Shale gas sparks fracking frenzy

Published: Tuesday, 20 March 2012

The US shale gas revolution is causing a new gold rush in fracking fluid feedstock such as frac sand and ceramic proppants. But what is unconventional drilling? And can the boom be sustained for much longer?

Demand for fracturing sand and other industrial mineral proppants is booming, and it is all down to the US shale gas revolution.

Extracting natural gas from shale formation involves hydraulic fracturing (fracking) - a drilling technique which requires large amounts of water and sand to be blasted down wells to release small pockets of trapped gas (see panel: Fracking basics).

Due to the massive increase in fracking, the US frac sand market has quadrupled in the last decade to around 22m tpa, with producers estimating supply is yet to catch up with demand.

But will the US shale gas output continue to grow? And what is the outlook for frac sand and ceramic proppant producers looking to tap into the global fracking market?

Start of a revolution

Although fracking was developed in the mid 1970s, cost-effective technology was not brought to market until the 1990s and was then very quickly taken up the by the industry to produce vast quantities of gas.

From producing nearly nothing at the start of 2000, output from shale gas plays rose to 1 trillion cubic feet a year by 2006 and 4.8 trillion cubic feet by 2010, according to the US Energy Information Administration (EIA), and accounting for 23% of total US dry gas production (opposed to associated gas which is produced with liquids such as oil).

The US was expected to start importing gas from the mid-2000s due to lower output from maturing conventional fields, but the shale gas revolution has turned the market on its head, making the country more than self-sufficient. The resource base for technically recoverable US shale gas is estimated at 482 trillion cubic feet, nearly double the conventional gas reserve.

The abundance of gas has also resulted in a slump in US gas prices, which was over $12 per million British thermal units (mBtu) in mid 2008, to remaining flat at less than $5/mBtu since the beginning of 2010.

The EIA also forecast shale gas output to climb to 13.6 trillion cubic feet in 2035, accounting for nearly half of all US dry gas production.

In President Barack Obama’s State of the Union speech in early January, he urged the US to exploit domestic shale gas resources, while also acknowledging environmental controversies around fracking.

“We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy,” Obama said.

“Experts believe this will support more than 600,000 jobs by the end of the decade. America will develop this resource without putting the health and safety of our citizens at risk.”

Fracking environmental concerns

While shale gas has supporters in the highest office of government, it also has given birth to an anti-fracking movement which is concerned about water contamination and earthquakes resulting from unconventional drilling.

New York and New Jersey are the two US states that have imposed a temporary ban on fracking over concerns that the chemicals and minerals used in drilling fluid may contaminate into drinking water reservoirs, while protests have broken out in Pennsylvania over the same issue.

Ohio also suspended operations of some shale wells after the city of Youngstown experienced small earthquakes at the end of last year.

All four states lie partly on top of the huge Marcellus shale formation, which has an estimated recoverable reserve of 141 trillion cubic feet according to the EIA, enough to satisfy US gas demand for a decade.

Other issues include methane leakage, with the 2010 Oscar-nominated film Gasland showing residents setting fire to tap water, although this has been disputed because methane naturally occurs in some underground aquifers.

Corporate backing

But due to the availability of cheap energy, fracking has the backing of the US manufacturing base, with the industrial sector accounting for a third of the country’s gas consumption. With the US manufacturing sector shedding jobs to countries with cheaper labour in Asia, industrials argue that low-cost gas is a necessary to keep competitive in a global marketplace.

Consultancy PricewaterhouseCoopers (PwC) estimated shale gas could employ a million more workers by 2025 from industries directly involved with supply in the shale gas industry and also companies that consume large amounts of gas.

For example in 2011, 17 chemical and metal companies commented that growth in demand for products was directly attributed to the emergence of the shale gas sector, compared with no mention of shale gas in 2008.

PwC also said that cheap natural gas was likely to result in significant investment in new chemical factories, giving them an advantage against overseas competitors which use more expensive oil-based naphtha, according to its report: Shale Gas: A renaissance in US manufacturing?

“We estimate a cost saving for US manufacturers of approximately $11bn annually, by combining recent natural gas consumption levels with potential natural gas prices under high and low shale recovery scenarios,” PwC said.

“Given the historical relationship between domestic energy prices and manufacturing employment, we believe that a high-level of shale gas recovery could lead to approximately one million more manufacturing jobs by 2025, and by 2035, when compared to the low shale gas recovery scenario.”

Shale gas could also be exported to other countries via liquefied natural gas (LNG), which is a natural form that is super-cooled to a liquid, loaded onto tankers and warmed up back to gas at the destination port.

“Exporting natural gas means wealth comes into the United States,” US government Energy Secretary Steven Chu said. US gas prices dipped under $3/mBtu early in 2012, compared with European gas prices being over double and Asian countries are paying over three times as much.

“The US is projected to become a net exporter of LNG in 2016, a net pipeline exporter in 2025, and an overall net exporter of natural gas in 2021,” the EIA said in its latest Energy Outlook.

“The outlook reflects increased use of LNG in markets outside of North America, strong domestic natural gas production, reduced pipeline imports and increased pipeline exports, and relatively low natural gas prices in the US compared to other global markets.”

US dip

But the huge success of shale gas could also be its downfall. Since the shale gas boom, US gas prices have fallen so much that it may be unprofitable for companies to keep fracking.

As a result, Chesapeake, the second largest producer of natural gas, is planning to cut shale gas output by 9% this year in response to a bloated market.

“The curtailed volumes are located primarily in the Haynesville and Barnett shale plays. In addition, wherever possible, the company is deferring completions of dry gas wells that have been drilled, but not yet completed, and is also deferring pipeline connections of dry gas wells that have already been completed,” Chesapeake said.

Meanwhile, other companies such as UK-headquartered BG Group has said it would halve previous 2015 gas output forecasts and US oil company ConocoPhillips said it would also slash this year’s gas output by up to 9%.

However, cheaper gas prices also means more demand, with US power companies looking to capitalise on cheap gas instead of burning coal.

The US is also looking to convert vehicles to run on compressed natural gas, ensuring healthy long-term demand ahead.

European frac sand market

The fracking revolution that started in the US is spreading around the world, with many European countries investigating shale gas potential, including Austria, Germany, Hungary, Ireland, Poland, Sweden and the UK.

Within this group, Poland is leading the way and is targeting first shale gas production in 2014. According to the EIA, Poland has 187 trillion cubic feet of recoverable shale gas, enough to meet domestic demand for over 300 years.

Warsaw has welcomed US oil majors such as Chevron, Exxon Mobil, Conoco and Marathon to help kick-start the Polish shale gas industry, with the country desperate to reduce dependence on Russian gas imports. Poland imports 64% of consumption, mostly from Russia, giving Moscow powerful sway over its smaller neighbour.

Fracking has also started in Ukraine, which also has similar political motives for extracting unconventional gas. It sits on 42 trillion feet of shale gas, enough for over 25 years of demand, and also imports 54% of its gas demand, again from Russia.

But the same environmental concerns that plague the US shale gas industry also concern Europe. France and Bulgaria have already banned fracking for environmental reasons.

The UK has temporarily banned fracking after earthquakes occurred in the north-west of England. Cuadrilla, the company drilling for shale gas in England, admitted the earthquakes were due to fracking, but also said the tremors were so small that they could only be recorded with specialist seismic devices.

Fracking might also be more difficult in Europe as it has more urban areas compared with large areas of arid land in the US. And land rights also differ, meaning land owners may not benefit from fracking like they do in the US.

“Compared with the US, there is a higher population density in Europe and more stringent environmental regulations,” consultancy Ernst and Young said. “Issues like noise pollution, which has so far been less of a concern in the US than some of the other issues, might be more of a problem in densely populated regions of Europe.”

Europe also lacks the oil and gas drilling industry that the US has, hampering an uptake in fracking.

“Although the number of active land rigs in Europe has increased over the course of 2011 to more than 70, a higher number than operating offshore, there is still a shortage of suitable rigs for shale gas exploration and development in Europe,” Ernst and Young added. This compares to around 2,000 rigs in the US.

Other potential

China also has huge shale gas potential, with a recoverable 1,275 trillion cubic feet which is more than the US and Europe combined. Energy firms China National Offshore Oil Corp. (Cnooc) and China Petroleum & Chemical Corp. (Sinopec) have started drilling for shale gas, but it could be years before commercial production starts, according to the EIA.

Argentina also has large quantities of shale gas (774 trillion cubic feet) as does Mexico (681 trillion cubic feet) and South Africa (485 trillion cubic feet).

And fracking activity is likely to increase over the coming decades in line with the increase in gas usage. Oil major BP forecast gas to be the fastest growing fossil fuel through to 2030. This is partly because of environmental reasons - burning gas releases half the carbon dioxide of coal - and due to cost.

Energy prices have steadily risen over the last few years, with oil staying above $100/barrel for most of 2011 compared with around $80/barrel in 2010. Shale gas represents a cleaner and cheaper alternative, which is attractive to a world which cannot afford to go completely green.

Fracking basics

Unlike conventional drilling, hydraulic fracturing (fracking) requires large volumes of water to extract the gas.

Usually, 2-4m gallons of fracking fluids are pumped into each shale well, with the immense pressure forming small fractures several hundred metres long from the drilling area. From these cracks, natural gas which was trapped in impermeable rock is released.

More than 99% of fracking fluid is water and sand, but it also contains traces of clay and other chemicals in the drilling mud to aid the process. Fracking fluid also picks up other elements such as salts and heavy metals as it is forced into the ground.

After fracking, the liquid is pumped back out so the natural gas can flow back to the surface. The left over fracking fluid is either treated and recycled, or disposed of in deep disposal wells.

Frac sand is a form of silica sand which conforms to a specific size, roundness, and sphericity; and must be >99% quartz or silica.

It is divided into white sand and brown sand, with standard white specifications derived from St Peter’s sandstone in Illinois, US, and brown specification from Hickory sandstone near Brady in Texas, US.

The American Petroleum Institute (API) has specifications for proppants in fracking fluid including crush resistance, roundness and sphericity, and the amount of fines allowed above and below he specific mesh size (see IM February 2012: Frac sand in the pipeline).

Major US shale plays

Barnett Shale, Texas

This Texas shale is the one that started it all in the mid-1990s. The Barnett has estimated recoverable reserves of 43.4 trillion cubic feet and is the project that showed the world fracking was economically viable.

The shale covers approximately 16,726 km2 and has had over 13,500 gas wells completed since 1997. At the beginning of 2011, Barnett had around 75 gas drilling rigs.

From zero shale gas production in 2002, the Barnett output for 2010 jumped to nearly 1.7 trillion cubic feet of gas. Typical drilling depths are 2,500-3,000 feet.

Woodford Shale, Oklahoma

The Woodford shale in south-east Oklahoma has recoverable reserves of around 22 trillion cubic feet, but due to the complexity compared to the Barnett shale, the formations are more difficult to drill and frack. Drilling depths are slightly deeper than the Barnett, at over 3,000 feet.

Covering 7,510 km2 in the Midwestern state of Oklahoma, Woodford produced under 0.5 trillion cubic feet of gas in 2010 and had around 55 drill rigs.

Haynesville Shale, East Texas/Northwestern Louisiana

Still in the early stages of discovery, the Haynesville shale is estimated to hold a huge 74.7 trillion cubic feet of gas.

Covering 23,310 km2, the shale is also at depths of 10,500 to 13,500 feet, which is deeper than others, making it more difficult to extract gas. Issues include requiring almost twice the amount of hydraulic horsepower, higher treating pressures and more advanced drilling fluid chemistry than the Barnett and Woodford shales.

Haynesville has around 150 drill rigs and produced 1.3 trillion cubic feet of shale gas in 2010.

Fayetteville Shale, Arkansas

The Fayetteville shale holds around 32 trillion cubic feet of shale gas and is located in the Arkoma Basin.

With an area covering 23,310 km2, Fayetteville has around 25 drilling rigs and produced around 0.5 trillion cubic feet of gas in 2010. The drilling depths required range from a few hundred to around 7,000 feet, making this play shallower than the Barnett in places.

Marcellus Shale; New York State, West Virginia and Pennsylvania

The Marcellus shale play is potentially the big daddy of them all, although still in early exploration stage. The shale is located in the Appalachian Basin and holds a whopping 141 trillion cubic feet. The area covers 246,048 km2 and stretches under New York State, West Virginia and Pennsylvania.

The Marcellus formation is not a new discovery and has been producing conventional gas for a number of years, but the fracking had increased output significantly. With a little over 100 rigs, shale gas output has climbed to nearly 0.5 trillion cubic feet in 2010.

The Marcellus shale ranges in depth from 4,000 to 8,500 feet.

Bakken Shale, North Dakota/Montana

The Bakken shale in the Williston Basin differs from the others as it is an oil play rather than gas, with liquid trapped between dolomite layered between two shales at depths ranging from around 8,000 to 10,000 feet.

It could also hold up to 3.65bn barrels of oil, which would make Bakken the largest find in US history. The shale covers 16,890 km2 and has around 50 rigs working on it.

Bakken produced around 225,000 barrels a day in 2010, helping push total North Dakota oil output to over half a million barrels, which is more than Opec member Ecuador.