Prepared for: Plenary Session: Energy Technologies: From Development to Deployment

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1 Fostering Continuing Innovation in Unconventional Oil and Gas Prepared By: Vello A. Kuuskraa, President ADVANCED RESOURCES INTERNATIONAL, INC. Arlington, VA Prepared for: Plenary Session: Energy Technologies: From Development to Deployment Sponsored by: 30 th USAEE/IAEE North American Conference Changing Roles of Industry, Government and Research, Washington, DC 1

2 Discussion Outline 1. The Impact of Innovation in Unconventional Gas and Gas Shales 2. How Did the Innovation Occur? Model for Innovation Key Success Factors 3. Learnings for Other Energy Sources 2

3 1. The Impact of Innovation in Unconventional Gas and Gas Shales Driven by a new understanding of the massive size, technology readiness and economic viability of unconventional gas and shales, a paradigm shift is underway for natural gas supplies. This paradigm shift began a decade ago in the U.S. with only modest fanfare. Low cost coalbed methane in the San Juan Basin of Colorado and New Mexico led the way. Next was the introduction of highly productive tight gas development at Jonah and Pinedale fields in western Wyoming. Third was the emergence of the Barnett and now the other deep North American gas shales. Now this paradigm shift is underway worldwide including Canada, China, Europe, Indonesia and numerous other areas. 3 3

4 Year 2000 Fostering Continuing Innovation in Unconventional Oil and Gas The Paradigm Shift in U.S. Natural Gas Supplies The 21 Bcfd growth in unconventional gas production has more than replaced a decade long decline in U.S conventional onshore and offshore production 70 JAF2011_028.XLS Dry Gas Production (Bcfd) Bcfd 24 Bcfd 16 Bcfd 13 Bcfd 0 TOTAL Conventional Onshore Gas* Unconventional Gas Offshore Gas *Includes onshore associated, non-associated and Alaska. Source: U.S. Energy Information Agency (2010); Advanced Resources Int l (2010). 4

5 How Much Does U.S. Shale Gas Contribute? Production of shale gas has grown by ten-fold. It provided 14 Bcfd, equal to nearly a quarter of U.S. natural gas production, last year. Annual Shale Gas Production, Wet (Bcfd) (p) 2010 (e) (bcfd) (Bcfd) (bcfd) Haynesville/Bossier Marcellus Woodford Fayetteville Barnett Other Sub-Total (e) Source: Advanced Resources International (2010) 5

6 How Has Shale Gas Impacted U.S. Natural Gas Prices? Unconventional gas (particularly the higher quality gas shales) is today the low cost portion of the U.S. natural gas price/supply curve. Prior Perception New Understanding Gas Supply Costs Unconventional Gas (Shale Gas) Conventional Gas Gas Supply Costs Conventional Gas Unconventional Gas (Shale Gas) JAF02052.CDR Gas Resources Gas Resources 6

7 2. Shale Gas And Unconventional Gas Are A R&D And Policy Success Story Innovation and progress in technology converted an un-producible shale/source rock resource into a large, low cost domestic supply of natural gas plus oil: The DOE/NETL helped build the essential resource and science knowledge base. The Gas Research Institute and industry launched the early technology demos. Section 29 tax credits (now expired) helped attract capital and build economies of scale. However, we are still in the early, emerging stages of having an optimum set of technologies, particularly for tight (shale) oil. 7

8 2. How Did the Innovation Occur? Four factors were essential for successful technology innovations in shale gas: 1. Building a foundation of data and science on self-sourcing, low permeability resources. (1980s U.S. DOE and 1980s/1990s GRI research built the foundation.) 2. Understanding the true size and potential of the resource. (Mid-1990s U.S. DOE/EIA-sponsored studies and models.) 3. Capturing insights for optimizing recovery efficiency. ( Innovation follows insights.) 4. Providing information and knowledge transfer to help the private marketplace work. (Supporting capital investment and risk taking.) 8

9 The 30 Year Overnight Sensation Much of the popular media tends to calls shale gas an overnight sensation. However, 30 years of research and innovation are behind this overnight sensation : The innovation pathway stared in the early 1980s with DOE/NETL research program in Devonian shales: Natural fracture and stress orientation cores (early 1980s) Comprehensive resource assessment for Devonian shales (NETL/ARI reports). Impact of horizontal wells on shale gas recovery (NETL/ARI technical report 1984). Next was the GRI-sponsored field research in the Antrim Shale (late 80s through early 90s): Demonstration of two stage fracturing Quantifying the volume of adsorbed gas Developing new resources characterization tools 9

10 Key Research Initiatives Three key research initiatives provided evidence that the Barnett Shale could become an economically-viable resource: A rigorous reservoir characterization (supported by GRI) showed that the resource in-place was nearly twice as rich as previously assessed. The Stella Young #2 intensively stimulated slant well (drilled by Mitchell Energy and GRI), the best well drilled to date, demonstrated that increased reservoir contact would lead to better wells. Completing the entire Barnett Shale vertical interval, rather than a high graded interval, was cost-effective. 10

11 Information Disseminated Also Played a Role A series of publications and information dissemination activities helped transfer research findings and spur continuing innovation: The quarterly GRI publication Gas Shales Technology Review. The Oil and Gas Journal article on the Barnett Shale (Kuuskraa, et al., 1998) that argued: Vertical wells were draining only 10 to 30 acres. Porosity as well as adsorbed gas are key gas storage mechanisms The size of the Barnett Shale resource was at least 10 Tcf recoverable. The initial EIA unconventional gas module included the use of horizontal wells in gas shales in the high technology case, helping define the benefits of utilizing this innovation. 11

12 The Final Insight The final game changer insight came from refracturing the older, vertically drilled Barnett Shale wells. The second (or third refracture) was contacting additional shale reservoir. The refracs significantly increased gas reserves. The volume of gas recovery in deep shales is related to how much of the shale formation one contacts and stimulates. Less costly and less damaging slick water fracs provided superior performance to traditional gel fracs. The key insight was the recognition that one could create a permeable reservoir and high rates of gas production by using intensively stimulated horizontal wells in deep gas shales

13 Devon Denton Creek Trading Co. No. 1 Well Gas Production, Mcf/d 10,000 1, Initial EUR: 1.0 Bcf Final EUR = 2.9 Bcf Fostering Continuing Innovation in Unconventional Oil and Gas Refracturing Gas Shale Wells (Barnett Shale/Newark East Field) Fracture Reorientation Time, Years Johnson No. 2 Well 1,000 Gas Production, Mcf/d Time, Years Initial EUR: 0.4 Bcf Final EUR = 2.9 Bcf

14 Where Are We Today? Fostering Continuing Innovation in Unconventional Oil and Gas Horizontal Well with Multi-Stage Fracturing Early Horizontal Well Completion Practices 1,500 Stage 4 Stage 3 Stage 2 Stage 1 Latest Gas Shale Well Completion Practices 5,000 Source: EnCana 14 14

15 3. Lessons For Other Unconventional Oil and Gas Resources Four lessons learned have emerged from the successful innovation in unconventional gas and shale gas. 1. The oil and gas marketplace tends to avoid incurring private costs with public benefits (R&D market failure). 2. In-depth, credible information on the size and economic viability of resources is essential for helping the marketplace work. 3. Multiple parallel public and private investigations on high impact topics will accelerate learnings and technology progress. 4. High impact domestic oil and gas resource innovation opportunities: Integrating CO 2 storage and enhanced oil recovery Accelerating pursuit of tight oil Cracking the technical nut on lacustrine, clay-rich shale gas (and oil). 15

16 Integrating CO 2 Storage and Enhanced Oil Recovery (EOR) Integration of CO 2 storage with next generation CO 2 -EOR technology would provide multiple energy security and environmental benefits: Economically recoverable* domestic oil supplies equal to 67 billion barrels.** Major new revenues for Federal, state and local governments and the electric power industry. Market for 18 Gt of anthropogenic CO 2, equal to 30 years of CO 2 emissions captured from 100 (1 GW-size) coal-fired power plants. Additional benefits would accrue from application of CO 2 -EOR and storage technology to the large domestic Residual Oil Zone (ROZ) resource. Credible information, incentives and joint industry/government R&D on next generation technologies would help unlock this resource. * At an oil price of $85/B, a CO 2 market price of $40/mt and a 20% ROR, before tax. ** The U.S. DOE/NETL-sponsored report, Improving Domestic Energy Security and Lowering CO 2 Emissions with Next Generation CO 2 -Enhanced Oil Recovery (CO 2 -EOR), prepared by Advanced Resources Int l., states that this volume of economically recoverable oil is sufficient to support nearly 4 million barrels of domestic oil production. 16

17 Accelerating the Pursuit of Tight Oil In addition to natural gas, large volumes of oil are contained in domestic tight shale and sand formations, such as: Eagle Ford Shale Granite Wash Tight Gas Oily portions of the Barnett, Marcellus and Utica shales The innovations developed for shale gas (such as sweet spot exploration, horizontal drilling and intensive hydraulic stimulation) are necessary, but are not sufficient, for efficient production of tight oil. Key new innovations requiring R&D investment include: Increased reservoir contact plus identification and/or creation of higher conductivity natural/induced fractures. Deployment of secondary reservoir drive mechanisms. Efficient displacement of residual oil. * The recent NPC North American Resource Development Study, Prudent Development, estimated that up to 3 million barrels per day of oil production would result from application of advanced technologies for tight oil. 17

18 Closing Comments The U.S. has a bountiful, but complex set of unconventional oil and gas resources, as argued in numerous reports by Advanced Resources and as documented in the recently completed NPC study: Prudent Development Realizing the Potential of North America's Abundant Natural Gas and Oil Resources. Converting these complex resources into commercially viable domestic oil and gas reserves requires further innovations and technology progress. The private marketplace can provide much of this innovation once the foundation (data, science, firstgeneration technologies) is set in-place by high impact public/private R&D initiatives. 18

19 Advanced Resources International Office Locations Washington, DC 4501 Fairfax Drive, Suite 910 Arlington, VA Phone: (703) Fax: (703) Houston, Texas Westheimer, Suite 520 Houston, TX Phone: (281) Fax: (281)

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