Shale Gas: A Panacea to Solve Americas Energy Woes?

Fourth Annual Chesapeake Energy Lecture National Energy Policy Institute Tulsa, Oklahoma February 7, 2012

J. David Hughes Global Sustainability Research Inc. Geological Survey of Canada - retired

The Optimism on Gas

- There is so much natural gas that there is enough available to, according to one researcher, "displace half of the coal burning power plants [in the United States] by 2020 (Pickens Plan, 2012) - We have the domestic natural gas necessary to fuel our trucks and fleet vehicles (Pickens Plan, 2012) - Studies from prestigious energy research firms and universities have affirmed that the dream of clean, abundant, home grown energy is now reality, with the help of shale gas. (ANGA, 2012). - I believe U.S. natural gas producers can increase supplies by 5% per year for at least the next decade and that assumes there is no more access to public lands and waters than there is today. (Testimony to Congress, Aubrey McClendon, July 30, 2008). [63% compounded]

World Gas Production and Consumption 1970-2010

120
100 80
3038%

Production
Asia Pacific 219% increase Africa up 7.3% 2010 Middle East over 2009 Former Soviet Union Europe S. & Cent. America North America

Consumption
120 100
221% increase Asia Pacific Africa up 7.4% 2010 Middle East over 2009 Former Soviet Union Europe S. & Cent. America North America

Trillion Cubic Feet per Year

Trillion Cubic Feet per Year

80
3780%

60 40

2213%

60 40

2038%

323%
177%
791%

230%
392%

715%

20
25%

20
31%

0
1970 1980 1990 2000 2010

0
1970 1980 1990 2000 2010

Year
Hughes GSR Inc, 2011

Year
(data from BP Statistical Review of World Energy, 2011)

Forecast U.S. Energy Consumption by Fuel 2009-2035 (Reference Case, EIA, 2012)
120

Market Share
8.2% 2.8% 8.7% 20%

14% Growth 2009-2035

100
4.4%

Quadrillion Btu

8.8%

80
21%

Coal +10% Natural Gas +16%

60
25% 25%

40 20

39%

Oil +4%

35%

0 2009
Hughes GSR Inc, 2012

2013

2017

2021

2025

2029

2033

Year
(data from Energy Information Administration Annual Energy Outlook, 2012)

Shale Gas North American Prospects

(from National Energy Board, 2009)

U.S. Natural Gas Supply Forecast by Source 2009-2035 (Reference Case, EIA, 2012)
30 25 20 15 10
Lower 48 Unconventional Shale Gas +365% 20% Total Supply Growth from 2009-2035 US becomes net exporter 2021

Trillion Cubic Feet per Year

Coalbed Methane -8%

Lower 48 Conventional (including Tight Gas) -25%

Lower 48 Production Grows 37% 2009-2035

5
Lower 48 Onshore Associated -24%

0 2009
Hughes GSR Inc, 2012

Lower 48 Offshore +2%

2014

2019
Year

2024

2029

2034

(data from Energy Information Administration Annual Energy Outlook, 2012)

EIA projections of U.S. Shale Gas Production, 2009-2012

16 14 Shale gas forecast 2009 Shale gas forecast 2010 Shale gas forecast 2011 Shale gas forecast 2012
49% of production

Trillion Cubic Feet per Year

12 10 8 6 4

45%

26% 16%

2 0 2008

2013

2018

2023

2028

2033

Year
Hughes GSR Inc, 2012

(data from Energy Information Administration Annual Energy Outlook, 2009, 2010, 2011 and 2012 reference case projections)

EIA projections of Gas Price and Production Compared to History, 1995-2035

20 18 30 25 Russian Gas Price Indonesia LNG Gas Price in Japan U.S. Henry Hub Gas Price EIA Forecast U.S. Gas Price ($2010) Actual U.S. Gas Production EIA Forecast U.S. Gas Production

Annual Gas Production (Trillion cubic feet)

Gas Price ($US/mcf)

16 14 12 10

20
15 10 5 0

8
6 4 2 0 1995 1999 2003 2007 2011

2015 2019 Year

2023

2027

2031

2035

Hughes GSR Inc, 2012

(data from International Monetary Fund 2012; EIA AEO 2012)

Arthur Berman on Shale Gas (ASPO meeting in Washington DC, October, 2010)
Shale plays are marginally commercial at best. The plays have consistently contracted to a core area that represents 10-20% of the resource that was initially claimed. The manufacturing model has failed. These are not low-cost plays: the marginal cost of production for most companies is $7.50/Mcf based on SEC 10-K filings over the past 5 years.

Reserves have been greatly over-stated and 80% of booked reserves are undeveloped.
(from Art Bermans ASPO-USA presentation in October 2010)

Shale Plays contract to Core Areas as more information is gathered

(from Art Bermans ASPO-USA presentation in October 2010)

Technically Recoverable Resource Estimates for the Marcellus Shale, 2009-2012, decline as Information Improves
500 450

Trillion Cubic Feet

400 350

250 200 150

489 Tcf

410 Tcf

300

50 0 Engelder 2009 P50 EIA 2011 Intek

USGS 2011 mean

84 Tcf

100

EIA 2012

141 Tcf

Number of Operating Gas Wells in the U.S. versus Average Productivity

500,000

190

Average Gas Well Productivity (Mcf/day)

180
170 160

Number of Producing Gas Wells

450,000

400,000

Number of wells Average Productivity

150

140
130 120 110

350,000

300,000

250,000 100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year
Hughes GSR Inc, 2011

(data from EIA, 2011)

Natural Gas Production in the United States by Well Vintage at Yearend 2006
2012 update overall decline is still 32%/year requiring 22 bcfd to be replaced each year to maintain production requires $88 billion in investment which is $50+ billion more than cash flow in the current low price environment

60%
From Most Recent FOUR YEARS

(data copyright IHS Energy, Diagram prepared and copyright by EOG Resources Inc., 2006; Cash flow and deficits are from Arc Financial http://arcfinancial.com/research/energy-charts/who-is-eating-at-the-petroleum-club/ )

Annual Number of Successful Gas Wells Drilled

Natural Gas Production versus Annual Drilling Rates, 1990-2011

40,000 25

Annual Dry Gas Production (trillion cubic feet)

Production up 4.6% from 1973, 15.8% from 2001

35,000 20 30,000 25,000 20,000 15,000 10 Number of wells Dry Gas Production 15

Drilling triples from 1990s levels

10,000 5 5,000

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year

Hughes GSR Inc, 2012

(data from EIA, 2012; includes production and drilling up until October, 2011)

Annual Number of Successful Oil Wells Drilled

Crude Oil Production versus Annual Drilling Rates, 1990-2011

Crude Oil Production (Million barrels per day)
25,000

Drilling Doubles from 1990s levels

8 7

20,000 Number of wells Crude Oil Production 15,000 6 5 4 10,000 3 2 5,000

Production down 42% from 1971 peak; up 13% from 2008 low
0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year

Hughes GSR Inc, 2012

(data from EIA, 2012; includes production and drilling up until October, 2011)

Shale Gas Production by Play (2003 - June, 2011)

20

Gas Production (billion cubic feet per day)

30% of U.S. Production

Niobrara Mississipian Permian Bakken Eagleford Granite Wash Woodford Marcellus Fayetteville Haynesville Barnett

18 16 14 12

10
8 6 4 2

Haynesville

Barnett
2004 2005 2006 2007 2008 Year 2009

0 2003
Hughes GSR Inc, 2012

2010

2011

(data from Art Berman, HPDI, 2012)

Shale Gas Production by Play (2003 - September, 2011)

7

Gas Production (billion cubic feet per day)

6 5 4 3

Barnett Haynesville Fayetteville Marcellus Woodford Granite Wash Eagleford Bakken Permian Mississipian Niobrara

Haynesville

Barnett

Fayetteville Marcellus

2
1 0 2003 2004 2005 2006 2007 Year 2008 2009 2010 2011

Woodford

Hughes GSR Inc, 2012

(data from Art Berman, HPDI, 2012)

30 25

U.S. Natural Gas Consumption by Sector 2009-2035 (Reference Case, EIA, 2012)
16% Growth 2009-2035

Market Share

Quadrillion Btu

Electricity +30%
20
15
33% 30%
Pipeline Fuel +11%

34%

CNG

Industrial +14% Commercial +14% Residential -3%

2013 2017 2021 2025 2029 2033

32%

10
14%
13% 18%

5
21%

0 2009
Hughes GSR Inc, 2012

Year
(data from Energy Information Administration Annual Energy Outlook, 2012)

Forecast U.S. Electricity Generation by Fuel 2009-2035 (Reference Case, EIA, 2012)
6000

Market Share

27.9% Growth 2009-2035

5000
9% 6%
7% 20% 39% 44% 18%

Terawatt Hours

4000
3000 2000 1000

Coal +11%
27%

23%

Natural Gas +49%

2013 2017 2021 2025 2029 2033

0 2009
Hughes GSR Inc, 2012

Year
(data from Energy Information Administration Annual Energy Outlook, 2012)

U.S. Non-Hydro Renewable Electricity Generation Market 2009-2035 (EIA Reference Case, 2012)
Share

500 450 400 Terawatt Hours 350 300

226% Growth 2009-2035

Solar Geothermal Wind Biomass and other renewables
(3.8%)

250
200 150

Wind +156%
3.7%

9.4%

100
50 0 2009
Hughes GSR Inc, 2012

(3.9%)

Biomass and all other renewables +261%

2013 2017 2021 2025 Year 2029 2033

(data from Energy Information Administration Annual Energy Outlook, 2012)

But there is no such thing as a FREE LUNCH

There has been a great deal of pushback by many in the general public and in State and National governments to environmental issues surrounding hydraulic fracturing

Public concern about hydraulic fracturing is very high

- environmental organizations - community groups - listserves - documentary films such as Gasland - scientific reports, NYTimes drilling down series, etc.

The Meme of Natural Gas as a clean Transition Fuel to a low carbon future is being seriously questioned

- Methane contamination of groundwater - Disposal of produced fracture fluid contaminating groundwater and inducing earthquakes
-Industrial footprint truck traffic, air emissions etc. -Full cycle greenhouse gas emissions which may be worse than coal

Methane Contamination within 1000 metres of Active Wells in Pennsylvania, Osburn et al. 2011, Duke University

Surface Casing Vent Flow and Gas Migration are Chronic Problems

Watson and Bachu, SPE 106817, 2009.

(from Watson and Bachu, SPE 106817, 2009; thanks to Tony Ingraffea)

- Contamination of groundwater from improper disposal of fracture fluids; - Induced seismicity from injection of wastewater in disposal wells.

NETL (Skone, 2011) Methane Emissions by Gas Source adjusted to match average emissions of the 2009 EPA inventory
Percentage of Lifetime Production
3.5 3 2.5 Distribution Transmission and Storage Processing Extraction

2
1.5 1 0.5 0

Hughes GSR Inc, 2012

Source

Comparison of NETL (Skone, 2011) and Howarth et al. 2011 vented methane as a Percentage of EUR for Barnett Shale
Percentage of Total Production
9 8 7 6 5 4 3 2 1 0 % of total production vented according to NETL % of total production vented adjusted to match EPA 2009 inventory

Hughes GSR Inc, 2012

EIA Intek (2011) 1.42 bcf

Estimated Ultimate Recovery (billion cubic feet)

Low estimate High estimate

Global Warming Potential of Shale Gas versus Coal Given various 20- and 100-year estimates of Methane Potency Compared to CO2 on an Electricity Basis (Mean methane emissions)
4
IPCC 2007

Pounds of CO2 equivalent per kWh

3.5
3

Shindell et al. 2009 100 year GWP

IPCC 2007 20 year GWP

Shindell et al. 2009 20 year GWP

2.5 2

1.5 1
Existing U.S. Coal Fleet Existing U.S. Gas Fleet fuelled by shale gas Best-in-class Coal Technology Best-in-class Gas Technology fuelled by shale gas
25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105

0.5

0
Global Warming Potential (GWP) of Methane (times CO2)
Hughes GSR Inc, 2012

Summary and Implications

Natural gas will continue to be a very important component of U.S. energy supply. Almost all eggs are in the shale gas basket as a hope in meeting supply growth projections. There are significant geological, environmental and economic challenges in continuing to grow shale gas supply. I expect significantly higher prices going forward over the next 24-36 months. The hope that shale gas can make more than modest inroads on oil for transportation and coal for electricity is unwarranted, even if the EIAs supply projections can be met. Shale gas has been a game-changer in that it has averted a terminal decline in supplies from conventional sources. A rational energy strategy must emphasis demand side reductions in consumption as opposed to a supply side drill, baby, drill mindset there is no free lunch.