SHALE GAS GHOST

08.02.2011

SHALE GAS GHOST

Sergei Sargsyan

S.Sargsyan - Deputy Head of the Center of Political Studies at “Noravank” Foundation

Part 1. Sanguine hopes

Unexpectedly for many, in 2008 the United States sharply revved up production of natural gas – on 7.5% or 41.7 billion m3, and left behind Russia which produced “only” 582 billion m3.

Such a success was acquired by the US at the expense of shale gas production¹ - gas in the shale stratum: 80 billion m3 was produced from five gas fields. It is forecasted² that shale gas production in the US will go on with an averages annual growth rate of 5.3% till 2035, reaching 109 billion m3 in 2015 (about 20% of an average natural gas production) and by 2030 it will be 156 billion m3 (24.6%).

The way of the US to such rates was long and persistent. The first shale gas well was drilled in the US back in 1821. A small volume of the shale gas has been produced there for about 100 years.

In 1946 the American billionaire George Phydias Mitchell established the largest oil and gas production company - Mitchell Energy & Development. For 17 years it had run experiments on adoption of various technologies of increasing productive capacity of shale reservoirs. And only in 1981 its first industrial production was initiated on Barnett oil field. At first building up of the production capacity proceeded at a slow pace – by the end of the 90s it was about 13 billion m3. After the adoption of the horizontal drilling technology in 2002 (in 2001 Mitchell Energy & Development was sold to Devon Energy at a price of $3.5 billion) the productive capacity of the wells has considerably increased. And the appliance of the technology of hydraulic fracturing of the shale rock alongside with the technology of horizontal drilling³ provided well rejuvenation for hundred times, which became a breakthrough in the industrial adoption of the shale gas fields – in 2009 about 67 billion m3 was produced (11.3% of all the gas produced in the US). And, according to Wood Mackenzie’s forecast the total share of the shale gas in the overall gas production in the US may reach 35% by 2020⁴.

Appearance and practical application of new technologies of gas production from the shale rock allowed increasing the capacity of the produced stock of the natural gas in the US – from 36.8 trillion to 58.7 trillion m3. On the assumption of the current annual gas consumption this will cover its domestic demand approximately for 90 years.

As for the shale gas its proven reserves are about 1 trillion m3, meanwhile estimated reserves are about 20 trillion m3, the biggest shale gas fields in the US are Barnett (in Texas; it provides about a half of all the shale gas produced), Haynesville, Fayetteville and Marcellus (which reserves are assessed at approximately 14 trillion m3 gas).

Shale gas production buildup in the US caused the increase of the volume of the imported gas (mainly liquefied natural gas, LNG) which was redirected by the suppliers to Europe which caused the increase of its import on 22%. Due to the fact that all these firstly took place against the background of the ongoing economic crisis, which caused gas saving on 6% and, secondly, under the shift to the liberalization of the access of the final consumer to the gas pipeline system and diversification of the supply sources, the prices on LNG has fallen to $70-90 (as for the supply from Qatar). And this conditioned the choice of the consumers to its favour, as Russian Gasprom supplied gas to European countries at the average price of $270-275 for 1000m3.

Illustrative example of the US caused that the possibility of local shale gas production became the issue under the discussion in mass media, in the expert community and political establishment. The fuss round the shale gas was stirred up by a number of experts’ forecasts. For example the analytics from the International Energy Agency⁵ believe that the shale gas will constitute about a quarter of total natural gas production in the world.

According to some estimation unconventional sources can increase world gas reserves 3 times, and some part of those reserves is situated in the “stable” parts of the world, particularly in Europe. International Energy Agency assesses total European reserves of non-traditional gas in 35 trillion m3. Though those reserves are considerably smaller than in North America and in Russia, but they will be enough to substitute import of gas for the period of 40 years in case of the current level of consumption⁶.

However, at current moment only the US and Canada produce shale gas on an industrial scale⁷, and one can make only approximate suppositions concerning its possible reserves in other countries on the geological analogy with the US gas fields before getting the results of geological investigation. It was noticed that the reservoirs of gas bearing shale rocks are found in the proximity to the reserves of traditional energy resources – oil, gas and coal. Thus, according to this approximate method of estimation the shale gas reserves in Europe and China may be about 10-15 trillion m3.

It is assumed that there are shale gas reserves in Germany, Austria, Poland, Ukraine, Romania and Sweden.

In 2009 in Sweden Shell PLC has started shale gas well drilling which according to the forecasts will cover its self-sufficiency in 10 years⁸.

The most promising is the shale gas investigation in Poland. Its government is very eager in involving foreign energy companies in this process. In 2009-10 the licenses of geological prospecting in the area of more than 400 thousand acres were taken up, alongside with the state PGNIG oil and gas company, by such famous companies as ExxonMobil, ConocoPhillips, Marathon Oil, Chevron, Canadian Talisman Energy and others. This year preliminary results of the prospecting are expected.

There is already shale strata found in the north-west of the country which depth are up to 200 meters and the occurrence depth from 2 to 3 km. According to the estimates of Wood Mackenzie consulting company the reserves of shale gas in northern and central parts of Poland may reach 1.36 trillion m3.

But according to the most optimistic forecasts, taking into account the shale gas fields in the south-east of the country, its reserves may be 12 trillion m3 annually, and this will cover its own demand and relieve of the dependence on the import of the gas, mainly from Russia.

Ukraine is also interested in geological prospecting and production of the shale gas and coal bed methane together with the American Shell and ExxonMobil. Here the shale gas fields can be found alongside the whole Ukrainian part of the Carpathians. The total geological reserves of menilite shale are estimated at 520 billion tons. There are five shale gas fields found in Lvov region, six in Ivano-Frankovsk region, two in Zakarpatsky and one in Chernovitsky region⁹. Kiev plans to produce 7-10 billion m3 annually in three or four years.

Success of the “shale revolution” in the US is not only of economic significance: many experts consider it as a ground for formation of a new global geopolitical picture of the world. It seems that the direct consequences of buildup of the shale gas production in the US. Europe and China can be:

Loss of possibility to use the status of the leading gas producing countries – mainly by Russia, Iran and Venezuela – to obtain military and political goals.
Lowering of the support of Iran on behalf of China; consequently a possibility may appear for amplification of world pressure on Tehran concerning the issue of nuclear programme which, in the opinion of Washington and Jerusalem will have military application.
Refusal of Iran from the economic groundings for the necessity to build new nuclear power plants, in case if the most of the gas produced in Iran and which has no demand in Europe which provided itself with shale gas, is directed to meet the domestic demand without involving nuclear energy.
Softening and easing of the reaction of Beijing to the control of the straits in South-East Asia by the US Navy, through which it receives most of the imported energy carriers.
It would make senseless the creation of the gas cartel by analogy with OPEC.
It would make building of two Russian gas pipelines – Northern and Southern streams, unprofitable.
It will make the producing countries to refuse from connecting gas prices with the oil price.
It will cause tangible decrease in world prices on natural and liquefied gas.

The prospects of refusal of Europe from the considerable part of the imported gas also has a direct connection with Armenia, in particular, due to the redistribution of balance of powers in the region of South Caucasus because of the lowering of the political and economic influence of Russia and Iran, as well as to the loss of possibility by Azerbaijan to substitute in mid-term the decrease of revenue from the oil production and export by the profits from gas. In general, it may cause both worsening of social and economic situation in the country with the further lowering of the level of the political stability and affect the dynamics of foreign political activity of Baku, first of all in regard to the resolution of the Nagorno-Karabakh conflict through the peaceful negotiation process.

However the mechanical transference of the US experience on increasing the share of the shale gas in the energy balance of the country up to the full self-sufficiency to the European continent seems to be not so proper due to a number of reasons.

Both the safeness of the technology of shale gas production and its declared prime cost cause definite concern.

In present the picture of redistribution of word gas flows from producing parties to the consumers caused by the “shale revolution” still has not acquired unequivocal and distinct outlines which is, in particular, proved by fact that the decision about the prospects of gas production at huge Shtokman gas field will be taken by Russia at the best in 2011.

¹Shale gas – it is one of the types of the so called unconventional gas, i.e. natural gas contained in the clay shale rocks, coal-beds and tight sands deeply lying in the geological zones under high pressure.

²According to the forecasts of the statistic agency of the US Energy Department , http://www.energy.gov

³Hydraulic fracturing – is a process used to increase or restore the rate at which fluids, such as oil, gas or water, can be produced from a reservoir. A hydraulic fracture is formed by pumping the fracturing fluid into the wellbore at a rate sufficient to increase the pressure downhole 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 farther into the formation. To keep this fracture open after the injection stops, a solid proppant, commonly a sieved round sand, is added to the fracture fluid. The propped hydraulic fracture then becomes a high permeability conduit through which the formation fluids can flow to the well. For the first time this method was used in 1949 by Halliburton Company

⁴Газета «Коммерсантъ», №188, October 11, 2010г.

⁵http://www.iea.org

⁶"Business New Europe", 20.01.2010.

⁷The industrial production of shale gas in Canada is arranged in two gas fields – Horn River and Montney. In the opinion of the specialists from the Canadian National Energy Board, by 2020 the shale gas and tight sands gas production will reach the amount of 200 billion m3 annually.

⁸http://naer.gov.ua/archives/2064

⁹Ibid.

«Globus Energy and Regional Security», issue 1, 2011

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