Executive Viewpoint

Vol. 233 No. 8

Unconventional gas is here to stay

The marketplace votes with its pocketbook. Although no forecast is perfect, there’s a heavy favorite—and it’s gas. The large-scale commercialization of hydraulic fracturing and other unconventional oil and gas technologies has brought about an energy revolution in North America. Unprecedented advances in unconventional gas technologies have increased the size of the available gas resource and reduced the cost of bringing it to market. Improvements in completion technology, efficiency of frac placement, microseismic technology, fluid chemistry and water management have combined to create an industry in the U.S. that meets a growing demand for clean energy. It does this at reduced cost with a reduced footprint while putting people to work.

Although we have a winning formula in North America, we can see the reserves in the rest of the world, even though the analogies aren’t perfect. The geologic, commercial, infrastructure and political conditions in the U.S. are unique. As the saying goes, “History doesn’t necessarily repeat itself, but it does rhyme.” The development of unconventional gas outside of North America presents a fresh set of challenges, and our industry stands ready to meet those challenges.

Eventually, that which is unconventional but successful, becomes the conventional. The move toward unconventional technologies has been a perfectly natural result of resource depletion and technological advancement. The “low-hanging fruit” (conventional oil and gas) inevitably becomes increasingly scarce and the industry turns to more sophisticated technology, which we call unconventional at first. Over time, those technologies become standardized, more efficient and more widely used until they are the norm. This is not unique to the energy industry.

The underpinning of all of this is demand. I’m convinced that demand growth over the long term is real. Between the forces of economic growth and long standing and nagging concerns about coal and nuclear power, there is little doubt that the world’s appetite for new sources of gas will grow relentlessly. The U.S. Energy Information Administration (EIA) projects that between 2012 and 2022, the worldwide demand for energy will increase by almost 18%. I believe strongly that gas will earn more than its fair share of that growth.

The resources are there as well. The EIA estimates that the technically recoverable shale gas resource is more than 6,600 Tcf. Of that, just over 1,200 Tcf are in the U.S. and Canada. The biggest pieces of what’s left are in China, Argentina, Mexico, South Africa, Australia and the Middle East.

Until now, the unconventional gas story has been North American. The U.S. and Canada, together, account for roughly 89% of the world’s production of unconventional oil and gas. In the U.S., 59% of gas production now comes from unconventional sources. That trend will continue. By 2035, the International Energy Agency (IEA) projects that, outside of the Middle East and Russia, nearly half of the world’s natural gas supplies will come from what we now call “unconventional” sources.

In the last five years, U.S. gas production has increased by 31%. In the previous 10 years, it had been essentially flat. Before this started, a large infrastructure was being developed to move liquefied natural gas (LNG) into U.S. markets, in anticipation of growing gas demand and flat, if not declining, domestic supplies and historically high prices. LNG infrastructure in the U.S. now sits largely idle, made obsolete by domestic resources, developed using unconventional technologies. The industry is looking hard to find new markets for gas every day. These opportunities include increased use of gas to generate electricity, gas-to-liquids technologies, new industrial applications and LNG exports.

There are barriers to expanding this model globally. Specifically, will governments permit the development of the resource, and will companies make the large investments necessary to access that resource and take it to market?

Political concerns are front and center today, both in the form of objections to expanded use of fossil fuel generally and to unconventional production techniques in particular. In Europe, where there is an immediate need for the resource, and a recognized potential resource in Poland and France, there is also public resistance.

The solutions to these challenges are simple and the upside too large to walk away from. Growing energy demand, the desire to put people to work and the realization that the net impact of increased gas consumption is reduced coal demand (as recently witnessed in the U.S.) will carry the day. As the IEA points out in its recent report, the elements necessary to manage environmental risks and gain public acceptance of unconventional techniques are already embedded in the best practices of leading players. Oil companies and their service providers have made great strides, reducing the footprint of drilling activities, assuring the integrity of wells, incorporating environmentally friendly chemicals into their processes, reducing or eliminating the use of biocides and recycling waste water.

E&P companies and their service providers will need to establish infrastructure and supply chains to work in remote areas, where the unconventional resources are located. The pipelines, liquefaction, regasification and consumption infrastructure required to make gas useful will take time and money to develop, and LNG investment will demand gas supplies.

We’re confident that those investments will be forthcoming. Capital investment follows the demand for energy and energy resources. The energy industry has a history of taking those risks and making them pay off.