Unexpected natural gas boom may ease U.S. energy crunch
By Clifford Krauss

Friday, August 22, 2008
HOUSTON: American natural gas production is rising at a clip not seen in half a century, pushing down prices of the fuel and reversing conventional wisdom that U.S. gas fields were in irreversible decline.

The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America - gas believed just a decade ago to be out of reach.

Shale gas could ultimately be important beyond North America. The rest of the world has shale formations on an immense scale. Many of them, including beds in Europe, Russia and China, are known to contain gas, but exploration and assessment of those fields with the new production techniques is just beginning.

The trend has significant long-range implications for U.S. consumers and businesses. A sustained increase in gas supplies over the next decade could slow the rise of utility bills, obviate the need to import more gas from elsewhere around the globe, including liquefied natural gas delivered in tankers, and make energy-intensive industries more competitive.

While the process of extracting gas produces some environmental damage, natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil. It is now used primarily for residential heating and cooking, power generation, providing energy for industrial processes, and as a feed stock for fertilizer, chemicals and plastics.

Some experts believe that wider use could be a step in battling climate change, helping to buy time until renewable fuels like wind and solar power become feasible on a large scale.

While the recent production increase is indisputable, not everyone is convinced the additional supplies can last for decades. "The jury is still out how big shale is going to be," said Robert Ineson, an analyst at Cambridge Energy Research Associates, a consulting firm.

Still, many people in the natural-gas industry believe a new era is at hand, and a rising chorus of analysts on Wall Street accepts that notion. Competition among companies for rights to the new gas has set off a frenzy of leasing and drilling.

"It's almost divine intervention," said Aubrey McClendon, chairman and chief executive of Chesapeake Energy, a major natural gas producer in the United States. "Right at the time oil prices are skyrocketing, we're struggling with the economy, we're concerned about global warming, and national security threats remain intense. We wake up and we've got this abundance of natural gas around us."

U.S. gas production is up about 9 percent this year, a rate of increase not seen since 1959. Most of that gain is coming from shale, particularly the Barnett Shale around Fort Worth, Texas, which has been under development for several years. The increase in gas production stands in sharp contrast to the trend in domestic oil production, which has been declining in fits and starts since 1970.

The Barnett proved that shale gas could be practicably extracted, but companies have lately set their sights on shale formations that could produce far more gas.

Testing to determine the productivity of fields has been completed on just a tiny fraction of the potential acreage. According to a new report by Navigant Consulting, paid for by a foundation allied with the gas industry, there could be as much as 842 trillion cubic feet, or 24 trillion cubic meters, of retrievable gas in shales around the United States, enough to supply about 40 years of use at today's consumption rate. But thousands of wells need to be drilled before the exact reserves will be known.

Domestic natural gas prices have already fallen nearly 40 percent since early July, an even faster drop in price than oil or most other commodities, in part because of the stagnant economy but also because rapid supply growth has begun to influence the market. Price spikes remain possible, of course, but throughout the industry, the shale discoveries are causing a shift in thinking about the long-term outlook.

Extracting gas from shale beds is far more promising and less damaging to the environment than the elusive, costly dream of crushing shale rock to produce a form of crude oil.

Black or brown shales are a type of sedimentary rock, high in organic matter, found beneath millions of acres in the United States. The rock has been known for more than a century to contain gas, but it was considered virtually worthless until a decade ago because wells would produce gas for a brief period and then die.

Now, companies are drilling long, horizontal wells and pumping in water to fracture the rock, releasing vastly more gas than could the vertical wells of old.

The Barnett was the first shale field to undergo major development, and production has gone up tenfold since 2001, so that it now produces 7 percent of the country's gas supply. At least two other shale formations, the Haynesville in Louisiana and Texas and the Marcellus in the Appalachian Basin, are believed to be even larger, though substantial production in those will take another two to five years.

Prospectors have identified at least two dozen shale beds in North America that could contain large amounts of gas.

A Deutsche Bank analyst, Shannon Nome, estimated in a report that production from the eight largest shale fields was likely to hit 6.6 billion cubic feet a day this year, or 11.8 percent of national gas production, and then rise to 14.5 billion cubic feet a day by 2011, or as much as 23 percent of domestic production.

Chris Ruppel, an energy analyst at the firm Execution, said, "Shale is the most significant domestic natural gas find in 50 years, which means the United States will become gas independent and more industrially competitive versus Europe for gas intensive industries such as chemicals, fertilizer, smelting iron and aluminum."

In the United States, real estate speculators are becoming overnight millionaires in Pennsylvania, Louisiana and Texas by buying up lands and selling them to companies that drill for natural gas. Wildcatters, or those who drill oil wells in areas not known in advance to be oil fields, are ordering every rig they can get their hands on, and paying signing bonuses of $25,000 an acre, or about $10,000 a hectare, to drill below houses, schools and churches. Pipeline companies are building as fast as they can to get the new gas to market.

As the frenzy unfolds, some energy experts urge caution in projecting how big the new supplies will be and whether they will alleviate the loss in productivity of conventional wells, particularly those in the Gulf of Mexico. "Its hard for me to believe we will have more domestic gas production in six years than we have now," said Chip Johnson, president and chief executive of Carrizo Oil and Gas, a Houston company involved in several of the shale fields.

The U.S. Energy Department's 2008 estimates for shale gas reserves that may one day be economically produced stands at 125 trillion cubic feet, about a seventh of the most optimistic industry estimates. Jeffrey Little, a gas analyst at the Energy Department, said the government estimate was based on 2006 data and could increase after further testing.

"The larger reserves could very well be out there, but their magnitude is uncertain," he said.

Some industry experts warn that shortages of engineers and rigs, the scarcity of pipelines near some shale fields, and fights over land and water use could slow development.

In the Marcellus field, drilling and pipeline work must be done over woody and hilly terrain, and enormous amounts of water are needed to fracture the shale. Drilling has been halted in places after local regulators caught companies drawing water from streams without permits.

"We see natural gas as potentially a very important transitional fuel, but we can't use it at the expense of our natural resources," said Kate Sinding, a senior lawyer for the Natural Resources Defense Council.

She warned that water-intensive drilling in shale could threaten local water supplies and aquifers. "We need to slow down and make sure we have the right regulatory regime in place," Sinding said.

U.S. gas production was in decline from the early 1990s to 2005, before production from shale beds and some lesser unconventional fields led to increases beginning in 2006. In the meantime, consumption increased by more than 15 percent, satisfied largely by rising imports.

Prices in recent years soared from less than $2 per 1,000 cubic feet in 1999 to more than $13 as recently as last month, before a precipitous decline in recent weeks, to just more than $8.

The production boom "is great news for both the fertilizer industry and U.S. food production," said Kathy Mathers, a vice president at the Fertilizer Institute, a Washington trade association. She said that half the country's fertilizer production capacity had shut down over the past six years because of the soaring price of natural gas.

Some in the gas industry are worried about continued price declines, however, saying a big jump in production may not be sustainable.

Michael Zenker, a natural gas industry analyst at Barclays Capital, estimates that at $7 per 1,000 cubic feet "you begin to lose enough rigs to start to move from supply growth to supply decline."

McClendon, of Chesapeake Energy, has become the industry's most active salesman in trying to boost demand to soak up the new supplies.

Some of his arguments have been echoed by T. Boone Pickens, the Texas oilman, with the two of them arguing that natural gas, if expanded to other uses - including transportation, which is now completely dependent on oil - could help the country reduce its petroleum imports substantially.


--------------------------------------------------------------------------------
Notes:



--------------------------------------------------------------------------------
Copyright © 2008 The International Herald Tribune | www.iht.com