COLUMN-Sceptics are wrong to bet against shale expansion: Kemp

Reuters

By John Kemp

LONDON, Oct 17 (Reuters) - Sceptics are too quick to dismissthe potential expansion of horizontal drilling and hydraulicfracturing to other shale areas in the United States and aroundthe world.

Based on early setbacks and the slow rate of progressoutside Bakken and Eagle Ford, they doubt whether the revolutioncan be replicated. But shale entrepreneurs areinvesting heavily to prove them wrong.

So far, the North American shale revolution has beenconfined to two states, Texas and North Dakota, at least as faras oil is concerned.

U.S. crude output has jumped by 2.2 million barrels per day(bpd) since 2008, the biggest five-year increase since 1970 andthe fastest two-year increase in history (Chart 1).

But Texas, where production is up 1.469 million bpd, andNorth Dakota, where production has risen 671,000 bpd, accountfor virtually all the increase (Chart 2).

Other states including Oklahoma, New Mexico, Colorado, Utah,Wyoming and Kansas have achieved marginal production increasestotalling 400,000 bpd, but the rise has been offset by fallingoutput from California, Alaska and offshore fields in the Gulfof Mexico (Chart 3).

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Chart 1:

Chart 2:

Chart 3:

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The U.S. Energy Information Administration (EIA) hasidentified 22 potential shale oil and gas prospects, known asplays, across the continental United States, but so far all theincrease in oil production has come from just three: the Bakkenin North Dakota, and the Permian and Eagle Ford in Texas.

Substantial amounts of gas are being produced from a numberof other formations, including the Barnett in Texas and theMarcellus in the U.S. Northeast, but oil production remainsconfined to fairly small areas of south and west Texas as wellas North Dakota.

No significant quantities of either oil or gas have beenproduced from shale anywhere outside the United States.Small-scale drilling programmes in Poland and China have proveddisappointing. Only a handful of exploratory wells have beendrilled in the UK, Argentina and other countries identified ashaving potentially substantial shale resources by the EIA.

Shale sceptics question whether the regulatory andgeological conditions which underpinned successful production inthe Bakken, Permian and Eagle Ford areas are replicatedelsewhere. If those conditions are unusual, they say it may behard to transfer the revolution to other parts of the UnitedStates, let alone internationally.

Drilling in other parts of the United States has yieldedvery low flow rates for crude and liquids, adding to thepessimism, and causing major companies like Shell aswell as niche shale specialists like Chesapeake andSandRidge to scale back their drilling programmes in morespeculative frontier areas.

WIDE VARIETY

Despite the disappointing results outside Texas and NorthDakota, sceptics may be being too quick to write off thepotential for new Bakken, Permian and Eagle Ford-sized playselsewhere in the United States and internationally.

Shale plays are enormously variable. The term "shale" isapplied to a wide range of different rock types that differ interms of porosity, organic content, thermal maturity, formationthickness, buried depth, the pressure on them, andsusceptibility to fracturing.

Fracturing operations must be tailored to the specific playto optimise flow rates. The length of the horizontal wells, thenumber of fracturing stages, the amount of pressure applied, thechemicals used in the fracking fluid, and the spacing of thewells must all be customised.

Some lessons learned in one shale play can be applied inothers. But in practice much of the know-how can only beachieved through experience operating in the specific play,"learning by doing".

In most instances, dozens or even hundreds of wells need tobe drilled to acquire the necessary experience and prove thepotential of the play.

PATIENCE REWARDED

Developing a successful new shale play can take years. TheBakken, Eagle Ford and Permian plays, as well as gas plays likeBarnett, have all taken many years to reach production maturity.

Fracking operations began in the Bakken around 2005.Initially, however, drilling and output increased only veryslowly.

The number of wells drilled into North Dakota's Bakken,Sarnish and Threeforks formations climbed from 219 at the end of2005 to just 834 by the end of 2008, before leaping to 5,047 bythe of 2012. Output grew from 4,000 bpd in December 2005 to112,000 by December 2008 and then surged to 704,000 by December2012.

Most of the sceptics who currently doubt whether the shalerevolution can be replicated outside Texas and North Dakota werealso very sceptical about whether it would really work in thosestates, and have been repeatedly proved wrong.

They underestimate the perseverance needed to make a newshale play work. George Mitchell's role in pioneering shale gasproduction is rapidly becoming a modern parable, but thetechnologies he employed had been around for decades. Frackinghas been around since the 1940s and 1950s. Horizontal drillingis even older but has been in widespread use since the 1980s.

Mitchell's obsessive genius was to keep trying them for morethan a decade until he figured out how they could be made towork successfully in the conditions that occurred in the play,ignoring the sceptics who said it would never work. HaroldHamm's Continental Resources has played a similar roledeveloping the Bakken and now dominates the play.

THE NEXT BIG PLAY?

Continental is investing heavily in part of the Woodfordshale it has dubbed the South Central Oklahoma Oil Province(SCOOP).

SCOOP is a "world class resource shale" according toContinental and an "excellent siliceous and highly fracturedreservoir". Production has already increased more than 400percent since the end of 2012, according to Continental'sOctober 2013 investor presentation on its website.

Not all shale plays will prove successful or easy todevelop. Some will be failures. Some will require very differentapproaches to drilling and fracturing the reservoir rocks.

But it would be wrong to focus on the setbacks and failuresto write off the potential to develop new shale provinces. IfMitchell and Hamm had given up in the face of initialdifficulties, the Bakken, Barnett, Marcellus and Eagle Fordwould not exist today.

In a report published in June 2013, the EIA identified andassessed more than 150 potentially oil and gas-bearing shaleformations around the world (including 137 formations in 41countries outside the United States) and concluded shale oil andgas resources were "globally abundant".

Even if only six to twelve are put into production and proveas high-yielding as the Bakken, Eagle Ford, Barnett andMarcellus, it would have a globally significant impact on oiland gas supplies.

For that reason, the sceptics are wrong to bet against thetechnology's long-term transformational impact.

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