Shale the revolution that wasn't

multidisciplinary studies for interdisciplinary solutions
Shale: the revolution that wasn’t
Richard Chuchla
Director, Energy and Earth Resources graduate program
photo credit: Dave Leary, 2016

What is EER?
Premise: Sustainable (= lasting) solutions to energy and earth resource problems are
inherently multidisciplinary.
Jackson (administrative home) / earth, atmospheric sciences
Cockrell / engineering
McCombs (dual MBA) / economics, finance
LBJ (dual MPAFF, MGPS) / policy
Law / law, regulation, contracts
Energy and Earth Resources graduate
program
Energy Institute+
technology
policy
economics
/ finance

The prevailing view

Kah, 2016
The revolution part
Premise: confusing the outcome with what produced the outcome hides important learnings

Geology / What is shale gas?
(buoyant accumulation)
(non-buoyant accumulation)
Biogenic production(< 80oC)
Thermogenic
modified from

Fayetteville shale
modified from Ikonnikova et al., 2018

Geology / The underpinnings Appalachians
modified from Soeder, 2012
Appalachian foreland basin
Utica (schematically shown)

• The recognition of natural gas in organically-enriched shales and other organically enriched rocks is
hundreds of years old
History / The concept
photo credit: Lash, 2008
photo credit: Matthew Conheady, 2012
Lash and Lash, 2014

Lash and Lash, 2014
First proof of concept
t0 : 1825 –the first “well” drilled to
produce natural gas
Fredonia, NY

From Lash and Lash, 2014
first well, 1825
Dunkirk shale
First shale gas “well” (1825)
initially used bamboo

Second, third shale gas wells and first (multistage) frac, 1857
122 ft: fracced with 8 lbs of gun
powder
85 ft: fracced with 8 lbs of gun
powder
1866: Roberts develops concept
of using water to contain
explosive energy

First metered use of natural gas; first natural gas distributor;
1858; first industrial user of natural gas; 1868
Fredonia Trinity Episcopal Church
Fredonia, NY
Fredonia Gas Light and
Water Works Company

Big Sandy shale gas field, KY
• Development started in 1915;
significant drilling by 1921
• Produced from fractured
Devonian shale
 >1 TCF produced from
late 1920s to 1950
 >21,000 wells drilled
• Wells successfully stimulated
with gelatinated
nitroglycerine; small hydraulic
fracs tried in 1965
• Well decline analysis
performed; first “type curve”?
Hunter and Young, 1953
Barnett shale: approx.
14,000 wells drilled
through 2010

Disconnected players / important technology developments
• Patents for incandescent light bulb, 1879,
1880
 Wabash, Indiana: first city to be lit by electric
incandescent lights (1880)
• Invention of the Bunsen burner, 1885
 Insights into gas combustion moved natural gas
from just a fuel for light to a fuel for thermal
applications (heating, cooking, power generation)
https://en.wikipedia.org/wiki/Bunsen_burner#/media/File:
Bunsen_burner_flame_types.jpg
https://www.ourdocuments.gov/doc_large_image.ph
p?flash=false&doc=46

Building the technology foundation / first horizontal well, 1929
• 1800s to 1900s: acid bottle technique (South Africa mining)
made clear that many wells had unintentionally
deviated…up to 50 deg.
• 1891: first U.S. patent for the use of flexible shafts to rotate
drilling bits was issued to John Smalley Campbell (Patent
Number 459,152). Dental application but broader
applications described in patent.
• 1929: first oil field application in Texon, Texas
• 1980s: advent of improved downhole drilling motors and
the invention of downhole telemetry equipment.
 Much of the development pioneered by Elf Aquitaine
(Aquitaine basin, southern France)
 Major application by BP at Prudhoe Bay, Alaska
• 2000s: ExxonMobil currently drilling horizontal wells with
15 km (!) reach (Sakhalin Island, Russia)
https://www.rosneft.com/press/news/item/188679/

First hydraulically stimulated well, 1947
• 1947: No.1 Klepper well in the Hugoton Field, Kansas.
Stanolind re-entered well and fracced with one thousand
gallons of naphthenic acid and palm oil (napalm) and
gasoline and sand to stimulate the flow of natural gas from a
limestone formation.
• 1949: Halliburton obtained a licence for hydraulic fracturing
process; 332 oil wells fracced with crude oil or a combination
of crude oil, gasoline and sand.
• 1953: water used as a hydraulic fracturing fluid
• Late 1960s: widespread use in the U. S.
• 1967: Operation Plowshare; Project Gas Buggy; gas well in
northern New Mexico; 29-kiloton nuclear device detonated
more than 4,000 feet downhole to frac tight sands.
• 1998: First slickwater frac application at Mitchell Energy https://en.wikipedia.org/wiki/Project_Ga
sbuggy#/media/File:Gasbuggy_Site_Cross
_Section.svg
Skelton, 2013
No.1 Klepper, Hugoton field, Kansas
Testa, 2017

The policy context for the start of the “modern era” of shale gas
• 1930-1978: Price controls on transmission, wellhead price
adversely affect reserves and supply
• 1973: Arab oil embargo
• 1976, 1977: natural gas shortages in Midwest
• 1976: Eastern Gas Shales Project initiated
• 1978: Western Gas Sands Project; Gas Research Institute
• 1978: Natural Gas Policy Act
 Regulation of interstate and intrastate gas production and
transmission
 Price ceilings on old gas; phased out controls on new gas by 1985
(Natural Gas Wellhead Decontrol Act of 1989 repealed price
ceilings on old gas)
• 1978: Federal Powerplant and Industrial Fuel Use Act of 1978
discouraged the use of natural gas for power generation
(restrictive provisions of the Fuel Use Act were repealed in
1987).
• 1978: Windfall Profits Tax on old oil (repealed in 1988) and
Section 29 Alternative Fuel Production Credit for natural gas
production from unconventional sources
• 1985, 1992: FERC Orders 436 and 636 require pipeline
unbundling
Capacity by initial year of operation and fuel type (2010)
GW

• The primary goal of the EGSP was to increase gas yield from Devonian
shales in the Appalachian and Illinois basins by undertaking three major
tasks:
1) resource characterization
2) improved technology
3) data transfer
• EGSP was designed as collaboration with industry from its inception
 Small companies were the pioneers of shale gas
 Small companies could not support R&D
• Hydraulic fracturing of shales had not been investigated
• Very modest geologic understanding; to this point, shales were source
rocks and seals, rather than reservoirs
• No understanding of alternative stimulation methods in shales
• No experience with horizontal drilling in shale, including fractured shale.
• No idea of reserve magnitude (“3 TCF to hundreds of times that number”)
Advancing the concept / EGSP / Challenges
Source: U.S. Department of the Interior, Minerals
Management Service, Gulf of Mexico OCS Region
(By 1970, approx. 3 TCF of gas
had been produced from
shallow Devonian shales
(Michigan, Illinois basins)

EGSP total expenditures over project lifetime: ~ $92 M
Lots of new technology
• New stimulations technologies: nitrogen foam, massive hydraulic, CO2-sand
• Directional / horizontal drilling in shale; core recovery from horizontal shale
wells
• Multiple stage fraccing (7X) in horizontal wellbore
• Microseimic acquisition and processing to map induced fracture network
• Downhole video
• Shale logging suite
• EM/MWD technology
• Oriented core and fracture analysis (azimuth and dip)
• Steady state apparatus to measure porosity and permeability in tight rocks
Lots of new publicly available data
• Very large shale data base including complete characterization of 25,000’ of
oriented core from 35 wells drilled by the EGSP
• Extensive mapping effort including integration of large in-situ stress data base
• Discovered a new oil/gas play (Bass Island trend)
• Discovery or role of adsorption in Devonian shale gas production
• Analytical methodologies for mapping shale gas fairways
EGSP / WGSP / GRI Accomplishments

https://i1.wp.com/inflationdata.com/articles/wp-
content/uploads/2013/07/Inflation-Adjusted-Natural-Gas.jpg
Creating the context for accelerating growth
Proof of commercial viability (1998)
• Mitchell Energy gas supply declining for long term deliver or
pay contract
• Tried slickwater frac (SWF) technology being used by Union
Pacific Resources
• S. H. Griffin #3 well demonstrates higher level of sustained
flow with SWF
Perception of looming gas shortage
• Natural gas price triples to $8/mbtu (short term spike to
$12/mbtu)
• LNG regasification build-out
Yet, many, in 2000, maintained that shale
gas was inconsequential / insignificant,
would never compete with LNG
Gulen, 2011

0
3
2
1
‘82 ‘86 ‘90 ‘94 ‘98 ‘02 ‘06 ‘10
BCF/D
BARNETT (23 YRS); 4.8 bcf/d
FAYETTEVILLE (4 YRS; 2.5 bcf/d
HAYNESVILLE (1.5 YRS); 4 bcf/d
Chuchla, 2012
MARCELLUS (3 YRS); 17 bcf/d
Interplay learning / the accelerant of growth
cbm
shale
other gas
http://potentialgas.org/wp-
content/uploads/PGC_Press_C
onference_2017_07-19-
2017_Final.pdf
*
EIA, 2018
*
*
*
*
*~36% of shale gas is a
byproduct of liquids production

Shale oil: building on shale gas
https://bakkenshale.com/maps/
Main Production
• 1953: Antelope field developed
• 1987: first horizontal well in Upper Bakken
• 2000: Middle Bakken developed in Elm Coulee field
• 2017: Bakken shale producing 1.15 MBOE/D from 7000 wells
Prudhoe Bay Field Scale
*
EIA, 2018
*
*
*
*
*~36% of shale gas is a
byproduct of liquids production
Passey and Chuchla, 2018

201719871927 195718971837 1867
50 BCF/D
first shale gas “well”
first
commercial
use
first frac
Commercial
shale gas field
development
first intentional
horizontal well
in oil field
first
hydraulic
frac
Shale: the 200-year (r)evolution
EGSP
Lots of new technology
• New stimulations technologies: nitrogen foam, massive hydraulic, CO2-sand
• Directional / horizontal drilling in shale; core recovery from horizontal shale wells
• Multiple stage fraccing (7X) in horizontal wellbore
• Microseimic acquisition and processing to map induced fracture network
• Downhole video
• Shale logging suite
• EM/MWD technology
• Oriented core and fracture analysis (azimuth and dip)
• Steady state apparatus to measure porosity and permeability in tight rocks
Lots of new publically available data
• Very large shale data base including complete characterization of
25,000 ‘ of oriented core from 35 wells drilled by the EGSP
• Extensive mapping effort including integration of large in-situ stress
data base
• Discovered a new oil/gas play (Bass Island trend)
• Discovery or role of adsorption in Devonian shale gas production
• Analytical methodologies for mapping shale gas fairways
first
Barnett
shale well
start of the shale oil
“revolution” (~2010)
5 MB/D
Barnett
deemed
commercially
viable

Solar PV: global installed capacity
Projected (labeled by year published) vs
Historical cumulative PV installations
Actual
Sources: IEA World
Energy Outlook (various
years); Mints (2015)
from presentation by
Margolis (2017)
Projected (labeled by year published) vs
Historical cumulative PV installations
Actual
• Exponential increase in global solar PV capacity
Repeated under-prediction due to linear extrapolation of status quo
7 GW
90 GW
170 GW
230 GW
2016:303 GW

Electric vehicles; projection to 2035
“nothing’s happening”
“won’t amount to much”
“revolution”
(includes plug-in hybrids)

What’s next?
• Shale production is inefficient
 Acquire too much acreage(uncertainties about sweet spot location)
 Drill too many wells (to find the sweet spot, demonstrate commercial flow)
 Frac in too many stages (~30% of stages produce 80% of hydrocarbons)
 Prop a very small part (<10%) of induced fractures (stimulated rock volume)
 We recover too little of the resource (<<10% of oil; 10 - 20% of gas)
• because “manufacturing and logistics” have gotten in front of geology
• but we are learning…fast
FIB SEM image of organic matter in producing shale Hydraulic Fracturing Test; Rassenfoss (JPT), 2018
(Marcellus, Haynesville, Fayetteville, Barnett)
(10%)
(25%)
(15%)
(5%)
(from 277,100 wells)
% of OGIP produced
Ikonnikova et al., 2018

lots of drilling;
lots of success
“Crazy 80s”:
lofty price
expectations;
more drilling;
less success
low oil price;
mega-mergers;
harvesting
merged
portfolios
Crooks and Ward, 2017
• ‘60s – early ’70s: lots of successful exploration drilling
• ‘70s: sustained drilling; diminishing success (risk profile increasing)
• ‘80s: unrealistic oil price expectations drive more drilling with even less success
• mid ‘80s - ‘90s: consolidation (emergence of super majors); focus on harvesting merged portfolios
• mid ‘90s – ’08: U. S. natural gas price quadruples
The business context for the start of the “modern era” of shale gas
diminishing
success
Conventional Oil/Gas Exploration
Great
Recession
“opening” for the
shale gas business

2014
2018
The business challenge: tight rocks and steep decline

10 wells / month for 5 years = 600 wells
~$8 M D&C/T-I
$4.8 B CAPEX + OPEX (~0.30 M/well) = $5B
Year 1-5: Gross revenue (@$65/bbl) = $5.6B
B/E @ $59/bbl
2014
The business challenge: drilling treadmill
• All cash flow in initial years must be reinvested to fund next well which delivers the next production and cash flow
• Very high reinvestment makes assets more vulnerable to price declines, especially if relying on external financing
• Production tails are important to economics (AVP, modest NPV)
~85 MMBO
~120 MMBO
undiscounted
EUR/well = ~340 MBO

Shale / free cash flow
Brackett, 2018
Natural gas drives the shale business Shale oil start-up:
• Production increases from 0.4 to 3.6 MBPD
• Cumulative negative free cash flow: $200 B
• Significantly increased debt financing
Survival mode:
• ~100 bankruptcies
• Increased PE, equity financing
• CAPEX, OPEX cuts, efficiencies
Consolidation, +FCF?
• Asset sales
• Efficiencies
• Increased investment

Outlook for the technology / commercial challenge
• Subsequent tranches of resource, beyond the sweet spot, will be of lower quality
• Infilling the sweet spot will be limited by interference between wells (EUR/well will drop)
• Improved geologic understanding will be the most significant factor enhancing efficiency
• Manufacturing/logistic efficiencies will improve incrementally
• Enhanced oil recovery technologies offer real promise
• There’s lots and lots and lots more shale resource to be produced outside the U. S.
 Argentina
 Mexico
 Russia
 ME / North Africa

“easy”
“really hard”
Increasing call
on technology
• While the impacts of shale resources are vast, their emergence
is part of a normal technology progression coupled with
accommodating commercial/political circumstances.
 Dramatic change = revolution!
 Adoption of new ideas is profoundly hindered by prevailing dogma
 Understanding of old ideas is muddled by mythology that
develops around new ideas
 We have a cognitive inability to comprehend exponential change
 Context (perceived s/d, prices, risk, policy) and timing matter
 Government can play an important, constructive role
• Shale is on the verge of demonstrating true sustainability
 Improved geologic understanding is the key to improved efficiency
and long-term sustainability
• The next tranche of energy resources / applications will be
hailed as another “(r)evolution” as we work down the resource
pyramid
shale
deepwater
methane hydrates
conventional
So what?
renewables

Shale the revolution that wasn't

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