Musings: Thoughts About The Changing Future of Gas Shales

Obviously this past spring was a time for researchers to prepare reports about the future of the gas shale business. Two recent reports landed in our inbox recently. In one case, the report focused on the impact of the Marcellus shale on the economy of Pennsylvania, while the other focused on the national security impact for the nation of gas shale development. Is it a coincidence that these reports are arriving at the same time Captain America is debuting in the summer movie, Captain America, The First Avenger

So just who is Captain America? Quoting from the Wikipedia entry for the comic book hero we learn that: "Captain America is a fictional character, a superhero that appears in comic books published by Marvel Comics. The character first appeared in Captain America Comics #1 (March 1941), from Marvel Comics' 1940s predecessor, Timely Comics, and was created by Joe Simon and Jack Kirby.  Over the years, an estimated 210 million copies of "Captain America" comic books have been sold in a total of 75 countries. For nearly all of the character's publication history, Captain America was the alter ego of Steve Rogers, a sickly young man who was enhanced to the peak of human perfection by an experimental serum in order to aid the United States war effort. Captain America wears a costume that bears an American flag motif, and is armed with an indestructible shield that can be thrown as a weapon." 

According to the article, Captain America was the most popular Marvel Comics character during the 1940s. But after the end of World War II, his popularity waned and Captain America completely disappeared by the early 1950s except for one revival issue in 1953. It wasn't until 1964 when the character of Captain America was resurrected by the Avenger team and has become the leader of its group since. 

It is interesting to draw the analogy of gas shales to Captain America. Both were born out of periods of distressful outlooks – for gas shales it was high natural gas prices and a nation struggling to meet its energy and environmental commitments, while for Captain America it was the gloom of conflict in Europe and the impending World War II. Just as Captain America emerged as a transformed sickly Steve Rogers, gas shales have gone from a junk zone drillers hated to encounter into a huge source of new natural gas at a reportedly incredibly low cost. The powers of Captain America enabled the U.S. to overcome Germany and Japan just as gas shales will solve the domestic energy problems of the U.S. and break the energy backs of Russia and Iran. 

Exhibit 15.  Shale = Captain America?

Shale = Captain America?
Source:  the

Additionally, if we think about how gas shales emerged from obscurity (sickly) to peak performance, it was achieved by employing "new" drilling and completion technologies (experimental serum). We're taking some literary license since horizontal drilling and hydraulic fracturing technologies have been around for a long time in the oil patch, but it was their joint use that is recognized as being the key to unlocking the mystery of gas shales. 

With the keys to the gas shale kingdom in their pockets, E&P companies embarked on a land grab to lock up all the prospective shale acreage possible in order to insure their financial success for many years into the future. Unfortunately, some of the tenets that underlay this grand success have begun to falter. Explorationists are possibly dismissing some of these cracks in the gas shale façade because the long-term rewards of pursuing the Holy Grail would well outweigh the near-term costs of the pursuit. 

In that regard, we were intrigued by a paragraph in Schlumberger's second quarter earnings press release about a commercial success by one of the units of the company. Oilfield service companies developing new drilling and completion technologies such as Schlumberger often tout these commercial successes as a form of advertising because their message goes to a broader audience.  Financial press releases often are read by the senior managers of target customers (oil and gas companies) rather than the engineers in the bowels of the company who may not be passing on knowledge of these new products and services since they don't appreciate the overall impact on the company.

The paragraph stated: "In the Marcellus shale, a Data & Consulting Services reservoir characterization study based on Schlumberger measurements allowed Ultra Petroleum to determine that well locations, rather than completion techniques, was the major contributor to variable well performance and enabled Ultra to prioritize its drilling and completion plans for several wells. The study was performed by integrating 3D surface seismic with EcoScope and SonicVision logging-while-drilling data on 19 laterals, and ECS, FMI and SonicScanner data on seven vertical pilot wells. The results highlighted sweet spot areas with better reservoir quality where wells produce superior results compared to average levels previously seen in the field, This study has helped Ultra establish criteria that will reduce risk as it continues development of its Marcellus acreage."

This announcement acknowledges that gas shales have sweet spots, a fact that has emerged over the past year or so, and provides a death-knell to the "manufacturing" development process. Moreover, the Schlumberger effort suggests that other disciplines besides just horizontal drilling and hydraulic fracturing are important for the success of gas shales. We were intrigued by the mention of 3D seismic as a key factor in this process. We have had that statement confirmed by others in the seismic business. This announcement also reminded us of a conversation we had following a presentation we made four years ago to an audience of seismic technologists in which we mentioned seismic as a beneficiary of the gas shale revolution. We were told that since these were blanket formations, seismic would play only a minor role in gas shale development. That is just another of the tenants that is crumbling.

Along those lines, we know gas shale producers have been working to improve their recoverability from wells by trying to find any natural fractures that might exist in the shale before applying a hydraulic fracture treatment. The idea is that greater production may be obtained if the fracturing is done in a way to widen the natural fractures in the formations. Possibly one way of finding these natural fractures is listening for gas moving in the formation and plotting their direction. Passive listening to the noise in the subsurface rock entails inserting seismic cables into formation to try to hear the "gurgling" sound of the gas moving along the natural fractures. We are officially designating "gurgling" as the scientific term to describe the sound these listening devices are attempting to hear. What we don't know is whether "gurgling" is the politically correct name for the gas movements – we can think of other descriptive terms but probably not for use in mixed company.

What the Schlumberger announcement suggests to us is that gas shales are going to have more technology applied to them than merely the brute force of hydraulic fracturing. It also suggests that well costs could be heading higher. On the other hand, technology could lead to fewer wells being needed to develop fields. These will be interesting trends to watch evolve as they may have long-run implications for oilfield service companies and their producer customers.