Unconventional Today is Conventional Tomorrow
In a pre-conference masterclass at Shale Gas Eastern Europe 2011 in Warsaw, Poland, Ramin Lakani, Operations Manager at Baker RDS (a division of Baker Hughes) discussed unconventional gas development in the US and lessons for Europe.
“Small mom and pop companies were able to take the chance and the risk,” he observed. “Who would’ve thought someone like Statoil would be buying shale gas assets onshore?”
In Europe, he noted, majors and IOCs were operating alongside smaller companies.
“Can you drill and stimulate large numbers of wells, can you achieve that outside US?” he questioned.
Lakani showed a slide of the “Unconvenventional Gas Prize” and said: “You can see this huge production that can be attributed to shale gas. You also have liquids-rich basins like Eagle Ford, so the development is also generating a lot of liquids.
“Total US production has grown to 20% and by 2017 could go as high as 30%. LNG has been highly impacted,” he said.
Regarding the commodity price, Lakani asked if that pace of development would continue at $4-5/MBTU? “Can the growth continue?”
“The prize is not just the production,” he continued. “From 1979 to 2009, if you look at TCFs of reserves: Federal offshore, Alaska, etc. are all either steady or declining.”
He asked, “How do you go from 30mmscfd to 1.5 bcfd in 5 years?” offering an example from Southwestern Energy, which he said was still rising, having 23 rigs drilling simultaneously.
“How did they achieve this?” Lakani asked, showing a graph providing total well costs and average initial production in million cubic feet. He said declines could be drastic.
“Of course you can increase the lateral length, but they tend to plateau off. What’s interesting is that they have doubled the lateral length while keeping well costs the same – that’s what needs to be copied elsewhere to keep it economic, the key for commercial viability,” he explained.
He also spoke about wow many wells were necessary for developing 30 BCM (1TCF) of shale gas.
“We’re talking about 200-300 wells. Is Europe ready for drilling 300 wells for a single development? That’s the question that you need to bear in mind. Hopefully you can reduce that to 100 or to 50.”
Regarding how can you make it work, Lakani insisted on an integrated approach. “We need to look for the sweet spots, use reservoir performance analysis – we cannot learn by the drill bit like in the US where if it’s a failure, you move on.”
He said he did not believe it was possible to apply the same learning in Europe and in Poland. “You might say, ‘we do this everyday.’ But even if you do that for conventionals and do full integration, applying the same process, the margin of error is much smaller. The economics are against you if you provide the same number of iterations. Environmental regulations and costs are working against you,” he said.
Lakani compared “gas on gas” competition in the US and in Europe, where he said unconventional gas was in competition with imported pipeline gas and domestic conventional natural gas.
“But if you look at the European map, you’ve got the former Soviet Union, you’ve got Norway, LNG coming in, pipeline gas from Algeria to Spain, projects like Nabucco. More and more LNG will be diverted to Europe with the developments in the US. Can these compete with LNG?”
He continued: “In the whole mix, don’t forget the role that politics play in Europe. Unconventionals create jobs, social security, supply security and tax revenue. In that whole mix you need to bear all of that in mind when you’re looking at large scale projects.”
Of course, there were issue of the environment including water supply and management; and the right of way in built up areas like Europe.
He said there were other dynamics outside of natural gas, with big questions over nuclear, and renewables discussions.
Lakani presented gas spot prices and conjectured on the existence of a shale gas bubble. His slide plotted US dollars per million BTU and showed the Henry Hub price versus the spot contract price. “When the shale gas bubble hit, there was a decline in gas price,” he noted, showing the decoupling of the oil and gas prices, and that the price of oil had increased drastically, leaving natural gas prices far behind.
He discussed the breakeven gas prices for US shale projects and said a number of projects went beyond the break even price.
“Dry gas projects in the US are not getting funding, that’s why liquid rich projects are being pursued in places like the Eagle Ford and the Bakken. Now we emphasize the checking of the liquid content,” said Lakani.
Other dynamics were also at play.
“Smaller companies are actually making money by selling their assets, almost like land developers. Getting permission and then the price of land can double or triple- a very similar situation.”
He added, “Many dry gas projects did not make break even in 2009-2010. Most rely on tax credits, price hedging and farming out.”
According to Mr. Lakani, explorers were willing to pay the price to gain the experience with unconventionals and use it elsewhere: “They’re willing to pay a premium. Large sums of money are changing hands and players like Cheseapeake are using that to fund their development and expansion.”
"You don’t want to lose your position. Many plyers are making money because they own the technology.”
He contended that O&G players now wanted to move Europe from resources to reserves. “How does that happen? It’s not just the oil and gas companies, but the banks, service companies, etc. in order to move into the reserves.”
“There’s a step in the middle: the fracturing and commercial viability tests. In unconventionals there are so many analogues, so if you find something it’s a done deal. In this day and age, gas sale agreements are done. In shale gas development you need to focus on this before you can move into reserves.”
His slide showed the “tight gas value jump” from resources to reserves.
Lakani said: “Clients want to have explanations for previous behavior, like unsuccessful frack jobs. They also want predictions of behavior in subsequent wells: what caused the last behavior and can you influence the next event?”
“How to reduce development time?” was one of the other questions he posed, projecting that in the next decade the role of unconventionals would increase as demands increased. Governments, he said, responded by offering incentives and better terms to encourage development of unconventional gas.
“You cannot apply conventional tax terms to this – governments need a change in mentality,” he said.
Lakani forecasted that shale/tight gas engineering would evolve into a standard tool within the energy industry. “What is unconventional today is conventional tomorrow.
I hope that energy companies overcome the technological, logistics, production, cost and marketing challenges in these projects.”
He continued, “Service companies need to find innovative ways to share risks/costs. In a ‘European Frack Club’ companies could pool their resources, allowing them to work together.”
Service companies, he noted, loaded costs on the first well, because they never knew what was going to happen, if the subsequent wells panned out.
Key ingredients, he said, were management, investor and government attitude change, attractive commodity prices, and advances in technology to drive down exploration and drilling costs.
“You can’t argue with the facts in NA,” said Lakani, who ended asking, “Can this be repeated in Europe?”