Rethinking unconventional oil and gas

LONDON: Most analysts and journalists still draw a sharp distinction between the production of oil and gas from conventional fields and from unconventional resources such as shale. The reality is more complex.
In practice, it is not easy to tell where conventional petroleum production ends and unconventional production begins.
In assessing how quickly shale and other unconventional petroleum resources will be developed, location matters.
Large shale resources in countries which are already major conventional producers and exporters may not have much impact on oil and gas availability: the shale accumulations may end up “queued” behind a long line of conventional projects as the host nation restricts resource development to support prices.
By contrast, shale accumulations in countries which are net importers and/or have few conventional supplies of their own look set to be developed much more quickly.
Unconventional oil and gas resources are often located in the same sedimentary basins as conventional oil and gas fields. In many cases, the shale or tight rocks which are targeted by horizontal drilling and hydraulic fracturing were the original source for the oil and gas found in more conventional reservoirs.
Petroleum geologists talk about a “total petroleum system” (TPS) that includes all the essential elements (source, reservoir, seal and overburden rocks) and processes (generation, migration and accumulation) linked to a particular source of oil and gas.
A total petroleum system will normally include both discrete accumulations of oil and gas in conventional pools, reservoirs and fields, as well as more extensive “continuous-type accumulations” in shales and tight rocks (“The total petroleum system: the natural fluid network that constrains the assessment unit” US Geological Survey, 2000).
For decades, North Dakota produced millions of barrels from wells drilled into conventional oil accumulations found in the Madison and Lodgepole formations. But the source of that oil was probably the Bakken and Three Forks formations, which are continuous-type accumulations, and are now being targeted directly by fracking firms.
The result is that much of the prospecting for shale oil and gas is occurring in areas that have already produced conventional oil and gas. Frackers have turned their attention to the Anadarko Basin beneath Oklahoma and Kansas, areas that have been producing substantial quantities of oil and gas for a century.
Argentina’s enormous Vaca Muerta shale formation is thought to be the source for several conventional oil fields in the region. China’s Sichuan basin, which is highly prospective for shale gas, has been the home of the country’s conventional gas industry for thousands of years.
The North Sea is also thought to contain substantial quantities of unconventional petroleum.
The main difference between conventional and unconventional accumulations is the ease with which oil and gas flows through the formation. Geologists measure this permeability in Darcy units. Permeability for the giant carbonate and sandstone reservoirs of the Middle East is a thousand times or more than for shale formations.
Until the advent of horizontal drilling and hydraulic fracturing, there was no way to extract oil and gas in commercial quantities from low-permeability rock formations such as shale. But by creating a network of tiny fissures in the rock formation, hydraulic fracturing can enable oil and gas to flow through rocks that were formerly impermeable.
However, it is important not to overstate the differences between conventional and unconventional production. Conventional oil and gas producers regularly use hydraulic fracturing, acidizing and other treatments to stimulate production from wells.
Hydraulic fracturing treatments have been performed more than a million times in the US since 1947, in most cases on “conventional” oil and gas wells, according to the National Petroleum Council (“Prudent Development: Realizing the Potential of North America’s Abundant Gas and Oil Resources” 2011).
The US Energy Information Administration (EIA) estimates there are 6,622 trillion cubic feet (tcf) of technically recoverable shale gas resources in the United States and 32 other countries.
To put this in perspective, the world’s proven resources of (conventional) natural gas are about 6,600 tcf, and total technically recoverable resources are roughly 16,000 tcf, so shale gas extends the conventional resource base by 40 percent (“World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States” Apr 2011).
Some of the biggest shale accumulations are likely to be found in countries that already have substantial conventional gas resources. The US is thought to have 862 tcf of shale gas, Libya’s shale resources are put at 290 tcf, and Algeria’s at 231 tcf.
The EIA study did not assess shale accumulations around the Middle East Gulf or in Russia and the other countries of the former Soviet Union, but they are thought to be extensive.
The report did not assess shale oil resources at all. But given the geology of total petroleum systems, it is very likely large shale accumulations will be found in the same areas and countries that already have large accumulations of conventional oil.
Crude-laden shale formations like North Dakota’s Bakken, Eagle Ford and Permian in Texas, Oklahoma’s Anadarko and California’s Monterey are all in areas that have produced billions of barrels of conventional oil in the past.
The relationship between conventional and unconventional production in the same area is interesting and has not been properly explored yet. The basic question can be stated simply: Are unconventional oil and gas accumulations in areas already producing substantial volumes from conventional fields more or less likely to be developed than those in areas without substantial conventional petroleum production?
There are some reasons to think unconventional oil and gas deposits may be developed more quickly if an area has a (recent) history of conventional production.
Producing areas like North Dakota, Texas and the North Sea already have pipelines and other infrastructure to enable quick development of extra oil and gas from fracked wells. They benefit from a well-developed network of service companies. Local residents may be more comfortable about oil and gas drilling in their midst.
But in other countries, shale gas and oil accumulations may be developed much more slowly, or not at all, if there are already substantial conventional resources.
If Saudi Arabia discovered significant quantities of shale oil that doubled its conventional resources, would it double output? The answer is almost certainly that it would not. Marketing significant quantities of unconventional oil or gas would threaten to undermine the price for its existing conventional output.
Saudi Arabia is prospecting for shale accumulations, but for gas, not oil.
The same logic probably applies to Algeria (which has enormous shale gas resources according to the EIA) and Qatar (which was not assessed). Both are already major conventional gas exporters. Neither country has an interest in producing large volumes of unconventional gas as well.
The main exception is the United States, which has produced enormous amounts of shale gas, and is now producing large volumes of shale oil, in addition to its large conventional output. The result has been a dramatic drop in prices which has caused severe problems for natural gas producers and cut returns for oil drillers.
In the US, however, oil and gas exploration and production is disbursed among a large number of companies, the market is highly competitive, and strict antitrust rules outlaw any attempt to coordinate production decisions.
In contrast, in countries like Algeria or Libya, production is in the hands of one or a small number of companies, under state control or at least heavily regulated. Monopoly suppliers of oil and gas are likely to produce less and seek higher prices.
Only countries like Argentina or Ukraine, which have relatively modest conventional production but large shale resources, are likely to push for rapid development of unconventional resources.
China is something of an intermediate case. The country has enormous unconventional gas resources, especially in the Sichuan basin, which the government is keen to develop. But until now most of the prospecting activity has been controlled by a small number of state-owned firms that already produce conventional oil and gas.
Some observers, like the International Energy Agency, question whether this has blunted their incentive to explore and develop shale fields. The latest licensing round seems to try to solve that problem by awarding exploration licenses to a much wider range of firms, many of which do not currently have conventional output.
— John Kemp is a Reuters market analyst. The views expressed are his own.