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Editorial Last Updated: Oct 22, 2014 - 9:07:36 AM


Shale Gas And Oil In International Trade
By Dr. Gary K. Busch 21/10/14
Oct 22, 2014 - 10:10:45 AM

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The increased production of oil and gas from the fracturing of shale formations has been one of the most potent influences in international relations. It has empowered the economy of the U.S. by lowering the domestic price of petroleum products and changed the U.S. industry from an importer to an exporter of petroleum products in a very short period. It has been the engine for growth in a range of industries associated with 'fracking' and has produced feedstocks for new chemical, fertiliser and plastics industries. Moreover it has permitted to U.S. to re-evaluate its stance on its former dependence on foreign oil producing countries and allowed it to develop the use of energy as a weapon against its enemies.

Until recently the search for oil and gas reserves has been a very expensive process of drilling at ever-decreasing depths to find pools oil trapped below the surface of the earth or seabed. The exploration for oil and gas has been the search for pockets of oil and gas trapped below the earth's surface and drilling a pipe down to open a passageway for that oil and gas to rise to the surface where it could be loaded aboard giant tankers, pumped into oil or gas pipelines, or refrigerated into liquefied natural gas or liquefied petroleum. The technology concentrated on producing equipment which could go ever deeper below the surface to reach these oil and gas pockets. Gradually a substantial part of current oil recovery has been from deep sea wells.

However, there are other deposits of oil and gas which are not part of subterranean pools of oil or gas. There are a number of formations which are "continuous" oil accumulations; i.e. the oil resource is dispersed throughout a geologic formation rather than existing as discrete, localized occurrence. There is a substantial amount of oil and gas trapped in shale below a hard crust of rock not very far below the surface. In recent years there has been the development of a technology which can access these shale oil deposits and deliver the entrapped oil and gas to the surface. These technologies include 'horizontal oil well drilling' and 'hydraulic fractioning' or 'fracking'. The first new technology was horizontal drilling, which allowed one vertical well to tap widely into a whole layer of oil or gas. The second is hydraulic fracturing, or "fracking," which involved pumping mixtures of water and chemicals into shale rock. This high-pressure injection of water and chemicals breaks up the shale and releases the oil and gas that had been trapped in the rock. Most fracking is on dry land and do not require deep sea wells or pumping stations.

There have been massive finds of 'continuous' formations of oil and gas in the continental U.S.

Within a short period of time the US became virtually self-sufficient in oil and natural gas. Rather than build the planned LNG receiving trains for the import of gas, the U.S. has begun to build liquefaction plants and trains for the export of natural gas to the rest of the world. U.S. energy costs have shrunken dramatically and remain stable. This availability of lower cost gas is creating many new jobs and attracting industry investments into North America from across the globe as energy costs are reduced and feed stocks of a variety of petrochemical derivatives are dramatically less expensive. In September, 2012 a large Egyptian construction company announced that it would build a new nitrogen fertilizer production plant in southeast Iowa to supply customers in the U.S. Corn Belt; it said the $1.4 billion plant would be the first 'world-scale, natural gas-based fertilizer plant built in the United States in nearly 25 years and would reduce U.S. dependence on imported fertilizers. Royal Dutch Shell announced plans for a $2 billion petrochemical plant northwest of Pittsburgh, where it can use natural gas supplies from the state's enormous Marcellus shale formation. Many German companies are moving their plants to access the U.S. shale gas opportunities.

Several transport industries are switching from petroleum and diesel to gas, both for savings and for reducing the carbon burden on the environment. The use of generating clean energy using gas will greatly reduce the emission of carbon dioxide. It can also improve the efficiencies of renewable energy sources as a back-up to solar and wind-power stations which stop or slow down when the wind drops and the sun sets. These developments have already had a major effect on world trade and development.

By 2020, the U.S. is expected to produce more gas than it needs. The oil and gas companies are making ready more than fifteen new export shipping terminals, sufficient to export a full third of current domestic LNG consumption around the world. More than a half-million gas wells are operating in the U.S., a 50% increase since 2000, according to the Energy Information Administration In 2000, shale gas was 2 per cent of the U.S. natural gas supply; by 2012, it was 37 per cent. EIA says the U.S. has 300 trillion cubic feet of gas in proven reserves and potentially ten times that amount in unproven reserves, much of which is in shale deposits. By comparison, the U.S. currently consumes about 25 trillion cubic feet of natural gas annually. If current trends continue, EIA estimates, the U.S. will be producing more gas than it consumes within the next seven years.

Indeed, the U.S. reserves of shale gas are probably a gross underestimate. Oil companies have found that there are vast entrapped gas reserves underneath the current shale gas formations. The Utica Gas play lies beneath the huge Marcellus field. The Marcellus Shale captured public attention when leasing and drilling activities began pumping billions of dollars into local economies in 2004.

Now, just a few years later, the Marcellus Shale is being developed into one of the world's largest natural gas fields. However, what geologists have found shows that the Marcellus is only the first step in a sequence of natural gas plays. The second step is starting in the Utica Shale which is found below the Marcellus Shale find.

One of the reasons that shale gas and oil development proceeded so quickly in the U.S. was that there already existed a well-developed interstate gas and oil pipeline systems which could move the gas into the national network grid.

Gas Pipeline 2014

While growth in the U.S. fracking business is very positive there are some unusual characteristics of this form of extraction which acts as a constraint on its expansion. These wells yield a high volume of product immediately after drilling but the yields decline rapidly during the first year and then more slowly over time.

When a new well is drilled it penetrates a rock unit with abundant gas, sometimes under pressure. These new wells can yield at a very high rate, but over time - as gas escapes from the well - the pressure in the formation goes down and the result is a well with a lower rate of yield

Most lower yield wells produce one to two million cubic feet per day in the first month. Many wells yield between three and five million cubic feet per day, but gigantic wells could produce as much as twenty million cubic feet per day. The more the well yields in the first month the more valuable it generally will be over time. A typical well might yield as much as half of its gas in the first five years of production. Wells might then continue to produce for a total of twenty to thirty years but at lower and lower production rates. So it is necessary to keep drilling new wells to keep up the production levels on the acreage available,

Year

Initial Production

Closing Production

Decline from Previous Year

Annual Royalties $4/mcf Gas 12.5% Share

First

2.0 Mmcf/d

0.70 Mmcf/d

68%

$207,605

Second

0.70 Mmcf/d

0.36 Mmcf/d

41%

$82,037

Third

0.36 Mmcf/d

0.25 Mmcf/d

27%

$53,327

Forth

0.25 Mmcf/d

0.19 Mmcf/d

24%

$38,966

Fifth

0.19 Mmcf/d

0.15 Mmcf/d

19%

$29,536

Sixth

0.15 Mmcf/d

0.12 Mmcf/d

18%

$23,428

TABLE: Production decline statistics from a hypothetical natural gas well in shale with horizontal drilling and hydraulic fracturing..

This is known as the Red Queen Effect. Most oil and gas companies who drill some of the first wells in a new natural gas area do not often have a way to deliver their gas to market. To obtain delivery from the well site to the pipeline they must enter into contracts for the gas with a natural gas pipeline company. The producing oil and gas company promises to provide a specific amount of gas per day and the pipeline company promises to provide transmission capacity.

So if, for example, an oil and gas company plans on drilling fifty wells during their first year in a new shale play they must then then contract with a pipeline company who will transmit that gas to market. One year after these wells are drilled their production rate may have fallen by 60 to 80%. So, to meet the amount of gas promised to the pipeline the oil and gas company must drill at least 30 to 40 new wells to make up for the drop in production. At the end of the second year the company has first year production drops on all of its new wells and second year production drops on all of the wells drilled in the first year. This forces the oil and gas company to keep drilling to keep up with its promise to the pipeline.

That's why it is called the 'Red Queen Effect'. It is named after a character in Lewis Carroll's Through the Looking-Glass novel. The Red Queen lectures Alice: "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Another fundamental drag on the full utilisation of the fracking method is that there is an urgent need to have a storage facility on or near the site so that the gas can be contained before it is put into the pipeline or sent to a nearby plant and converted into ethylene and polyethylene for the plastics industry. Without this storage or conversion process to contain all the gas produced, the U.S. fracking industry has been burning off (flaring) a large percentage of its production before it ever reaches the pipeline. In August 2014 the North Dakota Industrial Commission announced that the August capture percentage was 73 percent with increased daily volume of gas flared from July to August of 23.5 million cubic feet per day. Before the improvements the historical high flared percent was 36 percent in September, 2011. As the retention and intermediate storage capacity increases the decline in well output is compensated for by reduced flaring. Once these storage facilities are built they can be used for the replacement wells without extra as they come on stream.

In the early days of horizontal drilling and hydraulic fracturing of shale it was customary practice to allow the well to produce at full capacity as soon as it was placed on line. This produced rapid income for the company and helped generate enough funds to build intermediate storage facilities to reduce flaring. Recent experiments suggest that throttling the production of a new well might result in a longer productive lifetime for the well and a greater total recovery of gas. The theory behind this is that rapid initial production allows the pore spaces in the shale to deflate unevenly. Pores near the well collapse first as the gas rapidly moves to the well and that causes more distant gas to be trapped within the formation. Slowing the production rate allows the pores to deflate more evenly and allows an orderly, more efficient and more complete gas recovery. (see Geology.com. Production and Royalty Declines in a Natural Gas Well Over Time 11/13

The other constraint on the fracking industry is the need for large and reliable supplies of water. The U.S. is generally well-supplied with water in most of the areas in which shale extraction takes place. However, this growth of fracking sites has added to the general burden on water supplies and is having a negative impact on farming a human consumption. That is because there are not sufficient systems in place to clean and reuse the water. It is wasteful to take good water out of the system when the water-chemical mixtures used from fracking can relatively easily be remediated and recycled, using electronic separators or algae installations to clean and restore the water used. As in most technologies each further step generates another technology which fills the needs. The growth of a water recycling process is becoming an industry on its own and many people are also looking into re-working existing wells to reclaim the gas not yet removed; much as stripper wells did for the oil industry.

The impact of this process of fracking oil and gas shale on the world market has been very strong. The price to the consumer of shale gas and oil has diminished. It has become more economical to use this gas as a fuel in trucks, buses and trains, reducing transport costs for many industries. Singapore has just built a facility to refuel marine vessels with gas in a whole new bunkering industry. There is a mass market for cheap energy and the U.S. is preparing to export gas as well as oil to international markets.

This is a very important development; not only as a revenue-earner for U.S. suppliers, but also as a method of keeping prices low in the U.S... If the U.S. doesn�t export its oil and gas the consequences can be severe. If the U.S. market for shale oil and gas cannot absorb the full supply then it becomes uneconomic for producers to keep drilling new wells. However the Red Queen Effect demands that new wells be drilled. Without these new wells the rapid fall-off of supply from existing wells will soon make it too expensive to keep up with new drilling in the face of a diminished demand and prices will rise. If the U.S. producers can export the shale oil and gas then the unit price of newly drilled and renewed oil and gas supplies remains under less domestic pressure for higher prices.

The political consequences are equally serendipitous. As the Russian supplies of oil to Europe diminish, either through sanctions, political pressure or Russian programs of self-injury, there needs to be a reliable source of substitute energy to make up the shortfalls Where it used to be economic for gas to be frozen and shipped as LNG from export trains on specialised freezing vessels to receiving regasification plants technology has introduced several important improvements. By freezing gas the volume of the gas shipped is reduced 600 times in its liquid form. This is an expensive process; refrigerated ships are expensive and regasification plants are expensive. Now there are specialised vessels which compress gas, as opposed to freezing it; when the pressure is reduced the gas flows through a pipeline. This means that the receiving country or port doesn't need such an expensive cryogenic infrastructure as LNG. It can use compressed gas through a pipeline flange.

Equally, the vessels needed to carry this gas do not have be contracted for twenty-five years to a specific project as is true in most LNG agreements. Ordinary ships can be fitted out to carry compressed gas. This means that the journey from producer to consumer does not require vessels moving vast distances under ballast (without cargo). For example, an LG vessel loads at Woodside in Australia and delivers its cargo to Louisiana and then sails back thousands of miles empty to Australia. That is a crazy waste of money. By removing the need for cryogenics these vessels can deliver the cargo from one country and then pick up a cargo nearby for transport to a different buyer. This allows natural gas to be handled as a spot trade rather than a contracted voyage with long periods of ballast. There are a number of floating production, storage and offloading (FPSO) vessels being moored in the world's ports to receive gas cargos and which are linked to pipelines. This will free up vessels, ports and obviate the need for cryogenic systems.

This is just the beginning of the international spot and contract business of natural gas and, with foresight, the restrictions on U.S. exports will be lifted in their entirety soon..


Source:Ocnus.net 2014

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