If oil and gas players were asked to cast votes to select an industry mantra, “expect the unexpected” likely would be the unanimous winner.
A year ago, commodity prices were soaring, and operators were scurrying to lock in long-term rig contracts.
The Rocky Mountain players were feeling especially good back then – weren’t we all? – given that their stomping ground was the fastest growing region in the United States for gas production, according to Randy Ray, Denver-based consulting geologist/geophysicist and a recognized authority on the region.
Then, lo and behold, shale gas plays with humongous reserves potential began popping up in other parts of the country at a rate once unthinkable, posing considerable competition for investment dollars.
“Various plays in the Rockies are still very profitable and will continue to go ahead,” said AAPG member Pete Stark, vice president for industry relations at IHS. “And there will be some where cost versus performance in the new market paradigm just aren’t going to be competitive with shale gas.
“This sort of snuck up on everyone, almost like the doggone recession did,” Stark said. “We got hit with the dramatic collapse in oil prices and the collapse of the economy, the banks – it was like a house of cards.
“On the cusp of the economic collapse, there was the realization that, my God, the industry had broken the code on producing gas from shales,” Stark exclaimed.
“Suddenly, we weren’t just in the tens of trillions of cubic feet of new gas production potential,” he noted, “but were in the hundreds of trillions of cubic feet of new gas potential.”
Even though natural gas prices have since tanked – at least for now – Stark pointed to the bright side, saying:
“The most exciting news in decades for U.S. energy security is the fact that the industry has broken the code and now can produce large volumes of natural gas from U.S. basins.”
The initial big crack in the code for shale gas occurred in the Barnett Shale play in Texas in the late 1990s. The Barnett team at then-Mitchell Energy had struggled for 17 years before that eureka moment when they switched from gel fracing to water, which performed much the same as gel while significantly lowering stimulation costs.
Production revved up dramatically once horizontal drilling commenced in the field.
Today, operators have added stage fracs to the horizontals where long laterals are partitioned into segments that are stimulated in rapid succession to increase reservoir contact.
“The old paradigm in horizontal wells was you pay about twice as much for the well and get three times the gas back,” Stark said. “What the operators did is they took stage fracing into the horizontal wells in the shales, starting with the Barnett and moving to the Fayetteville, the Woodward and, more recently the Marcellus and the Haynesville.
“They’re paying now twice as much for a horizontal well and getting five or ten times more gas,” Stark said. “The factor is five or ten times more daily production and five to ten more EUR per well.
“For the average tight sand well in the Rockies, they’re getting about one MMcf/d, with perhaps one Bcf of reserves per well, and paying about $1.5 million for that,” Stark said. “A shale well might yield 5 MMcf/d for a cost of $2.5 million.”
But Stark was quick to give credit where credit is due.
“The Rockies absolutely saved the day for U.S. gas over the last decade, along with the Barnett, when the Gulf Coast (mainly offshore) lost more than eight Bcf/d while the Rockies added 5.5 Bcf/d,” he said.
Operators in the Rockies broke a code of their own about 10 years ago relative to producing gas from a variety of coal seams and tight sands, according to Stark.
“In breaking the code, essentially they were drilling vertical wells through several thousand feet of tight reservoir sands and developed the technique of stage fracs,” he said.
“The first four or five years those plays all evolved, what we saw year over year is for the average well, productivity improved as they improved their fracing and completion techniques.”
Economics and well productivity vary for different plays even in the same region, and the Rockies are no exception. Stark predicted that some of the stronger plays will continue to be strong and that it will be selective.
Like most other hydrocarbon producing areas, there are myriad challenges.
“Natural gas is now less than $5 an Mcf, and Rockies gas is at least $1 less than that,” Stark said. “But in the Marcellus (shale), they’re actually getting more than Henry Hub price because of the favorable market location,” he noted, “and the industry is going to be forced into a major adjustment to these new economic realities.”
During his keynote address at the Colorado Oil and Association’s annual meeting last November, Questar president, chairman and CEO Keith Rattie announced that for the first time in the company’s 80-year history they are allocating more capital this year for drilling outside the Rockies than within.
“That will likely be the case until we get better visibility on both pipeline take-away capacity and regulatory policy,” Rattie said.
Meanwhile, it may be time to re-group and come up with a new approach to the technology mix in this part of the world.
“In an environment where it looks like Rockies gas is going to be less than $5, cost cutting is one thing, but there’s another component that’s going to have to start, and that’s to find another technology breakthrough,” Stark said.
“We got one when we first did stage fracing,” he said. “We’ll need another so it puts tight sands wells back kind of on par with what’s happened in the shales.
“From the outlook of boosting the market after we get through this lousy recession, the Rockies gas is going to continue to be critical as a major supply source for the U.S.,” Stark emphasized.
“Rockies production can’t continue to grow until new export pipelines get built,” Rattie said. “We need another major Rockies export pipeline by 2012.
“I’m convinced we need a 42-inch ‘bullet’ from Wyoming to Chicago,” he said, “and the work needs to start now.”
Stark noted the unexpected occurrence of the ability to produce giant volumes of gas from unexpected reservoirs uncovered and exploited by the industry has ushered in a whole new sea change age, and there’s going to be massive adaptation to the new paradigm.
“From the point of energy security,” he said, “it’s fantastic this has happened for the U.S.”
Some folks haven’t gotten the message.
“If you polled the members of Congress, most would tell you America is running out of natural gas,” Rattie said. “A recent Navigant study puts the U.S. natural gas resource base at more than 2,200 Tcf – roughly 100 times current U.S. annual consumption.
“That number is sure to grow,” he added.
Rattie emphasized the need for producers to spread the word that natural gas is abundant and American, noting that more than 98 percent of the country’s gas supply comes from North America, including the roughly 8 percent that originates in Canada.