Shell (SG 14)
Executive Summary and Introduction
i.
Following the success seen in Unconventional Gas (UCG) production in North America, Shell also sees potential for UCG development across the globe, and particularly in Europe, China, Australia and Southern Africa, although it is not expected that the growth will be uniform. The estimated recoverable global resource base in unconventional gas is equivalent to 123 years of current global production.
ii.
In Europe, Shell believes the biggest untapped potential is found in France, Germany, UK, Hungary, Poland, Romania and Sweden. However, more extensive exploration programmes over the next 2-4 years are needed to better assess the resource. At the moment it is difficult to see shale and tight gas having the same, game-changing impact in Europe as in North America and certainly not before 2020. It could still however help lift production levels and further diversify Europe’s supplies.
iii.
The development of UCG resources outside of North America will depend on domestic gas price developments in different countries and regions, local gas infrastructure, government and community support, and the extent to which environmental issues can be effectively addressed. The Shell experience in producing UCG in North America, where the implementation of new technologies has significantly reduced the environmental footprint of UCG activities, demonstrates that if sufficient amounts of gas are found, it is possible to extract UCG in an economically, environmentally and socially acceptable way.
iv.
Locally and globally, a greater abundance of gas could encourage a move from coal-fired electricity generation to gas-fired generation. Coal-fired power is currently responsible for the fastest sector growth in CO2 emissions worldwide. Modern gas-fired plants emit between 50% and 70% less CO2 than coal plants per kilowatt hour of electricity generated. Hence replacing coal with natural gas is the surest, fastest and cheapest way to reduce CO2 emissions over the next ten vital years. For example, Shell analysis shows that for the UK, replacing existing coal with gas power plants would lead to a 20% cumulative reduction in UK CO2 emissions by 2050. Unconventional gas production in countries such as China could encourage an increase in the use of gas for electricity generation in these regions, with potentially significant positive impacts in reducing global CO2 emissions.
Where and how great are unconventional gas resources?
1.
The Shell view of global unconventional gas resources is in line with that put forward by the International Energy Agency in its extensive look at gas markets in 2009. The IEA estimate recoverable resources of UCG globally (tight gas, shale gas and coalbed methane) to be more than 380 tcm (13,700 tcf), out of a total estimate resource base of 920 tcm (33,100 tcf). This is equivalent to 123 years of current global production, which when added to recoverable conventional gas resources, is estimated to be equivalent to over 250 years of current global production. Unconventional gas resources are more widely dispersed compared with conventional. The regions with the largest share of these UCG resources are North America (25%), Asia-Pacific (30%) and the FSU (17%). The IEA estimate Europe as having 35 tcm (= 1,260 tcf) of gas resources in place. Both the US and China have similar unconventional gas resources and the estimates of technically recoverable gas in both countries is greater than 1000 tcf. However, the type of gas resources differs between the two countries with resources in the US split roughly between 60% shale gas, 33% tight gas and 7% coal bed methane (CBM). Resources in China on the other hand are split roughly between 47% shale, 34% tight gas and 19% CBM.
2.
As well as the success seen in UCG production in North America, Shell also sees potential for UCG development across the globe, and particularly in Europe, China, Australia and Southern Africa, although it is not expected that the growth will be uniform. This growth will heavily depend on domestic gas price developments in different countries and regions, local gas infrastructure, government and community support, and the extent to which environmental issues can be effectively addressed. If sufficient amounts of gas are found, Shell’s view is that it is possible to extract UCG in an economically, environmentally and socially acceptable way.
Unconventional Gas in Europe
Chart 1: Distribution of UCG in Europe
Source: WoodMackenzie
6.
One of the promising signs in Europe is the increase in the number of companies participating in UCG exploration across Europe. As Chart 2 below shows, less than five years ago there were only a few companies active in UCG in Europe. For Europe, from the beginning of 2008, almost all onshore basins with speculative UCG potential are now leased or under application, from a broad competitor base – Majors, Independents, Small Players and NOCs.
7.
The key indicators that unconventional gas in Europe could be material would be:
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Successful exploration wells proving the presence of unconventional gas resources.
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Successful pilot projects proving commercial gas production is possible from unconventional reservoirs.
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Examples of developments scaling up to material commercial projects.
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Government and local authority/community support – regulatory and environmental.
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Supply chain/contractor development with competition driving down costs.
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Sustained interest and investment by oil & gas majors.
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Development of a Mergers and Acquisitions market in unconventional projects.
Chart 2: Overview of known companies with UCG positions in Europe.
Unconventional Gas in the UK
8.
Current activity on UCG in the UK is exploration focused and there is no commercial production at this time. There is potential for CBM production across the legacy UK coal basins. There is potential for shale gas in Bowland near Blackpool (where a small start-up called Cuadrilla is currently drilling) and in the Weald Basin of SE England.
9.
Many UK areas of interest are relatively small (especially by comparison with North America) and there are no reliable estimates of reserves potential at this time. The non-technical risks in the UK are similar to those in the rest of Europe and are highlighted below. As UCG activity requires many more wells to be drilled (even if drilled from a single well pad) and more activity than conventional exploration and production, regulators will need to review whether they have the appropriate framework and resources available to deal with the increased level of well permitting, environmental permitting and legislation, production license permitting etc that will be required.
10.
In terms of the implications for the UK of global UCG development, unconventional gas resources are more geographically diverse therefore their development could enhance the diversity of gas supplies to Europe and the UK, with the consequent benefits for gas security of supply.
What do the economics of developing unconventional gas look like?
11.
The IEA have estimated that the recoverable unconventional gas reserves cost between $2.70/MBtu and $9/MBtu to produce (Chart 3 below). In North America, production costs have declined significantly over time and are now towards the lower end of the IEA’s range, and hence are competitive with conventional supplies. In Europe, WoodMackenzie have estimated that the costs of developing unconventional gas would have to fall by a minimum of 20% for European gas shale to be economical with current European gas pricing. In Shell’s operations in North America, better wells are being drilled much more cheaply than and twice as fast as in the early days, and have continuously improved over time. For example, since acquiring the Pinedale tight gas field in Wyoming in 2002, Shell has used multiple new technologies including micro-seismic mapping and underbalanced drilling to treble production, while reducing well costs and delivery times by over 25%, despite the surge in industry costs. This expected moderate cost of supply compared to current global gas prices - in combination with a sustained improvement in costs as technology continues to improve - creates positive prospects for further development of this resource globally.
12.
Key drivers in bringing costs down are continual development and implementation of new technologies, efficient business models and scaling, and importantly, competitive supply chain/contractor companies able to support and resource development of unconventional gas resources.
Chart 3: Long-term gas supply cost-curve
Source: IEA World Energy Outlook 2009
What are the challenges to the development of unconventional gas?
13.
The development of UCG comes with many challenges, particularly environmental, and addressing these challenges is key to gaining public acceptance for UCG exploration. Shell is tackling these concerns and is focussed on integrating transparent constructive community engagement, advancing efficient resource development and developing technical and engineering solutions to help reduce the environmental and community impact. For example, improving well performance and surface engineering can aid the development of UCG in a sustainable manner. At Pinedale, Shell is limiting the environmental impact of the facility by using directional drilling with fit-for-purpose rigs to reduce operational footprint; and improving and monitoring drill rig engines to decrease NOx emissions and expedite reclamation of drilling sites.
14.
One of the key public concerns around UCG development is that some of the techniques used to produce UCG, such as hydraulic fracturing, could affect local water resources. Hydraulic fracturing is a common practice to stimulate tight or low permeability natural gas (and sometimes oil) wells to increase the production rate. It is a safe, environmentally sound engineering practice that involves pumping fluid and a proppant into oil and natural gas wells to fracture resource-rich rock beds increasing production. Hydraulic fracturing fluid is typically composed of 99.5% water and sand. The other half percent contains small amounts of chemical components, most of which are also used in household products. Fracturing typically takes place thousands of feet below the water table, well bores are encased in concrete and well design incorporates several barriers to help ensure nothing contaminates water supplies.
15.
Fracturing can require the use of large volumes of water, with the actual volumes varying substantially between wells (though in relative terms, more water is used in other parts of the energy sector such as in nuclear generation or for other purposes such as agriculture). To mitigate these impacts, Shell is pursuing solutions for water usage and disposal. At the Pinedale site Shell has committed to install a Liquids Gathering System (LGS) that will:
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Cut the water usage and need for disposal;
·
Increase the ability to re-use water; and
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Reduce truck trips and dust associated with water removal/hauling.
16.
In addition, a water recycling/reuse program in place for completions is lowering the water usage and reducing disposal issues. Shell has reduced its use of fresh water by about 50% by reusing treated fracturing water.
Europe
17.
Commercial development in Continental Europe will ultimately depend largely on:
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Gas prices;
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Geology;
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Continued technological advances to supplement those that are already in place;
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Environmental and social considerations;
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Fiscal and regulatory regimes;
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Wider governmental energy policies;
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Transmission infrastructure;
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Industry competition.
18.
Importantly for Europe, key technologies will be those that help deliver solutions to environmental challenges and community concerns, for example; drilling of multiple (e.g. > 20 wells) long horizontal wells (>1.5 km) from a single well pad that significantly reduce overall well density and allow for efficient modularisation of other development facilities (e.g. water ponds to support formation hydraulic fracturing (or "fraccing"); facilities to 100% recycle fluids used in formation fraccing; and more efficient fraccing techniques that employ less equipment and fluids.
19.
Many European countries have strong gas demand, and successful development is likely to first meet local market demand, thus potentially freeing up supply to other parts of Europe. Once UCG systems are proven to be commercially viable, it is possible that UCG production growth could be accelerated with concomitant significant increases in supply chain capability, requiring delivery of new drilling rigs, fraccing equipment, drilling tools, development facilities and training of personnel. Rapid growth of UCG production is also likely to require new investment in European gas transport infrastructure and transparent commercial structures to facilitate pan-Europe gas sales.
20.
One of the challenges in developing unconventional gas in Europe is that some of the reserves are located within proximity of densely populated areas. The industry is developing methods to limit the environmental footprint by minimising the area required for drilling. Shell development planning for Europe at this time incorporates drilling of multiple horizontal wells from a single well pad as the base case scenario. Wells of this type are at the forefront of drilling technology. By providing more efficient access to small or multiple isolated pockets of oil and gas they bring down the cost of development and, most significantly, avoid the impact of constructing multiple production sites or surface tie-backs, with obvious benefits for resource demand and environmental impact. In addition, the advances made in drilling horizontal wells over distances of 1,500 metres and more mean that horizontal wells can replace many vertical wells, reducing the surface area disturbed.
21.
One of the key successes of UCG in North America has been the rapid development of the supply chain to support the increase in UCG development. Although an onshore drilling industry of comparable magnitude does not exist in many regions outside North America, should profitable projects appear in other regions, the oil and gas industry is capable of responding to take advantage of developments in new geographical locations – though this may take time. Similarly, a lack of transmission infrastructure in areas where there has not traditionally been any gas production could also challenge the development of UCG in these areas. Putting a regulatory regime in place to support the development of UCG could facilitate a more rapid development of both the supply chain and distribution capacity.
China
22.
In China, key factors for the development of UCG will include favourable gas prices, technologies that work, and the know-how to apply the right technology mix to make the production of unconventional gas economically viable. China has put in place a number of policies to facilitate the development of unconventional gas such as encouragement for foreign cooperation, supportive fiscal terms and measures to build up local capability.
What are Shell’s unconventional gas activities?
North America
23.
Shell has developed a strong position in unconventional gas in North America. The recent addition of further acreage will enhance the growth potential, bringing Shell’s total North American unconventional gas position to some 3.6 million acres, and resource potential of over 40 tcfe (>7.1 Bboe). Shell is active in 6 key Tight Gas plays in North America:
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Groundbirch and Deep Basin in Western Canada.
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Pinedale in Wyoming.
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The Haynesville Shale play of northwest Louisiana.
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The Rio Grand Valley (Wilcox and Vicksburg plays).
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New positions: about 250,000 acres in the Eagle Ford shale play, which complements Shell’s existing South Texas operations.
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More than 650,000 acres in the Marcellus Shale play, with the recent acquisition of East Resources in Pennsylvania.
Asia-Pacific
24.
Building on its experience in North America, Shell is building tight gas positions globally including the Sichuan and Ordos Basins in China, and is in the early stage of shale gas exploration in Sweden, the Lower Saxony Basin of Germany (operated by XOM), Ukraine, South Africa and the Sichuan Basin in China. Shell has recently acquired together with PetroChina the Arrow CBM assets in Eastern Australia where there is both exploration and production. Shell is also exploring for CBM in the North Shiloh permit, as well as in the Ordos Basin in China. Unconventional gas is going to be one of the largest opportunities for growth in Shell’sUpstream business in China and holds the potential of making China one of Shell’s key Upstream countries.
25.
Shell’s broad global exposure to many UCG systems has demonstrated that there are substantial differences among UCG plays. Each UCG play offers different technical and non-technical challenges for which solutions must be developed to achieve commercial success. Meeting these challenges requires expertise, innovation and investment, and those companies that can rapidly learn from diversified exposure are best placed to deliver success when exploring new areas.
January 2011
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