Risks and opportunities associated with shale plays as unconventional projects go global. (Part 5/5)
Posted by D Nathan Meehan January 5, 2014

Risks and opportunities associated with shale plays as unconventional projects go global. (Part 5/5)

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 fifth and final in a series of blog entries on the subject.

 

In this and the prior entry we discuss a series of potential risks associated with achieving widespread commercial shale production developed at a recent SPE ATW. These were meant to be applied to China; however, the issues are relevant in many countries outside North America. the entire list includes:

  • Availability of leases (land access)
  • Operability: Difficult terrain/other operating conditions
  • Service company capabilities
  • Well costs
  • Lack of numerous risk seeking firms (fast failure and technology acceleration)
  • Environmentally acceptable practices/social issues
  • Inadequate well productivity/resources
  • Low gas prices/ Achieving economic thresholds
  • Infrastructure challenges including pipelines
  • The technology to stimulate wells is not optimized for local stress conditions.
  • Data availability (Basin) both G&G and Production

Availability of leases (land access)

Individuals or corporations privately own the vast majority of mineral resources in the contiguous United States. While in some cases the surface and mineral rights are severed, a majority of the mineral rights belong to surface owners. Lease payments, royalties and other terms and conditions are entirely negotiable. Offshore properties and onshore federal lands tend to have fixed leases and terms and are awarded under set conditions, typically by competitive bidding. Canadian Crown land represents a larger fraction of government owned land in oil and gas prospective areas than in the United States; however there are significant amounts of freehold acreage in Canada. Terms for leasing Crown and Federal land in the US and Canada are relatively straightforward.

In addition, the buying, selling or trading of acreage is largely unfettered in these countries. Small, even tiny risk-seeking firms with acreage blocks can generate substantial value and leverage or fail quickly. Larger firms can accumulate meaningful blocks of acreage, production and reserves.

Outside of these countries, the mineral rights are generally owned by the state. One or more central agencies direct terms and conditions and in many cases development is done by or in conjunction with state-owned enterprises. Buying, selling or trading acreage often requires state consent.

China has had two bid rounds for shale acreage including a small initial one that awarded two blocks followed by a larger one that awarded a larger number of blocks. Many of the second round winners were firms with relatively little oil and gas exploration experience as operators. Clearly there is a desire to enable multiple companies to compete. It is impossible to say how many companies will operate in China and much of the attractive shale acreage is associated with existing oil and gas fields and operators.

Operability: Difficult terrain/other operating conditions

Much of the surface acreage with active shale gas activity in the US is on relatively flat farmland, rolling hills or similar. A surprisingly large fraction of potential shale resources elsewhere is in mountainous terrains, densely populated cities or deserts. The additional costs associated with such drilling activity may be difficult to overcome. Clearly the advances in pad drilling will be essential for such operations.

Service company capabilities

It is hard to overstate the value to operators associated with state-of-the art hydraulic fracturing equipment and multiple competing integrated service companies. With the exception of a (in retrospect all too brief) period of extremely high activity in which there were delays in scheduling and pumping hydraulic fracture treatments, the North American market retains high service capabilities.  The response to tight supply was a substantial addition to capacity and costs have decreased. Collaboration of active operators with service companies to develop new tools has lead to rapid evolution in all phases of well construction.

A simple majority of wells in the US and Canada are hydraulically fractured; this is untrue for much of the world. The majority of wells drilled in the US are horizontal; this is also untrue for most countries (Figure 7). The upshot of this is that the bulk of service company capabilities, particularly local service companies will need additional technical capabilities to handle widespread, active shale exploitation. This can be done organically but is likely to be done in collaboration with the international service companies.

Well costs

The Chinese participants in the workshop rated this item near the top of all risks. Well costs are important.  To first order, well costs per unit of production and product prices are the two key drivers to economics. One lesson learned over and over again in the US and many times elsewhere is that the main way to lower well costs is to drill lots of wells. The author’s personal opinion is that this risk is relatively low if the other risks are addressed. Some other risks work against drilling a lot of wells; if these are not addressed, well-cost reductions will be slow. In the early stages of the process, information analysis and identifying what to do and where to do it (Figure 6) is far more valuable than immediately working on decreased well costs.

Lack of numerous risk seeking firms (fast failure and technology acceleration)

Hundreds of firms appeared following the proof of the key technology that would commercialize shale plays. They varied from large independents down to two-man shops. So many wells had been drilled in the US, the source rocks had long been identified and their presence and general indications of thickness and properties was easy to identify. Dozens of potential ideas surfaced and with readily available capital and leases drilling activity promptly permitted the firms to high-grade play potential. There were many failures. The demand for improved capabilities for multiple stage hydraulic fracture treatments and rapid, in zone drilling resulted in rapid improvements in service company capabilities. Technology acceleration is fastest when actual demand is in place and repeated opportunities exist to test new ideas.

IOCs and NOCs may hold substantially larger acreage positions internationally and are probably less willing to drill the same number of unsuccessful wells that lead to rapid technology developments and sweet spot delineation. These firms are more likely to apply substantial G&G efforts early and continuously. If successful and if the developments lead to large-scale commercial development, reductions in well costs are highly likely. However, the development of commercial shale plays has yet to have been proven without the drilling of numerous unsuccessful wells.

Environmentally acceptable practices/social issues

Water usage is the number one environmental concerned raised among ATW participants. While hydraulic fracturing water usage remains small compared to agricultural use in most areas, most of the assessed shale resources (U.S. Energy and Information Administration, 2013) are in areas with little available water or in areas of high demand for water. Low salinity water is not needed for hydraulic fracturing. Technology advances have enabled the use of saline and high TDS water from deeper sources and the use of recycled water. Protection of surface aquifers using excellent cementing practices, casing bond logs and monitoring remains important.

Noise abatement, the impact of large numbers of trucks, pipeline construction and other environmental issues all need to be addressed. If environmental issues are not properly addressed, the overall activity will not be commercially viable.

Other environmental issues associated with hydraulic fracturing are addressed in the author’s blog (Meehan, Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring our Energy Future (I of III), 2012) (Meehan, Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring our Energy Future (II of III), 2012) (Meehan, Hydraulic Fracturing: An Environmentally Responsible Technology for Ensuring Our Energy Future (Part III of III), 2012).

Social issues are equally important. Employment and training opportunities along with the reduction in emissions from coal-fired power plants as demand is partially displaced by cleaner burning fuels with lower CO2 emissions are all foreseen as positive. However, large-scale shale developments with hundreds or thousands of wells will require significant surface use.  In densely populated areas where surface owners do not enjoy mineral rights this may require landowner compensation other than simply for the value of the land. Carefully planned multiple (12-36 well) surface pads may be appropriate to minimize the footprint of shale development activities.

Inadequate well productivity/resources

There are plays in North America with attractive values of Ro, TOC, Young’s modulus, thickness, etc. that have failed to generate high rate wells needed to warrant development. Few examples of really old, or non-marine shales are commercial. Sometimes it took dozens of wells to condemn an area. Even if the hydrocarbons in place are abundant, there is no guarantee that per well productivity or reserves warrants development. Of all the risk mitigation needs identified, this is the real “show stopper.”  If the resources are present but rates from existing completions are too low, hope for improvements in stimulation capabilities or new drilling approaches may exist. There is no substitute for well drilling to evaluate this risk.

Access to “risk capital”

Risk-seeking capital is fickle. Investors seek to balance risk and returns and ultimately a variety of investors exist at different risk tolerance levels. If higher return and/or lower risk alternative investments to shale resource development exist, investors will back off on supporting shale activities. To date there has been an abundance of such investments. Early enthusiasm has waned and investors seek better quality and lower risk developments in the shale. Based on their continued support, many believe it is possible.

Most international activity levels will not require small firms to borrow large quantities from risk-seeking investors but are themselves or their IOC partners the source of funds. Many states will have entirely different parameters to evaluate the economics of shale plays. Nonetheless, whoever funds this activity inevitably seeks the highest return and lowest risk achievable.

The technology to stimulate wells is not optimized for local stress conditions.

This concern was fairly localized to issues in the Sichuan Basin with high pore pressures and minimum horizontal compressive stresses approaching the vertical stress. Complex fractures that include horizontal fractures have been known to develop in coals and are often referred to as T-shaped fractures. Stress conditions and layering have generated lab examples of such fractures. Many failed hydraulic fracture treatments have been blamed on T-shaped fractures, often without conclusive proof.  Proper geomechanical models are necessary to address this issue; geomechanical models driven primarily from acoustic logs are unlikely to solve this concern.

Conclusions

Major risks exist for the development of shale resources outside Canada and the US. None of these seem individually insurmountable; however, in aggregate they suggest a much more G&G process driven model in order to eliminate a significant fraction of the poor wells present in even the best North American play.  The author would be personally surprised if there were not multiple international technical successes comparable to the Eagleford, Bakken or Marcellus. However, modeling the actual results of these plays at international costs and the sorts of timing, costs, prices and terms and conditions of various countries suggest that countries either must do much better that these plays geologically, find a way to mitigate the risks (variation in return) or have more attractive cost and pricing models.

 

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

 

 

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