Written by Vinod Dar
US natural gas resources and attendant reserves are, again, a strategic opportunity for the US and for investors. It is becoming clearer every quarter that not only are US natural gas resources much greater than imagined even 5 years ago, but reserves have the potential to increase steadily for many years, if market incentives exist.
The history of gas resource delineation in the US (and globally) is the history of severe underestimation. The lesson of gas exploration in the US (and globally) is that the more and better we seek the more we find. The more we find, the more we realize how little we actually know and how much more there is to learn and find. Natural gas E&P in the US is still a young business.
Natural gas has not captured the popular imagination nor has it had the strategic visibility of other major energy sources such as oil (more exciting and romantic), coal (more muscular and integral to the rise of the industrial age) or nuclear energy (more technologically glamorous and physically impressive).
As readers know, gas started as a nuisance by-product of the oil industry and until it found an initial commercial use as a street lighting fuel (displacing coal gas), it had to be flared, which did not endear it to field engineers or industry executives. Electricity soon drove gas out its first market so gas had to find "in premise" applications as a residential/commercial fuel, again displacing coal or wood. The industrial, chemical/fertilizer and power generating markets were developed considerably later.
It was only after World War 2 and the conversion of long distance oil pipelines to natural gas, that gas became a modern fuel but even so its market share was precarious. The Gulf of Mexico (GOM) was discovered as a major oil (and associated gas) play and quickly grew in importance and influence, saving the gas industry from precipitous decline and spurring a boom in petrochemical, fertilizer, gas gathering, treatment and long line transmission investments in Texas and Louisiana.
However, increasing and increasingly complex regulations and well below market price controls made natural gas a dull and uninteresting industry. Indeed, the thousands of independent E&P companies in the US mostly looked for and produced oil, finding gas often by happenstance.
By the mid 1970s gas was viewed as not only a mature but declining industry and public policy makers believed that it should be reserved for non-industrial uses while almost banning the building of new gas fired central station power plants.
The US was believed to be played out as a gas province. Canadian gas and LNG imports were deemed to be essential to maintaining stagnant consumption.
In the late 1970s there was much excited talk in Washington DC and Sacramento about natural gas being a bridge to a methanol based future transportation economy that would free us from Arab oil. This talk faded after a couple of years and then died when people found that methanol made little engineering and no economic sense as a major fuel.
It did, however, introduce the idea of natural gas as a bridge to something in some future.
The gas industry actually shrank in every segment of its value chain in the early and mid 1980s. It was only after a sustained and well organized marketing and lobbying effort coupled with the advent of the independent power producer (the precursor to the merchant energy industry), formal natural gas futures and options trading and the high efficiency, low capital cost, quick build natural gas turbine that natural gas finally found a growth avenue in the 1990s.
Intrigued by the growth prospects for natural gas and increasingly uncompetitive in the global oil industry, independents turned enthusiastically to natural gas and began their innovative and rewarding transformation into natural gas independents. They studied and invested in 4 "frontier" plays in the US: GOM (for non-associated gas), Rocky Mountains (extending deep into Canada), deep onshore and coal bed methane (CBM).
In each case they took significant risk, experimented with and developed suites of new engineering applications and financing techniques, created a new generation of management and succeeded beyond the expectations of analysts and the oil mini majors and majors, who swiftly followed where the independents led.
Once again, natural gas began to be viewed as a bridge to another energy future; this time to a hydrogen based economy which would transform the US energy and transportation industries, lead to renewal of global competitiveness, free the nation from Arab oil etc. There was much excited talk in the opening years of this decade but again this conversation faded in a couple of years, then subsided and has been very muted for the past 2 to 3 years.
However, while the talk of gas as bridge was going on the independents were quietly but consistently exploring and developing yet another natural gas resource: shale and the majors were, in parallel, advancing the technological frontier on ultra-deep water (UDP ---deeper than 5,000ft) drilling in the GOM.
Never in the economic history of the US has the value added potential and promise of natural gas been greater than it is now but with little assurance that this potential can be realized or promise fulfilled. In the past 2 to 3 years there has been an astonishing increase in the resource base estimate of natural gas and the (hoped for ) growth trajectory in natural gas reserves. The Potential Gas Committee (as most readers know this is a voluntary industry group analytically and administratively supported by the Colorado School of Mines) has released its latest report which evaluates US natural gas resources (excluding proven reserves).
The PGC reports that their latest (mean value) estimate of the US natural gas resource is 1,836 trillion cubic feet (Tcf), by far the highest in the 44 year history of the PGC. By comparison, proven gas reserves are in the vicinity of 250 Tcf and annual production about 20tcf.
This latest estimate represents a remarkable jump of 39% from an estimate made just 2 years ago. Proven reserves, as tracked by the DOE, have increased by over 10 % over the same 2 years. Almost the entire increase is attributable to shale, which has gone from a very minor factor in resource assessments in the 1990s to a third of the resource base at present.
The resource base estimate for CBM and UDP gas has also increased. The aggregate estimate for the total future supply potential of the US (resources+reserves) at end 2008 is now presented as over a third higher than end 2006. This is an astonishing accomplishment by the oil and gas industry and little reported by the MSM, hardly noted and not in the least appreciated by the public yet it can be, if allowed, transforming.
The current business environment for independents, even the biggest, is harsh. They face hostile public policy at the federal level and in certain states as well, low prices and constrained capital formation. This has crested an avenue for majors, mini-majors and foreign government owned oil companies to establish and expand a significant investment and business position in the North American shale business.
As a result, one should expect to see a shift in industry emphasis away from resource definition and prospect generation to proving up reserves, expanding production capacity and field infrastructure and (maybe) increased production.
Ultra- Deepwater GOM oil and gas is, of course, the domain of the largest, most sophisticated and well capitalized, oil and gas companies. It is where the majors, minimajors, the very largest independents, and government owned (eg Brazil, Norway) minimajors are building a large business position. It is where the newest, most expensive and most innovative technologies are being tested, developed and deployed. The investment scale is in the billions of dollars; projects have long lead times and require engineering and operating skills available to only the industry leaders. It is not a place for small and medium independents.
UDP oil and gas became a commercial proposition in 1986 with the discovery of the Mensa field. Since then there have been 64 other discoveries. The world water depth record for a completed subsea well is 9,356ft below the water surface in the Silvertip project, Prerdido Regional Host facility, Alaminos Canyon, GOM. The primary focus of UDP activity is oil but as more and more natural gas is found in commercial quantities, natural gas production is projected to increase in multiple jumps in the next decade.
The resource base for gas is still being delineated and it will be a decade more before any stable, confident, estimate is available. Industry experts and USGS analysts are both very optimistic that the resource estimate will be in the hundreds of Tcf. At present, the technically recoverable resource estimate for the entire GOM is 230Tcf.
UDP fields are prodigious oil and gas producers compared with deepwater, shallow water and most onshore fields. For example, the famous Thunder Horse Field, with the largest semisubmersible facility in the world, came on-stream in 2008. Producing from just 7 wells it is already the largest producer in the GOM. In March 2009, it was producing 260,000 barrels of oil and 210 million cubic feet of gas per day (enough to make it comparable to a medium sized independent oil and gas company in the US). Production will increase later this year.
The Thunder Hawk field just came on-stream with an initial output of 70,000 barrels of oil and 70million cubic feet of gas per day. Production will rise considerably as the field reaches full capacity. The Independence Hub Facility came online in 2007 tying together 9 fields. It capacity accounts for more than 10% of all GOM gas production. The Cascade and Chinook fields are scheduled to come on-stream in 2010 and expected to be prolific producers.
Both fields are being developed by the Brazilians who are deploying a suite of four advanced technologies, new to the GOM. Outside Texas and Louisiana, the American public has almost no awareness of how impressive industry achievements have been in the GOM and how valuable UDP gas can be for the nation.
Should the resource delineation and estimation trends of the past 5 years continue (recall that both shale and UDP are very young sub-industries and in the early days of resource development) then by 2020 the US may well emerge with one of the largest known endowments (not proven reserves) of natural gas in the world.
Propelled by shale and UDP resources, natural gas can readily be a very important, 30 to 40 year, bridge to whatever energy future comes next. Of course, neither shale nor UDP gas is unique to the US but if these industries are very young here, they are infants in the rest of the world.
If the national will exists, the US could increase natural gas output by 50% in 5 years and double it in 10 years, which would have transforming consequences not just for the US energy economy and energy imports but for the planetary energy economy.
However, based on today's public policy environment and gas market/capital formation market conditions, the prospects for this are nil. But, then, tomorrow is another day and the oil and gas industry never lives just for today.
More optimistically, neither shale nor UDP gas represent the final frontier for the natural gas industry. That distinction goes to methane hydrates (the ice that burns, as it is commonly called). Methane trapped in marine sediments as a hydrate is found in many parts of the world.
Immense, indeed unbelievably huge, amounts of energy are trapped in these hydrates. Confirmed deposits are especially abundant in the US and Canada with the largest such found in the GOM. However, this may be because the active search for these hydrates has just begun.
The USGS sampled two small areas off the coasts of North and South Carolina(in an oil and gas province that has never been drilled) and estimated that just these 2 small sample areas had a methane hydrate resource of 1,300 Tcf of gas (greater than the entire estimated shale gas resource of the US). This is a tiny fraction of the methane hydrate resource guess for the GOM.
According to USGS scientists and industry researchers, the energy content of these hydrates in US coastal waters exceeds the combined energy of all fossil energy resources in the US.
Research into these hydrates has been conducted at a low level for about 20 years. Recently investigations have started to become more serious and sustained. In addition to the US, Japan, China and India (all with very large offshore methane hydrate deposits) have active and expanding research programs. In May, 2009, the world's first "resource quality", meaning in concentrations of commercial interest, deposit was discovered in 2 sites in the GOM by the National Energy Technology Laboratory in collaboration with the Minerals Management Agency, the USGS and an industry consortium.
With methane hydrates we are perhaps in the same position as we were with shale gas 25 years ago: something known, something suspected much research to be done and commercially improbable for a generation. A generation later shale gas is one of the greatest commercial plays in the history of the American gas industry. Knowledge does accumulate and time does pass until a highly speculative resource becomes a producing reality.
The sequence of resource identification, academic investigations, resource delineation, mapping of high grade deposits, detailed resource estimation, test production and engineering innovation, conversion of resources to reserves and then initial production is familiar to everyone in the oil and gas business.
We are merely at the resource delineation and very preliminary high grade deposit identification stage with methane hydrates. Perhaps in 10 years, somewhere in the world, if not in the US, there will be a pilot program to liberate methane from the hydrate. It is likely enough, though, that the pilot will be in the GOM. Within 15 to 20 years there could be initial commercial scale production (perhaps via a business start up specially created to be a methane hydrate specialist) if several technological, public policy and economic factors align favorably. A genuine sub industry could emerge around 2030, which is within the strategic horizon the oil and gas industry.
Maybe the US will not permit a methane hydrate industry within its borders but we can be fairly certain that if commercial production from methane hydrates is possible the Chinese, Indians, Brazilians, Russians and Japanese, at a minimum will pursue it. The US has no power to stop them.
Should this transpire then not only will natural gas be a 30 to 40 year bridge to an energy future in the US but a 100 year bridge to a global energy future. The least romantic fossil energy may turn out to be the most strategically vital for the world in the 21st century.
Vinod Dar is managing director, Dar&Company; www.Darandcompany.com