The History of Shale in the U.S. @luisgomesb

A revolution is defined as a seismic change that occurs rapidly, upends the status quo, and establishes a new order. The U.S.-led "Shale Revolution" is doing all three. While the history of shale is still being written as we remain in the midst of the revolution, a rich and colorful narrative of the rise of unconventional activity has already been established.

What follows below is an exploration of the past, present, and future of U.S. shale as we document a brief history of the revolution to date, an assessment of the current state of unconventional activity, and forecasts for future activity. In upcoming installments of this US unconventional series, specific shale gas and unconventional oil plays in the U.S. will be chronicled.

The History of Shale in the U.S.

The year was 1825. The president was John Quincy Adams. And the place was Fredonia, New York. It was here that shale gas was first extracted as a resource in shallow, low-pressure fractures. But the technology to commercialize shale hydrocarbon was nowhere yet on the horizon. It would take more than 150 years for industrial-scale shale gas production to be enabled.

Starting in the 1970s, declining production from conventional gas deposits in the U.S. prompted the federal government to invest in R&D projects to try and boost U.S resource exploitation. Some of the first of these investments were the Eastern Gas Shales Project in 1976 and the annual FERC-approved research budget of the Gas Research Institute. In 1986, the Energy Department joined with private gas companies to complete the first successful air-drilled multi-fracture horizontal well in shale. The government further incentivized shale drilling through the Section 29 tax credit for unconventional gas from 1980-2000.

But it was not until 1991 that Mitchell Energy's first horizontal drill in the Barnett Shale in north Texas was drilled. A revolution had been conceived. Mitchell used new technologies, such as microseismic imaging, to achieve the first economic shale fracture in 1998 with the execution of a slick-water completion. Since that time, natural gas from shale has been the most rapidly-growing contributor to energy production in the U.S.

The Barnett Shale kicked off the revolution

To put the revolutionary nature of U.S. shale in perspective, consider the following statistics. In 1996 shale gas wells in the U.S. produced 0.3 Tcf, or 1.6% of U.S. production. In only a decade, production more than tripled to 1.1 Tcf, or 5.9% of U.S. gas production. By 2005, there were 14,990 shale gas wells in the U.S. In 2007 a record 4,185 shale gas wells were completed in the U.S. Observe the rapid rise of shale gas production in comparison to other sources of gas, beginning around 2005:

In 2008, U.S. shale gas production was 2.02 Tcf, an increase of 71% from 2007. In 2009, production rose 54% to 3.11 Tcf, while remaining proven U.S. shale reserves at the end of that year increased 76% to 60.6 Tcf. Shale production is expected to increase from 23% of total U.S. gas production in 2010 to 49% by 2035.

If Gas, Why Not Oil?

As the natural gas shale boom was taking off, operators in Montana and North Dakota were already drilling horizontal wells and seeking to determine whether the application of the same techniques (fracking longer laterals) could be employed in oil formations. Over the past few years, unconventional techniques have proven successful when applied to oil reservoirs and have led to a rapid increase in U.S. oil production. The Bakken and Eagle Ford shale plays are prime examples of this success (to be discussed later in this series).

The production of tight oil (crude oil and condensate from unconventional sources) is expected to rise from 2 M/bd in 2012 to 4.5 M/bd by 2035, accounting for approximately 63% of total U.S. crude oil and condensate production. Five years ago, the industry was most excited about new oil sourcing from the ultra-deepwaters of the GOM--the Lower Tertiary trend got all the attention. Now onshore unconventional oil activity is winning the mind share battle--the below chart puts the "why" into perspective. Notice how tight oil production is expected to be nearly triple deepwater production by 2020.

Shale and the Economy

The overall economic impact of the shale revolution is most vividly observed in jobs creation data. In 2010, the development of shale resources supported 600,000 jobs. The National Association of Manufacturers estimates that high recovery of shale gas and lower natural gas prices will aid U.S. manufacturers in employing 1 million workers by 2025 (and that may actually be conservative). Meanwhile, lower energy costs and feedstock due to increasing U.S. production could help manufacturers cut expenditures by as much as $11.6 billion by 2025. IHS Global Insight estimated that in 2012 employment in the entire unconventional upstream sector accounted for more than 1.7 million jobs. This number is expected to rise to more than 2.5 million in 2015, nearly 3 million jobs in 2020, and nearly 3.5 million jobs by 2035--again figures that we at Oilpro feel could track on the conservative side.

Indispensable Technology: Horizontal Drilling and Hydraulic Fracturing

New technologies, led by horizontal drilling and hydraulic fracturing, have allowed shale gas and tight oil development to move into areas that were previously inaccessible. While these technologies have been widely documented, a piece on the shale revolution would hardly be complete without some discussion of these advancements--for their role is a pivotal one in the advent of unconventional activity.

Today, the drilling and completion of shale wells includes both horizontal and vertical wells. The emphasis on horizontal wells over vertical is a consequence of the former's ability to provide more exposure to a formation.

This increase in reservoir exposure creates several advantages over drilling vertical wells. For example, six to eight horizontal wells drilled from one pad can provide access to the same reservoir volume as sixteen vertical wells. Additionally, using multi-well pads can also significantly decrease the footprint of a development (reducing well sites, pipeline routes, access roads, and required production facilities). These factors collectively minimize the disruption of habitats, impacts to the public, and the cumulative environmental impact.

In addition to horizontal drilling, hydraulic fracturing, which involves the high-pressure pumping of a fracturing fluid into a shale formation to generate cracks in the target rock formation, allows natural gas and oil to flow out of shale to the well in economic quantities. Thus previously non-commercial sources of oil and gas can now be extracted via this technology.

In addition to horizontal drilling, hydraulic fracturing, which involves the high-pressure pumping of a fracturing fluid into a shale formation to generate cracks in the target rock formation, allows natural gas and oil to flow out of shale to the well in economic quantities. Thus previously non-commercial sources of oil and gas can now be extracted via this technology.

The success of these technologies, first in the Barnett Shale (as recounted above), inspired renewed economic confidence in the industry, and the development of shale plays harboring both gas and oil accelerated throughout the country.

These successes have also prompted nations throughout the world to seek to replicate the U.S. shale revolution. Among the most notable recent examples are the UK, India, Poland, South Africa, Saudi Arabia, and Romania, among others. In all of these countries, local governments and foreign companies are exploring the possibility of making shale exploitation a reality. Other nations, such as France, have halted shale exploration due to ostensibly environmental concerns. And in MENA, the U.S. shale revolution has prompted OPEC to reassess its strategy and vigorously assert its continued relevance.

Thus the U.S. shale boom has inaugurated a ripple effect throughout the globe that shows no sign of abating any time soon. In fact, we at Oilpro are watching for international unconventional exploration and development to pick up meaningfully over the next 4-7 years. While many hurdles remain to be addressed (infrastructure, logistics, supply chain, and regulation), "money talks" as the saying goes, and the economics of shale production are too compelling to ignore.

Now that we have presented you with the big picture, we next will explore the specifics of the U.S. shale boom.

Chronicling the life-cycles of the major shale gas plays will be the subject of the the next installment of this series.

S: Jeff Reed

Adjusted: Luis Gomes
@luisgomesb