Risks and opportunities associated with shale plays as unconventional projects go global. (Part 1/5)
Posted by D Nathan Meehan November 7, 2013

Some of this material was prepared for presentation at the ADIPEC 2013 Technical Conference, Abu Dhabi, UAE, 10-13 November 2013 in a presentation titled “A Consistent Approach to Source Rock Resource Evaluation and Optimization.” This is the first in a series of five blog entries on the subject.

The commercialization and widespread development of shale resources in North America has been dramatic and substantial, reversing longstanding declines in oil production and reserves and sharp increases in natural gas production. Figures derived from the BP Statistical Review of Energy for 2013 (BP, 2013) illustrate this dramatic change. Figure 1 shows the long decline in oil reserves followed by a marked increase beginning around the time of active development in the Bakken and Eagleford plays.

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Figure 1 Historical US Oil and Gas Reserves (BP, 2013)

Gas reserves had held relatively steady in the US since the late 1980s but began to increase with the active development of the Barnett shale play using long lateral, multiple-stage hydraulically fractured wells and water fracs.

 

US historical oil and gas production

Figure 2 US Oil and Gas Production (BP, 2013)

 

Figure 2 shows the reversal of the dramatic decline in US oil production and increase in natural gas production. These increases in production contributed to a decrease in U.S. imports of crude oil from a peak of more than 10.5 million BBL/D in August 2006 to 7.7 million BBL/D in June, 2013 (U.S. Energy and Information Administration, 2013).  The characteristics of current shale plays include high initial rates and rapid declines. One consequence of this behavior coupled with relatively conservative booking practices for proved undeveloped reserves in shale plays is that the reserve life index (R/P ratio) has dropped following modest recent increases (Figure 3).

US historical reserve life

Figure 3 US Oil and Gas Proved Reserves Life (R/P ratio) (BP, 2013)

 

Drilling and completion activity levels in shale plays outside the US and Canada have not yet resulted in notable increases in production. The US EIA (U.S. Energy and Information Administration, 2013) indicates technically recoverable resources (TRR) of 345 billion barrels of oil and 7,299 TCF of gas from the areas they have assessed. Their assessment covered 137 formations in 95 basins in 41 countries but did not include the Kingdom of Saudi Arabia. To put these numbers into context, the world’s proven oil reserves at YE 2012 were 1,668.9 billion barrels of which Saudi Arabia accounts for 265.9 billion barrels (BP, 2013). Total world proven gas reserves at YE 2012  were 6,614.1 Tcf. TRR is fundamentally different from proved reserves of course; however, the fact that the estimated TRR of shale hydrocarbons exceeds global proved gas reserves and Saudi Arabian proved oil reserves suggests the magnitude of such resources.

Massive risks are associated with commercializing these resources, including the fact that about three million new wells would have to be drilled to translate this level of TRR into producing reserves. If every active onshore drilling rig in the entire world were converted to drilling shale oil and gas wells it would take nearly forty years to develop the TRR identified by the EIA.

Risks associated with shale plays

Shales, for the purpose of this paper include a substantial subset of unconventional resources and we apply a practical differentiation as opposed to a purely geological one (see the section on Terminology).  For our purposes, tight gas includes gas wells that must be massively hydraulically fractured to be commercially productive. Shales include extremely tight reservoirs that must be developed with long horizontal wells and multiple hydraulic fractures.

Risk is often defined by engineers to be something like “the probability of something bad happening” and such a definition is meaningful in the context of the likelihood of a dry hole, the probability of a well control event, etc. However, for the purposes of evaluating shale plays and for use in the term “derisking” we use something more akin to the financial definition, viz. the variability of return. Numerous studies have demonstrated the high variability of return in virtually all shale plays with a sufficient number of wells drilled. Lafollette (Lafollette, 2012), (Randy F. LaFollette, 2012) and Dong (et al) (Z. Dong, 2012) provide abundant examples of the variability in well performance. When translated into economic returns, similar results are obtained. A recent study of pre- and after-tax Net Present Value for a large play with normalized product prices and costs shows marginal results with may uneconomic wells. Analysis on an operator-by-operator basis shows radically different results with the operators responsible for the top 50% of production showing significantly greater economic success. In fact, some operators’ results can be shown to be improving during times when the results of the overall group of operators are flat or declining. There is extreme variability on a well-by-well basis even for a given operator; however, not everyone is accepting the status quo.

In order to address the risks of shale gas and shale oil exploitation, we need to address three primary areas of concern. These are shale heterogeneities at all levels, drilling, completion and evaluation processes and risk-taking and mitigation. In a recent SPE sponsored Applied Technology Workshop in Chengdu, China, participants rated numerous potential risks to the successful development of widespread, cost effective, safe and environmentally acceptable shale resources in China at a substantial level. These issues will also be discussed in the context of shale play de-risking.

The next blog entry focuses on shale heterogeneities.

References

Barton, C. M. (1997, 10 1). In situ stress measurements can help define local variations in fracture hydraulic conductivity at shallow depths. The Leading Edge , 16, pp. 1653-1656.

BP. (2013). Statistical Review of World Energy 2013. Retrieved from Statistical Review of World Energy 2013: http://www.bp.com/en/global/corporate/about-bp/statistical-review-of-world-energy-2013.html

Ebrahim Fathi, I. Y. (2009, November 1). Matrix Heterogeneity Effects on Gas Transport and Adsorption in Coalbed and Shale Gas Reservoirs. Transport in Porous Media , pp. 281-304.

Lafollette, R. (2012). Shale Gas and Light Tight Oil Reservoir Production Results: What Matters? Proceedings of the Twenty-third (2013) International Offshore and Polar Engineering. ISBN 978-1-880653-99–9 (Set);, pp. 54-60. Anchorage, AK: International Society of Offshore and Polar Engineers (ISOPE).

Meehan, D. N. (2012, 1 23). Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring our Energy Future (I of III). Retrieved 9 1, 2013, from Baker Hughes Reservoir Blog: http://blogs.bakerhughes.com/reservoir/2012/01/23/hydraulic-fracturing-an-environmentally-responsible-technology-for-ensuring-our-energy-future-i-of-iii/

Meehan, D. N. (2012, 1 23). Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring our Energy Future (I of III). Retrieved 9 1, 2013, from Baker Hughes Reservoir Blog: http://blogs.bakerhughes.com/reservoir/2012/01/23/hydraulic-fracturing-an-environmentally-responsible-technology-for-ensuring-our-energy-future-i-of-iii/

Meehan, D. N. (2012, 2 6). Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring our Energy Future (II of III). Retrieved 9 1, 2013, from Baker Hughes Reservoir Blog: http://blogs.bakerhughes.com/reservoir/2012/02/06/hydraulic-fracturing-an-environmentally-responsible-technology-for-ensuring-our-energy-future-ii-of-iii/

Meehan, D. N. (2012, 2 2). Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring Our Energy Future (Part III of III). Retrieved 9 1, 2013, from Baker Hughes Reservoir Blog: http://blogs.bakerhughes.com/reservoir/2012/02/20/hydraulic-fracturing-an-environmentally-responsible-technology-for-ensuring-our-energy-future-part-iii-of-iii/

Randy F. LaFollette, W. D. (2012). Practical Data Mining: Analysis of Barnett Shale Production Results with Emphasis on Well Completion and Fracture Stimulation . SPE Hydraulic Fracturing Technology Conference . SPE 152531. The Woodlands, Texas, USA,: Society of Petroleum Engineers.

U.S. Energy and Information Administration. (2013). Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States. Retrieved September 1, 2013, from Analysis & Projections: http://www.eia.gov/analysis/studies/worldshalegas/

U.S. Energy and Information Administration. (2013). U.S. Imports of Crude Oil. Retrieved 9 1, 2013, from EIA Crude Oil data: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrimus1&f=m

Z. Dong, S. H. (2012, January). Resource Evaluation for Shale Gas Reservoirs . SPE Economics & Management , 5-16.

Zoback, M. (2012, 7 1). Identification and Hydraulic Properties of Critically-Stressed Faults and Anticipating Triggered Seismic and Aseismic Fault Slip. Retrieved 9 1, 2013, from https://pangea.stanford.edu: https://pangea.stanford.edu/researchgroups/scits/sites/default/files/Zoback%20Presentation.pdf

 

Terminology:

 

The following statement is provided in (U.S. Energy and Information Administration, 2013) and is used in the course of this paper. When we refer to shales, we refer both to actual shale and resource plays that may include significant very fine grained siltstones and carbonates as well as tight oil.

Although the terms shale oil and tight oil are often used interchangeably in public discourse, shale formations are only a subset of all low permeability tight formations, which include sandstones and carbonates, as well as shales, as sources of tight oil production. Within the United States, the oil and natural gas industry typically refers to tight oil production rather than shale oil production, because it is a more encompassing and accurate term with respect to the geologic formations producing oil at any particular well. EIA has adopted this convention, and develops estimates of tight oil production and resources in the United States that include, but are not limited to, production from shale formations. The ARI assessment of shale formations presented in this report, however, looks exclusively at shale resources and does not consider other types of tight formations.

 

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