The rise of unconventional gas

Technological advances have allowed companies to exploit natural gas deposits that were previously off-limits. In this article, we look at the massive potential being unlocked and the wider ramifications for the energy and power sectors.

Strictly speaking, unconventional gas resources are defined as those trapped in areas were the permeability of the surrounding rock is too low to permit standard drilling techniques. As a result, specialised methods such as fracturing the basin, using a combination of high pressure water and sand, must be used to obtain commercially useful quantities of gas. Developing the necessary expertise has proven to be extremely challenging and it is only recently, thanks to massive investment by E&P companies that such resources can now be exploited.

There are four main types of unconventional gas resources: tight gas, coal bed methane (CBM), shale gas, and gas hydrates.

Tight gas sands are simply natural gas reservoirs, which cannot be developed using conventional vertical wells, while coal bed methane, as its name suggests is natural gas contained in coal beds, that are typically too deep or too low quality to permit mining. Shale gas deposits, refer to the type of rock where they are found. The gas can be trapped within the pores of the rock, within natural fractures in the rock formation or as a thin film on the rock and associated organic material. Exploitation of shale gas resources involves drilling many horizontal wells from a single location on the surface, followed by fracturing the rock at multiple intervals, a process that requires vast quantities of water. Thanks to efforts in the US, shale gas is perhaps the most well known form of unconventional gas, and certainly receives the majority of media coverage. In contrast, gas or methane hydrates – which are ice-like crystalline solids, formed from a mixture of water and natural gas and are typically found under the sea bed at low temperatures – have yet to be commercially exploited, but research efforts are currently underway.

The growth in unconventional gas production has been dramatic. As the IEA pointed out in its World Energy Outlook 2009, “…the term “unconventional” is becoming a misnomer, at least with respect to tight gas sands, CBM, and shale gas; “previously overlooked” would now be a more accurate term.”

The WEO indicates that North America is currently the leading producing region for all types of unconventional gas and that these account for over half of US output (see Figure 1) and more than a third of Canada’s production. In addition, they are the main driving force behind the recent increases in both natural gas production and reserves. Equally significant is the data indicating that the average cost of unconventional gas production in the US dropped below that of conventional gas in 2007, which combined with the rapid decline in natural gas prices, has helped to shift the focus of natural gas players towards shale gas.

Figure 1: Unconventional gas production in the US. Source: WEO 2009 © OECD/IEA, data provided by the EIA

The worldwide unconventional natural gas resource base is not well understood due to the fact that the technology needed to commercialise the reserves has only recently emerged. However, the USGS has assessed some basins in the US and the EIA has used these assessments to produce a country-wide estimate of 7.6trnm³ of technically recoverable shale gas resources yet to be discovered in the US. The Potential Gas Committee, estimates that at the end of 2008, the total US potential future gas resource stood at almost 59trnm³, with 52trnm³ of potential resources (including 17.4trnm³ shale gas and 4.6tm³ of CDM). Rough estimates put remaining recoverable global unconventional gas resources at 785trnm³, assuming that they can be recovered at similar costs and proportions to those in the US. To put these figures into some perspective, the US consumed 655bnm³ of natural gas in 2007. Interestingly, BP’s CEO Tony Ward said in October: “All in all we estimate that as yet undeveloped or unidentified unconventional gas could contribute a further 4000trnft³ to gas resources over the next few years.” This was picked up on by Daniel Yergin, chairman of the energy analyst firm IHS CERA, who said that this might be on the low end of estimates, which could be as high as 16,000trnft³. In the IEA’s reference scenario, the global natural gas supply is expected to rise by 42 per cent between 2007 and 2030, making it clear that the agency expects the proportion of gas in the global energy mix to increase substantially in the mid- to long-term (see Figure 2).