UNCONVENTIONAL GAS – THE SECOND “DASH FOR GAS”?

UNCONVENTIONAL GAS – THE SECOND “DASH FOR GAS”?

We regularly ask our interim executives to contribute news stories for our website. In this article, Peter Kitson a senior interim manager, gives us his view on the demands placed on energy today and muses what shape and impact this may have on the the future.
The one thing in life that neither Governments, Corporate bodies nor individuals can influence is thelaw of supply and demand and, given the ever increasing rise in World population, the obvious result is that there will be a significant growth in the demand for energy

This is an absolute given on the basis of the increase in World population and the changing demographic within this increase. For example, over the last 60 years, World population has increased consistently at the rate of 1 billion every 13 years and is expected to increase from the current 7 billion to 10 billion within the next 25 years. The increase is expected to be 1 billion in China; 1 billion in the Indian subcontinent and 1 billion spread across the rest of the World. The population increase in the UK is expected to rise from the current 62 million to over 80 million during this time frame whereas thepopulations of Germany and the FSU are predicted to decline. Within this there is the growing “middle classes” in theemerging economies of India and China and the ensuing increase in energy demands such wealth creates.

Reflect – when the Rev T Malthus wrote on the subject of population in the late 18th century the World population was a mere 1 billion.

It is truly concerning to think that Stephen King, HSBC’s chief economist, predicts that, “if China’s demand for oil continues to grow at its present pace, it will be using the World’s current total annual production by 2035 and will have to secure that supply”.

It is no wonder then that the Chinese, in particular, are so acquisitive in their desire to secure the World’s resources and that both India and China are currently commissioning 1 coal fired power station EVERY week and that China is looking seriously at unconventional gas.

Compare this then to the UK’s current energy policy.

In 2007, UK energy demand was supplied by oil (38.0%); gas (37.7%); coal (16.7%); nuclear (5.8%) and renewable sources (1.8%) – set to increase to 20% by 2020 under the Government’s climate change commitment.

However, between 2011 and 2020 UK annual oil production will decrease by an estimated 42.2% to 800,000 bopd with imports rising from 250,000 bopd to 950,000 bopd to meet demand. During this period, UK annual gas production will decrease from 2.0 TCF to 1.3 TCF with demand rising from 3.1 TCF to 3.5 TCF – that is, the UK’s gas supply / demand gap will be met from imports rising from the current 35.5% of overall supply to 62.9%.

So, with North Sea oil and gas well beyond “peak” and in decline and, apart from the Clair; Buzzard and Aldennes fields (claimed to be the third largest discovery in the North Sea), no recent major oil discovery that will reverse this trend, theGovernment has decided to go down the “Green” route that will, over the next several years, require an investment of some £200 billion to re-engineer the electricity grid to accommodate wind generation while revisiting the nuclear option. As a result, we currently pay a “Green Tax” of 17% on energy bills rising to 22% in the near future. No wonder there are a growing number of homes in the UK that are in “fuel poverty”.

With a significant number of coal fired power and nuclear stations due to be decommissioned in the next few years, just how does the Government expect there to be sufficient electricity to cope with a windless January day with thetemperature at minus 5 degrees? Alarmingly, the £200 billion grid investment is to cope with wind farms running at full capacity whereas best estimates are that they rarely achieve 25% so that is 75% of the £200 billion sitting idle – makes sense to anyone?? No wonder then that the “green lobby” only talks about the headline “installed capacity” rather than energy actually produced!!

While we have a Government and Energy Minister seemingly driven by ideology rather than economic arguments there is a small glimmer of hope in that the Chancellor, George Osborne, at the recent Tory Party conference said, “We’re not going to save the planet by putting our country out of business – so let’s at the very least resolve that we’re going to cut our carbon emissions no slower but also no faster than our fellow countries in Europe.”

Let me put George Osborne’s comments into context. The Carbon Dioxide Information Analysis Centre (an agency of theUS Department of Energy) calculated that the league table of Countries by CO2 emissions in 2008 was:-

(MT 000’s)

China 7,031,916 23.53%
USA 5,461,014 18.27%
India 1,742,698 5.83%
Rest of World 15,129,637 50.62%
UK 522,856 1.75%
Total 29,888,121 100%

It is self-evident that even if the UK became completely CO2 free this would hardly scratch the surface of what is perceived by some to be the major crisis of the 21st century. When you consider that China alone has increased its carbon emissions by 400% in the last 25 years alone and that they and the USA have refused to sign up to the Kyoto Agreement it would appear that the UK government is indulging itself at the tax payers expense in “gesture politics”. Just how does thegovernment then reconcile this to its decision to cancel the Longannet power station carbon capture scheme that would have seen an investment of £1 billion in research and new technology?

So, with current UK gas supplies coming from a diminishing domestic resource and increasing demand being filled by LNG and piped natural gas from Norway; Holland (Holland expecting to become a net importer of gas by 2025) and Russia, what does the future hold?

The future, in my opinion, is one of great opportunity with the emerging potential of “unconventional” gas extraction inthe UK and Europe and we only need to look at North America to see what has happened there in the last 10 years withthe “Shale Gas Revolution” where gas is now a quarter of the price of oil on an energy equivalent basis.

So what is “conventional gas” and how does it differ from “unconventional gas”?

“Conventional gas” is an accumulation of hydrocarbons in a medium to highly porous reservoir with sufficient permeability to allow gas to flow to the producing well in a natural flow.

“Unconventional gas” deposits are found in relatively impermeable rock formations (where expected value of permeability to gas flow is less than 0.1 milli darcy) such as tight sands, shale and coal beds. To extract resources in economical quantities, artificial pathways (fractures) have to be created which involves the use of key technologies such as “fracking” and horizontal drilling. For example, evidence in North America shows that a horizontal well will produce approximately 6 times the volume of gas compared to a conventional vertical well. “Hydraulic fracking” involves pumping sand, water and chemicals into a well and pressuring it to produce fractures in the gas deposits to release gas at an economic rate.

During the last decade, these two technological advances alone have led to a significant change in the US energy market which has gone from being an LNG importer to an exporter with Shale Gas now accounting for 20% of US production with a resulting 50% decrease in the cost of wholesale gas that provides the end consumer with lower overall energy costs and more stable prices.

However, this has not come without some controversy as environmentalists have latched onto the use of “fracking” as an issue resulting on a moratorium in New York State and a ban in France (which produces 80% of its electricity from nuclear power). The documentary film “Gaslands” also contends that water supplies were being contaminated by gas due to “fracking”.

The practice of “fracking” is not new (it has been estimated that over 1 million wells in the US have been “fracked” overthe last 60 years) and is now a widely used technology. Some 99.5% of materials pumped into a well are a mix of sand and water with the remaining 0.5% being chemicals found in household products such as bleach and cosmetics. As regards contaminating the water supply, this can happen with any well if the well completion is not adequate and Cement Bond Logs (CBL’s) have not been run to verify the well sealing integrity. Also note that shale/CBM deposits are generally found at depths of 1,000 metres and below whereas water aquifers are generally at 500 metres and above. Further, as a valuable resource, the materials used in “fracking” are recycled with US companies claiming an 85% recovery rate.

The point that I am making is that bandwagons, often misinformed and blinded to the facts by ideology, have a habit of gathering momentum.

In the UK, Cuadrilla Resources who are the first exploration company to drill Shale Gas wells, have announced a resource estimate of some 200 TCF of gas on their Lancashire licenses near Blackpool, but have currently stopped operations while claims that it caused 2 minor earthquakes are investigated.

To put this into some perspective,

Based on their own estimates gathered from their initial 2 exploration wells drilled to date, Cuadrilla, depending on thegas recovery factor which can range from approximately 7% to a possible 20%, could supply total UK gas demand from between 4 and 11.5 years alone.

So, with the UK and much of Europe sitting on vast untapped coal and shale deposits, we are possibly poised to see our own unconventional gas revolution that could change the Energy Market very considerably in the next few years and this will benefit economies by securing a supply of gas while creating jobs.

For example, the CEO of Cuadrilla, Dr Mark Miller, estimates that his company could contribute between £5 and £6 billion to the economy over the next 30 years through job creation and business taxes. A recent Pennsylvania State University study reports that the Marcellus gas industry (Marcellus resource estimate is some 500 TCF) has an estimated potential to contribute 100,000 jobs and $10 billion in local and state tax revenues.

Worldwide estimates of GIIP of unconventional gas are 9,000 TCF of coalbed methane; 16,000 TCF of shale gas and 7,400 TCF of tight gas sands mostly in the Americas; the Middle East and North Africa and China but with significant deposits across Europe and the Pacific region.

It is painful to juxtapose wind generation and other renewable sources of energy with unconventional gas:-

Wind generation requires significant subsidies to make it economic and is therefore a drain on the economy and on thepocket of each and every household in the UK whereas unconventional gas is economic on a stand alone basis and will make tax contributions while potentially reducing the cost of energy to the industrial, commercial and domestic consumer. Consider also that each wind farm requires a hydrocarbon based source of energy as they are only 25% efficient at best.

Further, when considered on a cradle to grave analysis, wind power results in more greenhouse gas emissions than either coal or gas when taking into account the steel; copper; aluminium and rare earth elements used to build theinfrastructure as they must all be mined, refined, processed, fabricated and installed using fossil fuel systems. And there is not a single UK company in the list of the top ten wind turbine manufacturers despite the fact that there are some 3,500 already installed in the UK (and some 5,000 redundant in the Los Angeles area as they are considered to be uneconomic).

The Government’s own chief energy scientist, Professor David MacKay, recently stated that “Whatever mix of renewable you take, they all deliver about 2.5 watts of energy per square metre. It means that the total land area occupied by renewable energy sources to supply today’s lifestyle would be about HALF the UK”. Also, to power a single car on biofuelsfor a year would take a piece of land the size of 100 football fields. By contrast, a nuclear power station produces approximately 1,000 watts of energy per square metre.

However, when considering the case for unconventional gas, not everything in the garden is rosy as there are a number of issues facing the exploitation of this vast resource in the UK:-

1) Political and public will to support the extraction of unconventional gas deposits.

For example, the UK results from the 1st Annual World Environment Review, published on June 5, 2007 revealed that:-

– 73% (of survey respondents) think that the UK is too dependent on fossil fuels
– 77% think that the UK is too reliant on foreign oil
– 24% think that the Government should do more to expand nuclear power, yet

– 87% think that a minimum 25% of electricity should be generated from renewable energy sources.

2) The lack of service companies in Europe versus the US and therefore the relatively high cost of seismic acquisition, seismic processing, rig hire and well completions etc.

3) Land access and planning permissions and the move to “localisation”.

An example of this issue can be seen in a single exploration licence in Scotland’s Midland Valley where the operator is dealing with numerous land owners and, with acreage split across several regions, the difficulties of dealing with thevarious licensing authorities that have different legislation and practices.

What then the future?

Taking into consideration estimates that the UK has recoverable unconventional gas reserves that could provide fuel to power gas fired power stations for the next 250 years and given the decline in conventional gas production; the looming “energy gap” and the decommissioning of coal fired and nuclear power stations, could Europe and the UK be on the verge of the second “dash for gas”? I predict so.

And to finish this article let me return to our old friend Malthus whose 1798 book, “An Essay on the Principle of Population” predicted that the natural outcome of an ever increasing population would be poverty, famine and pestilence and compare his predictions to the current day when the World’s population is some seven times what it was then.

Essentially, advances in science and agriculture have kept the human race ahead of the game due to selective breeding of livestock and crops together with better farming practices (I do not want to wander into the arguments for or against Genetically Modified Crops in this paper but we have been doing this for centuries!!) and so it could be with energy in thenot too distant future if the work currently being carried out by the US with the National Ignition Facility (NIF) in California and Europe and others in the International Thermonuclear Experimental Reactor (ITER) in Southern France manages to crack the “Holy Grail” of Nuclear Fusion.

Speaking in 1932, the father of nuclear physics, Ernest Rutherford, said of creating energy from nuclear fission that, ”We might in these processes obtain very much more energy than the proton supplied, but on the average we could not expect to obtain energy in this way. It was a very poor and inefficient way of producing energy, and anyone who lookedfor a source of power in the transformation of the atoms was talking moonshine.” Within 10 years Enrico Fermi createdthe first sustained nuclear chain reaction on a Chicago squash court; within 13 years the first atomic bomb had been detonated and in 1956 Britain’s first nuclear power plant at Calder Hall was opened.

Think of the possible consequences for mankind if the NIF and ITER experiments are fruitful!! The Sahara desert covers a landmass of some 9.1 million km2 and is sparsely populated. Compare that to the landmass of China at some 9.9 million km2 and a population of 1.3 billion. If nuclear fusion was able to supply limitless quantities of cheap “clean” energy to power desalination plants we could turn this barren land into a fertile area that would feed the increase in population while absorbing CO2 in the atmosphere and substantially reducing the World’s ever increasing reliance on hydrocarbons.

The end of geo-politics?

Not a bad vision to conclude on.

Peter Kitson has some 20 years experience in the upstream and downstream oil and gas business in both finance and general management.

Linkedin profile:- http://uk.linkedin.com/in/peterkitson

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Lisa has worked within the interim management industry for over a decade and has built an extensive track record of providing clients with experienced, senior level interim executives. She is married with a young son and regularly gives up her time to support her local community raising funds and awareness.

   

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