Natural gas enthusiasts can be forgiven for thinking the shale revolution is unstoppable. North America now has more gas underfoot than anyone could have imagined a few short years ago. But that doesn’t mean shale gas and its fans are without challenges.
“The biggest headwind for shales are other shales…too much gas,” David Pursell, head of macro research for Tudor, Pickering, Holt & Co. Securities Inc. (TPH), told a Houston audience at a Black & Veatch breakfast forum last week. Providing modest support to ongoing shale drilling are production declines in traditional supply basins, Pursell added.
That “helps a little bit, but it’s not enough,” he said, noting that drilling in shale plays is set to slow once producers are holding more leases by production. TPH’s long-term gas price estimate is $6, and $5 would be enough to draw more imports of liquefied natural gas (LNG) to the United States, he said. However, that now depends in large part on what happens in Algeria given the instability sweeping the Mideast region.
Another leg of support for domestic shale supplies would be exports of gasified shale production from the U.S. Gulf Coast and from Kitimat, BC, where a project to do just that is projected to come online in 2015 (see NGI, Jan. 3). Pursell noted that his firm’s clients have a shorter investment time horizon, though; “2015 just feels like forever to me.”
Another challenge for shale plays currently is the fight for oilfield services in a world of low gas prices and high oil prices. That will work itself out, though. On the horizon, Pursell predicted that an eventual overbuild of hydraulic fracturing (hydrofracking) capacity will come to light in 2012 or 2013 in response to the industry’s current shortage.
Also in oversupply will be ethane, due to the robust development going on in natural gas liquids (NGL)-rich plays, he said. “I don’t see any way that we don’t flood the U.S. ethane market,” he said. “I think the NGL benefit [to producer economics] is going to be reduced over the next couple of years.”
On the environmental front, Pursell said the potential for aquifer contamination from hydraulic fracturing doesn’t exist. However, the industry does need to be concerned with water usage and disposal of used water. “Water handling at the surface is a big deal…It’s going to work out, but not without a cost,” Pursell said.
Black & Veatch’s Fred Hagemeyer also cautioned the industry on costs associated with water needed to frack wells, and he added that the potential for federal legislation that would govern hydrofracking is a “significant headwind” facing the industry.
Besides that there is just the sheer number of wells that will be needed to recover the shale gas resource, Hagemeyer pointed out. In the Marcellus Shale, for instance, if the recoverable resource is 200 Tcf, 50,000 wells will be needed to get at it. “What we’re looking at is a vast number of wells,” he said. “It is challenging indeed to realize what people are talking about.”
Put another way, there were about 130 rigs working the Marcellus in January, according to Black & Veatch. It would take that number of rigs working nonstop 32 years to recover 200 Tcf, Hagemeyer said.
Following his presentation Pursell was asked if he knew of any discontent among the foreign joint venture (JV) partners of U.S. companies active in the shale plays. While some have said that the foreign investment is a “massive bet on gas prices…really it’s not,” Pursell said. For a company like China’s CNOOC Ltd., its cost of capital is probably about 2%, Pursell asserted. Investors like CNOOC “need to put dollars to work around assets in a safe economy,” he said; they can wait for returns.
And the fear that the Chinese are coming to take the United States’ natural gas and ship it back home as LNG is “a bit overdone,” Pursell said. “They just want a hedge…These guys are trying to create a portfolio of assets.”
One potential source of friction among JV partners that Pursell noted, though, is the cultural difference between the independent companies — which have picked the locks to the shales one well at a time, learning as they go — and international oil companies, such as ExxonMobil Corp., which prefer to do their experimenting in the laboratory. “There’s a little bit of a culture mismatch,” Pursell said.
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