U.S. natural gas shale could serve a critical role in supplying domestic gas needs if offshore drilling in the U.S. Gulf of Mexico remains at a standstill due to the ongoing oil spill and debate over whether drilling should continue.
However, natural gas shale exploration also presents risks. A Marcellus shale gas well drilled by EOG Resources in Pennsylvania blew out on June 3. The Pennsylvania Department of Environmental Protection suspended drilling activity at the site while it investigated the blowout's cause.
The blowout comes at a time when drilling safety onshore and offshore has been brought into the spotlight following the Deepwater Horizon incident. The blowout also comes in the midst of ongoing debate over the impact of hydraulic fracturing chemicals used to drill shale wells on the local environment. In the New York state legislature, bills have been presented that would place a one-year moratorium on new gas drilling permits and halt shale gas exploration until the U.S. Environmental Protection Agency (EPA) completes a study into the effects of hydraulic fracturing on water supplies.
The issue of hydraulic fracturing has raised debate on whether a federal mandate should be passed requiring oil and gas companies to disclose the components of hydraulic fracturing fluids. Proponents of the Fracturing Responsibility and Awareness of Chemicals Act of 2009,which co-author Maurice Hinchey has asked House Speaker Nancy Pelosi to bring to the House floor for debate, say the disclosure law is needed due to numerous reports that the practice has contaminated drinking water and surface water supplies, and negatively impacted air quality.
However, energy industry officials say that state agencies have been regulating hydraulic fracturing in shale drilling for 60 years, and that no incidents of hydraulic fracturing contaminating water have been documented. Companies such as Devon Energy say they would support regulations requiring full disclosure of the components of hydraulic fracturing fluids, noting that fracturing chemicals comprise only .5 percent of hydraulic fluids, with the remaining 99.5 percent being sand and water.
"These chemicals are injected into formations a mile below the surface, and the wells are protected by steel and concrete casing in the deepest part of the aquifer," said Devon spokesperson Chip Minty. "The industry already has protective measures put into place under the supervision of state regulatory agencies."
International Players Investing in US Shale
Despite the risks and issues surrounding shale gas drilling, U.S. onshore natural gas shale plays have attracted the attention of large U.S. exploration and production companies as well as international oil and gas companies. In 2009, ExxonMobil agreed to buy XTO Energy to enhance ExxonMobil's position in unconventional gas resources. Earlier this year, Chesapeake Energy formed a $2.25 billion joint venture with Total E&P USA, a subsidiary of Total S.A., to develop Chesapeake's upstream Barnett Shale assets.
Last week, a subsidiary of India's Reliance Industries said it would buy a 45 percent stake in Pioneer Natural Resources' Eagle Ford shale gas assets in South Texas for $1.315 billion. The acquisition would be Reliance's second purchase of U.S. shale gas as it seeks to expand its business into overseas markets. Earlier this year, the company formed a joint venture with Atlas Energy, which has interests in shale in the U.S. Northeast.
"The drive for a domestic, clean-burning energy source, along with incremental improvements in horizontal drilling, have given the industry more confidence to go after gas, and all these companies realize that this is a very good long-term environmental answer. Not a silver bullet, but close," said Charles Swanson, Houston office managing partner for Ernst & Young LLP's Americas Oil & Gas Center.
Looking for Higher Returns with Condensate Production
However, the rise in shale production and level of gas in U.S. storage, coupled with decline in energy demand in recent time, has depressed domestic gas prices from levels seen a few years ago. As a result, companies focused on shale are switching to shale plays such as Eagle Ford in Texas, which have associated condensate production to improve project economics. Industry observers remain cautious on the natural gas price outlook, noting that supply has not fallen due to E&P companies having hedged a significant amount of this year's gas production to reduce volatility.
Chesapeake, which holds significant positions in gas shale plays such as Barnett, Haynesville, Marcellus and Bossier, has begun to focus primarily on oil and liquids-rich areas when seeking new plays, although the company said in 2008 it would seek to develop new unconventional oil plays. Chesapeake CEO Aubrey McClendon said the company would redirect capital from its gas shale plays to focus more on oil due to continued low natural gas prices and the ongoing success in the company's liquids-rich play.
Petrohawk Energy reported earlier this year that it has increased its exposure to crude oil and liquids through budget reallocation in Eagle Ford and oil and gas projects. Petrohawk Chairman, CEO and Director Floyd Wilson noted that other companies also are playing the oil card where it exists within their portfolios. "This makes sense today. We believe natural gas is an important part of the U.S. energy security and clean air picture, but while natural gas prices are low, we will continue to grow our crude oil components as quickly as possible. When the balance of supply and demand again tips in favor of natural gas, we will be there with an aggressive response."
Despite the short-term bearishness, the long-term outlook for U.S. shale gas remains optimistic, with U.S. shale gas still expected to draw attention of additional foreign companies and domestic majors. While the exact number of shale reserves in the U.S. is still being debated, industry consensus is that a large number of shale gas reserves exist that could fuel the U.S. for decades.
While environmental issues surrounding horizontal drilling, fracturing and guarding water tables present challenges for U.S. shale gas drilling, Swanson is optimistic that the industry has and will continue to successfully address these issues.
Swanson noted that shale gas resources could play a critical role in the U.S. economy going forward in terms of power generation, transportation and job creation, but that tremendous investment in mid-stream infrastructure and storage capability is required. "It would be an incredible investment, but well worth it."
The wave of U.S. shale development has started to ripple across the world as shale gas resources are identified in Europe, Asia, Africa, and other parts of the world. European governments are seeing shale gas as a means of breaking dependence on Russian and other sources of gas. "From an environmental standpoint, we can see gas being pushed for use in power generation, which will help keep a lid on energy costs and help get the global economy back on track," said Swanson.
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