Beyond the Bell Sidebar:
Natural Selection
New drilling technology to release gas trapped in shale has created a natural gas glut — now all the industry needs is more users.
Courtesy Enercom
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E-mailIf it’s possible to have too much of a good thing, the U.S. natural gas industry has found out how. Since the technological breakthroughs in the middle of the decade that made pulling natural gas deposits from shale not only possible but also cost-effective, the market has been flooded with supply, driving down prices and driving out competition from imported liquefied natural gas, or LNG.
Now it’s a matter of waiting for demand to begin soaking up that excess. Such demand is already beginning, says Roger Read, senior energy analyst at Natixis Bleichroeder LLC, an investment bank based in New York. With an abundance of domestic natural gas reserves promising a secure, predictable supply of comparatively inexpensive and clean energy, Read projects that natural gas will increasingly become the fuel of choice for both industrial and residential energy.
“My view is that we found out about these heretofore unknown quantities of natural gas just in time,” says Floyd C. Wilson, chairman and CEO of Petrohawk Energy Corp. (HK). “There is a good opportunity for natural gas to play a role in offsetting the importation of crude oil, and for natural gas to become an important piece of the puzzle in our national energy security and in building a path toward cleaner production of energy.”
Generating New Opportunities
Technically speaking, geologists have long known about the natural gas resources hiding in the shale rock bed that covers vast areas of the U.S. But it wasn’t until the advent of horizontal drilling that accessing those deposits was considered economically feasible, according to Robert C. Turnham Jr., president and chief operating officer of Goodrich Petroleum Corp. (GDP). This new type of drilling, at a 90-degree angle across the underground rock bed, is usually accompanied by a process called “fracing,” or fracturing, in which fluid is pumped under high pressure into the horizontal well, breaking the rock apart and allowing the hydrocarbons to escape, he says.
As recently as 15 years ago, the technology didn’t even exist to get the gas out of this rock in an efficient manner, explains Turnham. “Frac technology and horizontal drilling have made a tremendous impact on the entire industry because you are capturing a lot more gas by virtue of drilling a different kind of well,” he says. For example, he notes, the typical vertical well costs about $2 million to drill and put into production, generating about 1 billion cubic feet of gas reserve production. By comparison, he points out, a horizontal well with fracing will cost about $8 million to develop but end up delivering six times the recoverable reserve, thereby producing a better economic return for the company and its royalty owners. It also minimizes surface usage.
More important, those fields are being developed in areas of the nation, such as the Northeast, that aren’t used to having a reliable natural gas supply. “The result is that for the first time, America has a convincing, scalable alternative to gasoline and diesel,” says James T. Hackett, chairman and CEO of Anadarko Petroleum Corp. (APC). Compressed natural gas produces 25 percent less carbon dioxide than diesel fuel or gasoline, he observes, adding that natural gas is much cheaper to produce. “If oil goes back to $100 a barrel, we are going to pay $4 a gallon for diesel, and if natural gas stays between $4 and $8 [per million BTU], the maximum price will be about $2.50 per gallon equivalent,” he says.
