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Shale Gas: Energy for future

Shale gas is changing the energy map as well as geopolitical map of the world

Ratan Ranjan (10BM60068)

Vinod Gupta School of Management

IIT Kharagpur

2010-12


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ABSTRACT

The world economy is recovering and so is the price of oil, it has crossed $70 per barrel and heading

towards $150 (pre-recession level).Shale gas, a non-conventional source of energy can be an answer

to rising dependency on oil. In this paper we see the process of extracting gas from the tough not so

porous shale rock and why it is the next big thing. It also looks into the possibility of developing Shale

gas outside USA i.e. Europe, India, its economic viability and technologies involved. We will look at

various numbers involving shale gas to understand the world potential and the big players in the world

market. Various environmental issues are also associated with shale gas and the extraction process.

Discovery of shale gas reserves around the world will affect economies of many countries.


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INTRODUCTION

The Energy sector around the world is changing at a pace world has never seen. While there is a

huge gap between demand and supply worldwide the energy challenges are not the same

everywhere. There is a huge competitive pressure on countries to produce energy at lower costs,

maintain its supply and protect the environment. Rapidly developing countries are focussing on

expanding energy sources to support their economic growth and provide basic energy services to its

citizens. On the other hand developed economies are focusing on securing energy supplies in

publically and environmentally accepted way. At present oil, primary source of energy is trading at

around $70 per barrel expected to reach $150 as the world economy recovers. Coal is another source

of energy in developing nations. Both the mentioned sources of energy have been losing sheen

because of their economical and environmental impact. Search for other sources of energy have

become imminent. Shale gas, an important source of natural gas in United States over the last

decade, is the probable answer to all these worries.

Shale gas has been making headlines in the past couple of years. Massive recoverable

deposits of shale gas have been identified in North America, where the first commercial gas well was

drilled nearly two hundred years ago, in 1821. According to geologists, there are more than 688

shales (rock formation that stores shale gas) worldwide in 142 basins. This means that there areliterally hundreds of shale formations worldwide that could produce natural gas.

Developing shale gas infrastructure and the cost of extraction of shale gas is high currently.

Advances in hydraulic fracturing and horizontal drilling have raised the hopes of making shale gas

wells more profitable. But hydraulic fracturing have environmental and health concerns associated

with it like mishandling of waste, contamination of ground water, and the unintended migration of

gases and hydraulic fracturing chemicals to the surface within a given radius of drilling operations.

Emergence of shale gas as major energy resource also has strategic implications on

geopolitics and energy industry. Based on the current reserve estimates Russia stands to be the

European and Southeast Asia winner in shale gas hence the dependency of European economies on

Russia for natural gas cannot be seen reducing in near future. Shale gas resources in the United

States will keep natural gas prices relatively low for an extended period of time.

Govt. of india is taking cognizance of the fact that shale gas stands to change the global

energy landscape of the future. New Delhi will finalize the shale-gas policy early next year and will

feature as an important topic of discussion when US President Barack Obama visits India. ONGC in

its board meeting on 25th march 2010 approved for exploration of Shale gas in Damodar basin.

Private company Reliance industries plan to invest $3.5 billion in three gas joint ventures in India.


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Along with this tremendous opportunity in shale gas lies some initial basic hurdles which has

to be crossed to make this viable. The amount of energy needed to produce unconventional gas is

considerably higher than for conventional gas. Developing nations will also face the challenge of the

cost and time to develop both the resource and infrastructure as economic returns will be initially

small. There are doubts about the environmental acceptability of the production technology. It is thepromise that Shale gas provides and scarcity of conventional fuels that world is looking at it as

another major source of energy.

1. Definition

Shale gas belongs to the category of unconventional natural gases, which also includes coal-bed

methane, gas from tight sandstones (tight gas) and methane hydrates. Shale is a sedimentary rock

formation which contains clay, quartz and other minerals. Much of the oil or gas formed in the shale

(this body is known as source rock, being the source of the hydrocarbon) migrates to porous and

permeable rock, such as sandstone, for example. *

It is assumed that shale gas is found proximal to conventional reservoirs. Shale are very low in

permeability hence possibility of gas escaping through rocks is grim. This is why the shale gas

resource is expected to be plentiful. The depth of shale gas varies. In most cases it is shallower than

conventional gas reservoirs, but in some cases, it could be deeper than conventional reservoirs.

2. ExtractionShale has low matrix permeability, so gas production in commercial quantities requires fractures to

provide permeability. A hydraulic fracture is formed by pumping the fracturing fluid (generally water)

into the wellbore at a rate sufficient to increase the pressure down hole to a value in excess of the

fracture gradient of the formation rock. The pressure causes the formation to crack, allowing the

fracturing fluid to enter and extend the crack further into the formation. To keep this fracture open

after the injection stops, a solid proppant (generally sand) is added to the fracture fluid. The proppant,

which is commonly sieved round sand, is carried into the fracture. This sand is chosen to be higher in

permeability than the surrounding formation, and the propped hydraulic fracture then becomes a highpermeability conduit through which the formation fluids can flow to the well. About 90% of gas wells in

USA use this method to extract gas economically.

Another significant development has been in technology for horizontal drilling; where lower portion of

the drill drills in horizontal direction hence once a hole is made in earths surface a larger portion of

gas reserve underneath can be covered making the drilling economically viable.

The gas layer and drilling method can be better understood from Fig. 1.
http://en.wikipedia.org/wiki/Shalehttp://en.wikipedia.org/wiki/Matrix_%28geology%29http://en.wikipedia.org/wiki/Permeability_%28fluid%29http://en.wikipedia.org/wiki/Permeability_%28fluid%29http://en.wikipedia.org/wiki/Matrix_%28geology%29http://en.wikipedia.org/wiki/Shale


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Fig1.

3. Present scenario

The estimate of total reserves of shale gas started with Rogners1997 top-down study of world

hydrocarbon resources.

Gas Shale Resource Endowment: 16,110 Tcf (456 Tcm)

In 2009 this Rogners resource endowment was backed by International Energy Agency, when in

World Energy Outlook (2009) they said that about 40% of above estimate was recoverable.

Gas Shale Recoverable Resource: 6,350 Tcf (180 Tcm)

3.1 North America and Canada

North America has been the leader in developing and producing shale gas particularly Barnett Shale

in the Bend Arch-Fort Worth Basin (250 million cubic meters per day). Marcellus shale and the New

Albany shale in the Illinois basin are the other two major sources of Shale gas in North America. They

and few others hold trillions of cubic feet of natural gas which may account for more than 51% of


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gas supply this decade. From 1.6% in 1996 to 10% in 2008, this is the rise in share of shale gas in

US natural gas production. Another big player in shale gas reserves is Canada. The Magnificent

Seven (7 big gas reserves in Canada and USA) has gas reserves equal to 5,146 Tcf (146 trillion

cubic meters (Tcm)), with an estimated 715 Tcf (20 Tcm) recoverable.Numerous other small gas

reserves will add to the total.

3.2 EuropeOther European countries have also started looking for gas fields that are rich in shale gas reserves.

Three areas have started the operation - the Alum Shale of Sweden, the Silurian shales of Poland

and the Mikulov Shale of Austria. The estimates are 1,000+ Tcf (~30 Tcm), with a potential

recoverable resource of 140 Tcf (4 Tcm).

3.3 World gas shale resourcesLikewise in other parts of the globe gas reserves are expected that will suffice to provide energy

requirements to a very large extent.

China and India. China and India have number of gas shale basins that are being evaluated only

recently. Lately, Shell and PetroChina announced plans to jointly evaluate and develop the gas shales

in Sichuan Province.

Fig 2. gives the probable distribution of shale gas reserves around the world.

Fig. 2

Areas where production has already begun

Areas where potential reserves of shale gas are present


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4. Technologies Involved

Transformation in shale gas production has been achieved largely because of horizontal drilling and

hydraulic fracturing. In horizontal drilling a well is sunk to a depth somewhat less than that of a known

shale gas deposit and then gradually deviated until the drill-bit is running horizontally through the

shale bed. The rocks are cracked open by a process known as hydraulic fracturing.

In first step technology is involved in exploration of shale gas reserves having recoverable quantities

of gas. The unit of measurement is Total Organic Carbon (TOC), this figure in commercial deposits of

US is about 4-10%. The higher TOC indicates high presence of gas.

4.1 Fracturing

The second step involves a process known as fracturing. Fracturing is achieved by injecting water

with some chemicals into well under high pressure. In general the water contains a gel (commonly a

derivative of the guar gum seed and essentially the same material used to thicken ice cream and

other liquids) which increases viscosity. This fractures the rock. The viscous liquid pumped also

contains sand or other such material also known as proppant. These props get into the cracks

and keep them open from which the gas flows out. The presence of gel in water was seen damaging

as they left behind gel residue. Lately Slickwater fracturing is used which use very little or no gel.

But this increased the requirement of water per well.

4.2 Horizontal Drilling

Most gas reserves are more spread in horizontal direction than in vertical direction hence by using

traditional way of vertical drilling to exploit a particular gas reserve number of vertical drills have to be

made. Breakthrough in this direction came with the advent of horizontal drilling.

The initial vertical well is drilled using the standard rotary drilling technique and after reaching the

kick-off point drilling begins in the horizontal direction. Fig. 3 explains the difference.


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Fig.3 Horizontal drilling

Another new technique in this direction is pad drilling in which multiple wells are drilled and completed

from a single location. This minimizes the need for roads and reduces the overall foot print of the

drilling operation.

5. Economic Potential

There is quite a difference over the production cost of shale gas. Extraction costs in North America

range from US $4-8/Mcf. Low price proponents argue that exploitation of shale gas begins in as little

as 3 months from the time of beginning of drilling effort. Also, the ease of hydro-fracturing multiple

times decreases the overall cost of extraction.

High Price proponents argue that drilling costs form a major chunk of the total cost of shale gas

production and is expected to increase when the environmental regulations are in place (U.S.

Environmental Protection Agency has put in place certain regulations that require drillers to stick to

environment friendly practices).

Also Shale gas basins that are isolated will increase the costs due to processing stations and use of

pipelines to the market.


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Apart from this decline rate is not a factor of worry for many as we have just started to understand

this type of reservoir. We were able to enhance the production in early stages by using slick-water

technique rather than using gel with water. Area of concern is the use of proppant which being denser

than water tend to settle down hence crack farther away from drill hole close after sometime

decreasing the production rate.

Technology will come to rescue in this case by using some proppant having low specific-gravity or by

finding out some completely different mechanism to keep the cracks open. In general the conclusion

is that with increasing costs of conventional resource of energy and decrease in their availability shale

gas has to be the future of our energy requirement.

6. Geo-political implication

Emergence of shale gas has implications on both the energy industry as well as on world politics.

European dependency on Russian gas as well as domestic politics in US and China are some of

political implications. Since all the nations rich in shale gas dont have technology for shale gas

extraction they will need to import technology from US and others. This will increase trade relations

between nations and will probably help US recover better. Apart from this countries like India and

China might develop indigenous means of extraction which might increase the economic feasibility of

shale gas extraction. Countries like India have been making relentless efforts to bring gas pipelines

from Iran without any success. Discovery of shale gas in Godavari basin will reduce Indias

dependency.

6.1 Europe and Russia

It seemed like shale gas will decrease the dependency of European nations on Russian natural gas,

but the reserves are limited and not as large as expected earlier. European industries are participatingin exploration and extraction but this has begun only in Poland and Ukraine. On the other hand they

are expected to benefit from US LPG exports due extensive availability of shale gas in US (but this

will hardly meet the demands in Europe).

In 80s and 90s Britain had invested hugely on infrastructure development for natural gas from North

Sea bus decline rate increased with time questioning the huge investment on the infrastructure.

Today Britain is hugely dependent on expensive LPG imports hence there is huge domestic pressure

on Britain.


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6.2 North America

Vast exploration and exploration of shale gas has made North America an exporter rather thanimporter of natural gas. However huge investments are needed on their part to extend the pipeline,

storage and processing stations to the shale gas fields. According to the Interstate Natural Gas

Association of America US will invest US $ 133-210 during next 20 years. Lesson, extracting shale

gas in one cost and processing and distribution are other costs.

Spot price of natural gas has declined to US$ 5 per mBTU due to ramping up of shale gas production

and global downturn. In fear companies are producing natural gas at rapid rate resulting in record

high storage of natural gas resulting in further decrease of prices of natural gas. Considering that

some traditional gas basins have production cost of US $ 4-5 this is resulting in loss for natural gascompanies.

7. Key Challenges

Building confidence in the available supplies of shale gas:There has been sceptics

floating all around questioning the authenticity of data on reserves and the cost of production.

Addressing environmental concerns: As drilling increases and more and more area are

brought under shale gas production questions are being raised on capturing methane

emissions and reducing surface impact.

Cost of production: Technology involved in production of shale gas is costly and is available

only to select few. Reducing cost is the major challenge to make the shale gas production

economically feasible and that to on large scale.

High water usage: Slick water technique increases the water requirement of a typical well to

3-5 million gallons. Above that the water required is fresh. The flow back water is brackish

and cannot be reused. Moreover all the water does not return hence even if reused the

efficiency is very low

Contamination of drinking water: As shown in documentary GASLAND the fracture in

rocks can move to water bodies and gas and fluid leakage can further worsen the situation.

Regulation Standards: Standards in various countries can pose some unseen restrictions on

the production of shale gas.


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8. Recent Developments in India

Reliance Industries Ltd. (India) signed $1.3 billion joint venture with Texas based Pioneer

Natural Resources Ltd. To develop shale gas assets.

India will launch its first-ever offer of shale gas areas for exploration by end 2011.

ONGC will spend Rs.128 Crore on shale gas exploration in Damodar Basin.

India and US to sign deal in Shale gas technology during Obamas India visit in Nov10.

9. Conclusion

Shale gas is proving to be a low cost option considering the high global prices of petroleum and

environmental concerns associated with other conventional sources of energy. The trend of lowering

production cost in North America is a positive sign. Availability of shale gas all around the world and

its production will ensure that demands are met by local supply reducing the cost of transportation of

gas from one nation to another. Efforts are to be made to develop technologies that reduces the

impact on environment and make it economically feasible.


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shale-gas-in-us/

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