An energy game-changer?
Louisiana shale could change fate of U.S. energy supply
By TOM FOWLER
HOUSTON CHRONICLE
Nov. 1, 2009, 11:41AM
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James Nielsen Chronicle
Drilling rigs dot northwest Louisiana, where locked into cement-like shale formations thousands of feet underground are potentially huge quantities of natural gas.

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EXPLORING ENERGY
Get the latest news from the industry This is the first of several reports looking at the boom in natural gas produced from shale formations.

GRAND CANE, La. — Two miles beneath northwest Louisiana's patchwork quilt of forests, cotton fields and pastures, dozens of drill bits are grinding their way toward what may be the nation's energy future.

The region around Shreveport has known oil and gas exploration for decades, but it's now buzzing anew as companies try to capitalize on one simple fact — locked into cement-like shale formations thousands of feet underground are potentially huge quantities of natural gas.

The gas found in the area's Haynesville shale and in other shale formations throughout the country has changed the nation's energy outlook in just a few short years.

Some see abundant North American natural gas as the gateway to reduced dependence on foreign oil and a bridge toward carbon-free energy sources since gas is the lowest-emission fossil fuel.

Others say the surge in next-generation gas production isn't paying off as promised and threatens local water supplies.

Some even see it as another speculative bubble, driven by hype that will never deliver the fuel it promises.

What is happening in Haynesville is typical of what has happened and will likely occur in the other shale regions — millions of dollars in investment, plenty of lawsuits against the drilling companies and concerns about the safety of the drilling techniques being used.

Until just a few years ago, the story of natural gas supply in the U.S. had been one of decline. Dozens of liquefied natural gas terminals were on the drawing board in the earlier part of the decade to help import the fuel from overseas.

But the marriage of two long-used drilling techniques — hydraulic fracturing and horizontal drilling — is showing potential.

For years, companies have used hydraulic fracturing — injecting water into underground formations to break apart rocks and release more oil and gas. The Woodlands-based Mitchell Energy perfected the techniques in the Barnett shale formations in North Texas. But it wasn't until Devon Energy acquired Mitchell in 2002 that engineers added horizontal drilling — turning the drill bit at a 90-degree angle to tap into a larger section of the strata.

Suddenly these dense formations that companies thought too expensive to drill are economically feasible.

And since companies have been drilling through them for decades to get at conventional oil and gas formations, the locations of the shale formations are well-known, said Rusty Braziel, managing director of Bentek Energy.

“You may as well drop the ‘E' from E&P,” Braziel said, using the common abbreviation for exploration and production. “They don't explore, just produce.”

In just two years the country's estimated natural gas resources rose 39 percent, from 1,320 trillion cubic feet in 2006 to 1,836 trillion cubic feet, according to the Potential Gas Committee, an industry think tank.

Climate change debate
The natural gas industry is using this boom as ammunition in the debate over climate change and energy security. They say the fuel is ideal for replacing coal to run power plants because it produces half as much carbon dioxide and note it also can run cars and trucks with modified fuel tanks and engines.

The Barnett shale formation around Fort Worth has been the busiest in recent years, followed by the Woodford and Fayetteville shale formations in Oklahoma and Arkansas, but Haynesville is now seeing its day.

Companies have scrambled over the past two years to lease as much acreage as possible. In 2008, oil and gas exploration companies in the Haynesville shale paid out about $3.1 billion in lease payments to property owners and $93 million in royalties, according to a survey done for the Louisiana Department of Natural Resources. That figure is considered conservative since only 70 percent of the companies responded.

State and local governments also collected about $56 million in state and local taxes related to the drilling and leasing.

The activity in the region is particularly clear from the air. Dozens of drilling-rig towers project above the treetops while acre-size red squares of freshly overturned earth mark future drill sites.Pathways cleared for new pipelines cross the region, with some pipelines recently buried and others exposed, their unconnected parts neatly arranged like hundreds of green drinking straws.

At a drilling site in rural Desoto Parish, Larry Strasheim, a drilling superintendent for El Paso Corp., says he has worked a lot of big prospects over the years, drilling in all kinds of formations. “But there's something special about this one,” he said.

Haynesville shale is deeper than many other shale formations, but the wells tend to produce more gas upon start-up than in other fields, often five times more.

That's why the new gas gathering and processing system CenterPoint Energy is building for Shell and EnCana's Haynesville production will be twice as large as a typical gathering system. The pipes running from the wellhead will be 24 inches in diameter instead of the standard 12 inches.

“The wells produce a lot more up front,” said Kerri Selsor, vice president of engineering and construction at CenterPoint.

“They are all working on an aggressive schedule and a very short time frame because they often have just three years to drill before leases expire.”

Not everyone is pleased with the boom.

Ben Wheeler, a retired truck driver in Desoto Parish, said he and his neighbors were among the first approached by natural gas companies in late 2007 about selling their mineral rights.

$125-$30,000 an acre?
He says the companies gave them a hard sell, saying everyone around them had signed up and that they had better do the same. Wheeler was offered $125 an acre.

Less than a year later Wheeler and his neighbors, who had agreed to sell for even less, were hearing of other landowners who had been offered up to $30,000 an acre. And the royalty payments have been more like a trickle than the torrent many were promised.

“If they had paid everyone a fair market value instead of taking advantage of us, we wouldn't have had all this,” said Wheeler, who is among landowners suing the owner of the gas well in their neighborhood.

Some are also skeptical that the boom in leasing and drilling in shale plays will deliver as promised. Houston energy consultant Arthur Berman likened the shale rush to speculative bubbles seen in financial services, real estate and technology in the past.

And famed energy investment banker Matt Simmons — a proponent of the “peak oil” premise that says the world already has reached its maximum oil production levels — has doubts about predictions that wells will continue to produce for years after their initial burst.

“In the past 40 years I don't think I've seen anything promoted as hard as shale in the oil and gas business,” Simmons said.

But investment in shale continues. Just last month Chesapeake Energy told analysts it expects to spend as much as $4.7 billion on drilling next year, a 40 percent increase over this year's budget. Plenty of others are following suit.


Buck