Memorandum submitted by Shell |
(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
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
3. There is currently no commercial UCG production
in Europe. European geological history is complex, and unlike
North America, suffers from a paucity of critical data to assess
accurately whether UCG can ultimately be developed commercially.
4. The key geological components appear to
be present in many sedimentary basins, but simple extrapolation
from North American analogues is difficult. At this time,
it is not evident which areas of Europe will ultimately host commercial
UCG production. Better assessment of UCG potential will first
require early (one to four years) investment in seismic operations,
exploration drilling and geological studies across many potential
areas, followed by significant investment in appraisal drilling
and production testing (two to five years). It is estimated that
20-40 wells (exploration, appraisal, pilot) are required to prove
commerciality in many basins. Exploration and production companies
with diversified portfolios and revenues are better able to absorb
this exposure, but to succeed they will also need positive government
support (eg the right fiscal framework and permitting and other
5. The potential is nevertheless there. Chart
1 below from WoodMackenzie gives an indication of how resources
could be distributed across Europe. 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 present, the estimates on potential resource
size have a large range of uncertainty. So although the potential
could be substantial (WoodMackenzie's optimistic view is that
by 2025 Europe could produce 5,000 mmcfd), 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.
DISTRIBUTION OF UCG IN EUROPE
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:
- Successful exploration wells proving the presence
of unconventional gas resources.
- Successful pilot projects proving commercial
gas production is possible from unconventional reservoirs.
- Examples of developments scaling up to material
- Government and local authority/community support
- regulatory and environmental.
- Supply chain/contractor development with competition
driving down costs.
- Sustained interest and investment by oil &
- Development of a Mergers and Acquisitions market
in unconventional projects.
OVERVIEW OF KNOWN COMPANIES WITH UCG POSITIONS
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
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.
LONG-TERM GAS SUPPLY COST-CURVE
Source: IEA World Energy Outlook 2009
What are the challenges to the development of
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
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:
- Cut the water usage and need for disposal.
- Increase the ability to re-use water.
- Reduce truck trips and dust associated with water
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.
17. Commercial development in Continental Europe
will ultimately depend largely on:
- Gas prices.
- Continued technological advances to supplement
those that are already in place.
- Environmental and social considerations.
- Fiscal and regulatory regimes.
- Wider governmental energy policies.
- Transmission infrastructure.
- 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 (eg
> 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 (eg
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
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.
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?
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:
- Groundbirch and Deep Basin in Western Canada.
- Pinedale in Wyoming.
- The Haynesville Shale play of northwest Louisiana.
- The Rio Grand Valley (Wilcox and Vicksburg plays).
- New positions: about 250,000 acres in the Eagle
Ford shale play, which complements Shell's existing South Texas
- More than 650,000 acres in the Marcellus Shale
play, with the recent acquisition of East Resources in Pennsylvania.
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's Upstream 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.