Unconventional gas refers to gas produced from coal-seams (‘coal-seam or coal-bed methane’), shale (‘shale gas’) rocks and rocks with low permeability (‘tight gas’). Once gas is produced from these reservoirs, it has the same properties of gas produced from ‘conventional’ (ie: sedimentary reservoirs with high porosity and permeability) sources. Unconventional gas may have high levels of Natural Gas Liquids (an exception is coal-seam gas which tends to be very ‘dry’ with high proportion of methane vs NGLs), may have low or high levels of carbon dioxide and high and low levels of sulfur (ie: ‘sweet or sour’). Because unconventional reservoirs have low permeability, artificial methods to increase gas flows, such as mechanical or chemical ‘fracking’, is often required before the wells are able to produce commercial quantities of gas.
The growth of gas produced from unconventional sources is truly remarkable, especially in United States and Australia. From less than 10% of total production a decade ago, unconventional gas accounts for over 25% of US current production and expected to exceed 50% of US production by 2030. The growth of shale gas, in particular, has dramatically disrupted the global gas markets. The US was expected to become a large importer of LNG – however, due to the large and relatively cheap shale gas fields that have been developed over the past decade, the US (and Canada) are now poised to export LNG and have forced other exporters, especially in the Atlantic Basin, to alter their marketing efforts. It is now likely that US natural gas prices will stay at the current low levels (around $5/ MMBtu or below) for the foreseeable future.
Coal Bed Methane
Similar to the process of conversion of organic matter to natural gas, the natural conversion of organic materials to coal also generates large amounts of methane. Methane is stored within the coal beds in much larger quantities per volume of rock than conventional gas reservoirs.
Much of coal, and thus much of the methane contained within the seams, occurs close to the surface. This allows cheaper exploration and production from less-expensive, but less-productive (because of lower reservoir pressure), shallow wells. Methane produced from coal seams is called coal bed methane (CBM), coal seam methane, or coal seam natural gas. Other than usually having a lower heat value because of the lack of heavier gas compounds, it is similar to gas produced from conventional gas reservoirs. Once it is produced, it is transported and marketed like conventional natural gas.
In conventional hydrocarbon reservoirs, gas overlies oil, both of which overlie adjacent water aquifers. Perforations are selectively placed to maximize production of hydrocarbons and reduce the production of water. In contrast, water permeates coal seams, and water pressure traps any CBM present. Producing CBM requires first removing water to decrease pressure on the coal matrix, allowing free gas to flow into the well bore. The water is usually saline, and disposing of it can add significant costs to CBM production. Water production is especially a problem in the early stages of production, when large amounts of water are produced to decrease trapping pressure on the methane. A general rule of thumb is that conventional gas is relatively difficult to find but easy to produce, while unconventional gas, such as CBM, is easy to find but relatively difficult to produce.
The United States has estimated CBM reserves exceeding 700 tcf, of which 100 tcf are thought to be economically recoverable. About 8% of total natural gas production in the United States is produced from coal beds. Large CBM reserves are also found in Canada, China, India and Australia. There is undeveloped CBM potential in Europe, Pakistan, and Africa.
Australia has become a leader in developing its CBM (called Coal Seam Methane – CSM) reserves. There are now over four projects to produce the methane from CSM reserves in the interior of Queensland, transport the gas to the coastline, and convert the methane into LNG for export. This concept would have been unthinkable a few years ago, but as LNG prices have risen and CSM exploitation has become more sophisticated (using horizontal wells and complex field modeling), these project are now apparently economic. However, promoters may be underestimating the cost of water disposal and LNG project capex, and overestimating the LNG prices based on recent spot market transactions. It is important to note that a large portion of LNG project profits come from LPG and Condensates; both which are not present in CBM gas. It remains to be seen whether the bubble in CBM asset prices will translate into true profits for the promoters of these ventures.
Shale gas refers to natural gas reservoir contained within layers of fine-grain clay and siltstone rocks commonly referred to as ‘shale’. Shale is the earth’s most common sedimentary rock, rich in organic carbon but characterized by ultra-low permeability. Permeability refers to the ability of the rock to allow gas to flow. Gas can either flow via natural fractures within the rock, or fractures must be artificially created.
Shale has always been regarded as the source of gas which eventually migrates to sandstones and carbonates and is produced as ‘conventional’ gas. However, not all the gas produced in the shale migrates to these higher permeability rocks. Over the past few decades, technological advances, especially horizontal drilling and artificially increasing the permeability of the shale (via mechanical or chemical ‘fracking’ stimulation to create artificial fractures) have facilitated the economic production of shale gas. Improvement in well completion and drilling efficiency are also key factors in unlocking this large resource.
Shale gas discoveries have added a substantial amount of US gas reserves. Outside of the more developed Barnett shale play in Texas, the DOE estimates four major shale plays (Haynesville, Fayetteville, Marcellus, and Woodford) may account for 550 tcf of gas, or ~30% of the ~1,750 tcf of technically recoverable reserves in the US. Shale gas is becoming increasingly important to annual US gas production as well. Major shale gas reservoirs accounted for about 40% of new onshore gas production in 2009.
Shale gas success factors
- Limited gas reserves driving increased prices.
From the 1970s until the 1990s, the U.S. faced declining reserves, demand growth and escalation in natural gas prices. There was growing dependence on imports from Canada and construction of plans for significant LNG import capacity. This created the impetus for alternative exploration methods resulted in dramatic growth in shale gas development that began in the late 1990s.
- Technological advances in horizontal drilling and fracturing techniques
These advances include as longer laterals, expanded numbers of frac stages per well, pad drilling, and simultaneous operations.
The technology, coupled with lean, factory-like practices, has shortened drilling and completion times, reduced costs, and raised initial production levels, making these plays cost effective.
One Marcellus shale operator reported bringing drilling and completion costs per frac stage down by 50% between 2008 and 2009 by applying technical and efficiency improvements
- Nimble independent exploration and production companies, working with service providers to advance conventional technologies into unconventional gas
Major energy company were completely absent from early shale gas activities. Independents have decentralized corporate structure that enables quick, in-the-field decision making in crucial areas, such as asset/land acquisitions and key operational decisions during the drilling and completion processes.
- Availability of capital.
The US has a very developed financial system allowing small companies access to capital and equity.
Smaller independents formed JVs with larger companies and National Oil Companies allowing the larger partners to fund operations
- Relatively easy access to land, fueled by the private ownership of surface and mineral rights and industry-friendly regulations.
Mineral rights ownerships allow profit sharing with land owners, which provide strong financial incentives to cooperate with industry developing shale resources.
U.S. government’s stance to date has been relatively positive towards the oil and gas industry.
Other countries that are hoping to replicate the US shale growth experience include Canada, China, Australia, Poland, Argentina, Brazil, Indonesia and India. However, their success will be dependent on the elements listed above.