The U.S. Oil and Gas Boom
Chroniques américaines, décembre 2012 (en anglais)
(Cette Chronique a été publiée en janvier 2012 par le Centre Energie de l'Ifri)
A funny thing happened in the last few years when no one was paying attention. J.R. Ewing, the legendary Texas oilman, and his wife Sue Ellen sold Southfork, their ranch near Dallas, and moved to a new home in Pennsylvania (Northfork?). JR immediately began buying subsurface mineral rights for acres of land above the Marcellus and Utica shale formations in the Appalachian Basin. Cliff Barnes, J.R.'s nemesis, sold all his Texas properties and moved to North Dakota, where he started leasing mineral rights to acreage above the Bakken shale play. Bobby, J.R.'s stepbrother, stayed in Texas, but moved from Dallas to the Eagle Ford area near the SE border with Mexico. What's going on here? Where are all the Texas oilmen going? What’s going on is nothing short of a revolution in U.S., Lower-48 oil and natural gas production that is quickly transforming the energy sector. This transformation, while important for the oil market, is likely to be spectacularly more evolutionary in natural gas markets, both here and abroad. New production technologies have arrived at a time when the whole world is looking for cleaner-burning fuels, and they may usher in a new golden era for natural gas as a bridge fuel to a cleaner, more-sustainable energy future.
High oil prices and advances in oil and gas exploration and production technology are now allowing us to bring previously unreachable and uneconomic shale oil and natural gas resources to market. These reserves aren’t new. We have known where they are for many years, but we just couldn’t get at them on commercial terms. Furthermore, our shale gas reserves are enormous, amounting to almost 900 trillion cubic feet (Tcf) which, when added to our proven reserves of conventional gas, brings our total gas reserves to 2600 Tcf. That’s enough gas to sustain our present consumption level of 22 Tcf per year for more than 100 years. These shale gas deposits also exist in many places not usually associated with oil and gas development, like in the Northeastern states of New York, Pennsylvania, Ohio, West Virginia, Illinois, Michigan, Alabama, Mississippi, and Arkansas. They also exist in places more traditionally associated with oil and gas, like Texas, Louisiana, Oklahoma and elsewhere. Shale oil deposits are more limited, and the largest identified reserves are in California, Texas, and North Dakota, with some smaller deposits in Montana, Wyoming, Colorado, Utah, New Mexico and other places. Our shale oil reserves are estimated at around 30 billion barrels of oil which, if realized, would nearly double our proven oil reserves.
For all intents and purposes shale oil and gas is conventional oil and gas, and it is not to be confused with oil shale or with (Canadian) tar sands. Oil shale is really kerogen, an oil precursor that might eventually become oil if left alone, in the ground under pressure for millions of years. Kerogen is lower in energy content than conventional crude oil, and it has to be chemically altered (manufactured) with the application of heat and the addition of hydrocarbons to make it usable as a petroleum-like fuel. The largest known deposits of oil shale, which could number into the hundreds of billions of barrels, lie in the green river formation of finely-grained sedimentary rock under Colorado, Utah, and Wyoming. People have believed that oil shale was on the verge of being the fuel of the future ever since the early 1900’s, and it still gains attention whenever oil prices rise. Shell, Chevron, and Exxon have been working on technologies to produce oil shale for over 50 years, and in the 1970s and 80s Exxon actually had an oil shale project up and running near Parachute, Colorado. Exxon’s Colony Oil Shale Project was funded in part by the U.S. Synthetic Fuels Corporation, but it closed in the early 1980’s, as a result of low oil prices, putting 2000 people out of work. The U.S. Synthetic Fuels Corporation shut its doors in 1986. Oil shale occurs in many countries, but only about 30 have known deposits of possible economic value. Oil shale may eventually be developed, but it will take some additional technological breakthroughs and oil price levels closer to $200 per barrel to make it happen.
Tar sands exist in many parts of the world, but some of the world’s largest known deposits are found in the Canadian province of Alberta. Tar sands are really a mixture of bitumen, clay, sand and water that lie near the surface. Bitumen, the source of tar sands’ energy content, is really a biodegraded form of conventional oil (old oil, kind of like wine that’s past its peak) that looks like a viscous, tar-like substance. It must be separated from the sand, clay and water it is found in, and upgraded with the addition of hydrocarbons and liquids before it can be shipped and refined into petroleum products like conventional crude oils. Fortunately for Canada, Alberta has plenty of natural gas that can supply the heat and hydrocarbons needed to manufacture a synthetic crude oil (called syncrude) out of the bitumen contained in tar sands. The Canadian syncrude industry got its start in the 1960’s, but didn’t really take off until about 15 years ago. Canada now produces 1.5 million barrels per day (mmbd) of syncrude, which accounts for almost one-half of Canada’s total crude oil production, and most of it is exported to the U.S. Canada is our largest supplier of imported oil, selling us 2.6 mmbd last year, or almost 75 % of their total oil production. Canadian production of syncrude is expected to grow by another 1.0 mmbd or more between now and 2020. This is where the Keystone XL pipeline controversy comes into play. The Keystone XL pipeline would carry almost all of this incremental Canadian syncrude production to markets in the U.S. once it is approved and built.
Shale oil, unlike tar sands and oil shale, is real oil, and it can be produced with today’s technology at today’s prices. Shale oil is somewhat of a catchall phrase that includes oil from shale formations, but also oil from other, tight, fine-grained rocks with low permeability like carbonates and sandstones, often referred to as “tight” oil or “tight” gas. Oil and gas don’t exist in underground pools or caverns, but in small, isolated pore spaces in sedimentary rocks, in subsurface fractures, and absorbed in mineral grains and organic materials; think sponge rather than pool. The finer the pore spaces and the less connected they are, the more difficult it is to produce the oil or gas. Traditional drilling of vertical wells depended for a long time on natural reservoir pressure to force oil and gas through naturally-occurring fractures in the rock to the well and up to the surface. The denser the sediment, the more difficult it was to get a continuous flow of oil or gas. Multiple wells had to be drilled fairly close to each other in the same formation to keep production flowing at a steady rate.
To overcome this problem the industry began experimenting with a process called fracturing (or “fracking” for short) which is a production method that involves fracturing the hydrocarbon-bearing subsurface layer to allow the oil and gas to escape from the pore spaces and flow along the fractures to the well. The idea is that the man-made fractures would intersect with other, naturally-occurring fractures in the formations, creating a series of underground canals for carrying oil and gas to the well. For a long time fracking was done by setting off explosive charges in the well bore at the depths thought to contain oil or gas. The technology was pioneered in the U.S. and it gradually evolved to include a wide variety of techniques suitable for stimulating oil and gas flow in many types of geological formations. Older wells can be fracked many times during their lifetimes. Over 1 million oil and gas wells have been fracked in the U. S. alone since 1949.
The latest of these fracking methods is a process called hydraulic fracturing or hydrofracking. Wells are drilled and lined with steel pipe. The well casing is sealed with cement to prevent oil or gas from escaping around the steel pipe. Explosive charges then blast holes through the well casing and into the surrounding rock in the parts of the well thought to contain oil or gas. A mixture of water, sand, chemicals and emulsifiers is then injected into the well under high pressure. The high pressure further fractures the surrounding rock and the sand pushes the fractures open. Once the pressure is released, the oil or gas flows along the fractures to the borehole and to the surface. Every company has its own proprietary mixture of fracking fluids, but 98 % of the mixture is usually sand and water. The process requires huge amounts of water that is scarce in many locations, and concerns have been raised about possible contamination of aquifers that provide drinking water.
Finding oil and gas used to be as much an art as a science, but advances in computer-processing power now allow geologists to interpret seismic surveys with greater accuracy and to produce three-dimensional images and underground maps of hydrocarbon-bearing formations that may exist in thin layers of rock a mile or more below the surface. Think of the subsurface as a multiple-tiered layer cake, with the pay dirt being the thin layer of chocolate fudge frosting holding the two bottom cake layers together. New directional drilling technologies, including horizontal drilling, allow companies to turn corners and follow thin hydrocarbon-bearing formations up and down for thousands of feet in a mostly horizontal direction to reach more oil and gas from one spot. Hydrofracking can then be done at multiple locations along a horizontal borehole to stimulate greater quantities of oil and gas from one well. As a result, “dry holes” are becoming far less prevalent. These technological advances have reduced financial risk and allowed for greater efficiencies that make it possible for companies to go after previously uneconomic, unrecoverable reserves, like shale oil and gas.
The oil story is good news for many reasons. We are the world’s largest consumer and importer of oil, and the world’s third-largest oil producer behind Saudi Arabia and Russia. U.S. production of crude oil peaked at about 9.6 million barrels per day (mmbd) in 1970, and then declined steadily to a low of 5.0 mmbd in 2008, a level not seen since the 1940’s. Total U.S. liquid fuels production, which includes not only crude oil, but other liquid fuels like condensates, natural gas liquids and biofuels, was 7.5 mmbd in 2008. Since 2008, however, total U.S. liquid fuels production has risen by about 1.2 mmbd, with crude oil rising by 0.8 mmbd, natural gas liquids rising by 150,000 barrels per day (bpd), and biofuels rising by 250,000 bpd. Half of the rise in U.S. crude oil production was from the deep-water Gulf of Mexico, and half was from new shale oil developments in North Dakota, Texas and a few other places.
Minor shale oil production began in the Bakken formation in North Dakota almost 50 years ago, but shale’s potential could only be realized when high oil prices and the cost-effective application of horizontal drilling and hydraulic fracturing allowed production to rise from 10,000 bpd in 2003 to 440,000 bpd today. Today, North Dakota is about to pass California to become the nation’s third largest oil-producing state behind Texas and Alaska. The rise in shale oil production will take over from the deep water Gulf of Mexico as the largest incremental source of crude oil production growth in the next 10 years, adding a total of about 2.0 mmbd to U.S. production between now and 2020. This growth, coupled with smaller gains in deep water production, biofuels, and natural gas liquids will help to offset continued production declines in older fields and help us limit our dependence on oil imports. Our dependence on oil imports reached a peak of over 60% in 2005, but it has since declined to just 49% in 2010, as a result of increased domestic production and stagnant demand. While the U.S. Department of Energy’s (DOE) Energy Information Administration (EIA) expects U.S. oil demand to resume growing slowly over the long-term, the expected increases in our domestic production of all liquid fuels together, including shale oil, may further limit our dependence on oil imports to just over 40% of our expected consumption in 2035. Shale oil will help us limit our dependence on potentially unreliable sources of oil, but it is unlikely to be a complete panacea.
The natural gas story is even more dramatic. The U.S. is the world’s largest producer and consumer of natural gas, but our production of gas was fairly stagnant for years up to about 2006. In the early 2000’s, our imports of natural gas, primarily coming by pipeline from Canada, reached a level of nearly 20 % of our consumption, and there was a great expectation that U.S. gas imports would continue to grow. Canadian gas production was also stagnating, and Canada began to use more of its own gas in the production of syncrude. As a result, just a few years ago the US was perceived as a growing market for liquefied natural gas (LNG) imports from Algeria, Trinidad and Tobago, Nigeria, Qatar, the UAE, Indonesia, Australia and other places. In 2004, the Federal Energy Regulatory Commission (FERC) was entertaining more than 40 requests for siting permits to build LNG receiving terminals along the U.S. coastline. Gas producers in many parts of the world invested billions of dollars in gas liquefaction plants, export terminals and ships to supply the U.S. market, only to see the demand dry up in the space of a few years.
High natural gas wellhead prices and technological improvements stimulated the industry to experiment with a combination of horizontal drilling and hydraulic fracking in the Barnett shale in Texas. Early success with the technique in the Barnett led the industry to focus on other shale plays in Haynesville (La.), Fayetteville (Ark.), Marcellus/Utica (Penn., Oh., NY, W.Va.), and others and the rest is history. Shale gas production went from 0.3 Tcf in 2000, to almost 5.0 Tcf today and it now accounts for almost 25 % of our total gas production. Our imports have dropped to about 10 %, and wellhead and spot natural gas prices have declined by half, to less than $4.00 per thousand cubic feet (tcf) today from more than $8.00 per tcf in 2008. The DOE/EIA now expects shale gas production to continue rising to more than 12 Tcf by 2035, when it will account for nearly 50 % of our total gas production. The EIA also expects natural gas prices to stay below the highs experienced earlier, which could allow it to gain market share, primarily at the expense of coal in electricity generation (but also nuclear and renewables like solar and wind), and possibly in the transport sector, at the expense of oil, as a fuel for trucks and buses. On an energy equivalent basis, natural gas today is roughly only about 25 % of the cost of oil.
The shale oil and gas revolution has been a boon to the economies of many states, and some analysts estimate that shale oil and gas exploration and development could add 1.5 million more jobs to the 2.2 million already working in the industry. Many land owners in the shale states have become overnight millionaires, and annual royalty payments on a single gas well producing 1 million cubic feet a day can easily run into the hundreds of thousands of dollars per year. North Dakota has the lowest unemployment rate (3.7 %) of any state in the country today, but development does come at a price. Housing is in short supply, rents have gone through the roof, a double-wide with hookups can cost as much as $500,000 in some parts of the state, you can’t get a seat at the local diner, and waitresses make more than $20 an hour before tips. It’s a boom town environment, and the traditional way of life is under siege. The locals complain about the Cajun-speaking workers from Texas and Louisiana that arrive daily, get drunk and chase their wives and daughters. Small towns are ill-equipped to deal with the immediate prospect of building more homes, roads, schools, expanding their sewer systems, and other demands.
In addition, all forms of energy have their environmental drawbacks. Shale oil and gas production raises risks of water contamination, methane leaks, oil spills, pipeline explosions, and possibly earthquakes. While natural gas is the cleanest of all fossil fuels, it is still a fossil fuel. In addition, shale gas potential around the world is enormous, and the technology for developing these resources is spreading like wildfire. Western Europe and Mexico both have shale reserves similar to ours, and China and Russia could have twice as much. The fear in some circles is that abundant supplies of relatively cheap and clean natural gas will delay the shift away from fossil fuels and retard the growth of renewables. Our newfound abundance of natural gas will be seen as a threat by those who believe that a good solution is the enemy of the perfect solution. As a country, we aren’t having a national dialogue on energy security and environmental risks at the moment, so we don’t have a roadmap and we don’t know where we are going. This makes the tradeoffs among the choices we face on these issues very difficult.
John Brodman is former Deputy Assistant Secretary for Policy & International Affairs at the U.S. Department of Energy.