KEY ISSUES TO BE CONSIDERED IN CONNECTION WITH SHALE GAS DEVELOPMENT
The following key issues should be carefully considered, when involved in the development of shale gas reserves internationally:
1) Environmental Protection Issues
- assuring that the Operator of the shale gas development takes necessary steps to fully protect the environment from damage caused by shale gas operations
- use of the most advanced technology and know-how, and proper cementing and casing are essential
2) Water Management and Treatment Issues
- assuring that there are adequate supplies of source water for hydraulic fracturing, and that the water can be delivered to the drill site at a reasonable cost, and that the water usage does not cause problems for the local population
- treatment of flowback and produced water, including the possible use of disposal wells, will be major issues in drilling operations
3) Transfer of Technology Issues
- engaging Operators, service companies and drilling contractors with access to the most advanced directional drilling and hydraulic fracturing technology
- negotiating appropriate technology provisions in service and drilling contracts
4) Transportation Issues
- assuring that water and equipment can be transported economically to the drill site, and that natural gas production can be transported to market
- also assuring that any liquids production can be processed and transported to market
5) Contractual Issues
- reviewing and negotiating the terms of contracts governing the acquisition of interests in shale reserves, and governing the exploration and production of shale gas and liquids (e.g., oil and gas leases or PSCs, and other contracts relating to shale gas and liquids operations)
- assuring that the terms of relevant contracts require the Operator to conform to international standards, and contain necessary protections in connection with shale gas and liquids operations
- negotiating terms of service contracts, drilling contracts, technology transfer agreements which provide adequate protections; negotiating contracts for natural gas processing and transportation
6) Further Information on shale related matters can be found at
- Why shale gas has become so popular and how is it different?
- Hydraulic fracturing – its impact on resources and the environment
- Shale gas development in the U.S.
- Shale gas development in China
- Key issues to be considered in connection with shale gas development
Why is shale so hot?
– Global demand for energy, with decreasing conventional reserves
– New technology
• Horizontal drilling
• Hydraulic fracturing
– Results:
• Boom in drilling and investment in U.S. shale
• Increase in U.S. natural gas reserves
• Proposals for changes in laws
Abundance
– Recoverable unconventional gas (shale gas, tight sands and coal bed methane) accounts for 60% of the U.S. onshore recoverable resources
– Current recoverable resources estimated to provide gas supply in the U.S. for the next 90 years, while a separate estimate of shale gas resources extends the supply to 116 years
– Available shale gas reserves in China, Europe and other parts of the world are substantial
– Natural gas is a “clean” energy source - preferred over other hydrocarbons
How are shale gas developments different from conventional oil and gas projects?
– Shale gas projects extend over large areas, involving many interested parties
– Modern hydraulic fracturing (“fracking”) technology and service contractors are essential to development
– Shale development involves significant environmental and water resources issues in connection with the fracking process
– Infrastructure needs and resources may be outside of conventional areas – new infrastructure may be needed for development and transportation
Overview of Horizontal Drilling
- Horizontal wells provide greater exposure to the producing formation (reservoir)
• Primary disadvantage is cost: as much as $2.5 million for a horizontal well versus $800,000 for a vertical well
• Well suited to tight formations that extend over large areas
Overview of Hydraulic Fracturing
Hydraulic fracturing is a formation stimulation practice that creates additional permeability in a producing formation, allowing hydrocarbons to flow more readily to a well bore
• Hydraulic fracturing involves pumping of fracturing fluid into formation under pressure to generate fractures or cracks in target formation
• Fluid includes proppant to hold cracks open
• Without hydraulic fracturing, the removal of gas from shale formations is not feasible
Hydraulic fracturing has been linked to a number of environmental hazards, including water contamination.
Although fracking has been in use since 1949, environmental groups in the US and Europe claim that fissures resulting from fracking can create pathways for chemicals or gas to seep into aquifers
Industry experts argue that shales are separated from aquifers by thousands of meters of impermeable bedrock, and therefore such seepage cannot occur
Other claims of environmental damage include escape of natural gas and earthquakes
Significant Environmental Issues
Water withdrawal / use
– Depletion of water supplies, particularly in times of drought, has been cited as an objection to hydraulic fracturing operations
– Substantial drought in Texas has raised questions about the efficacy of shale development
Managing flow back water
– In Pennsylvania (Marcellus Shale development), local companies disposed of contaminated water in waste treatment centers which were not equipped to clean the water of toxins before the water was released back into the water supply
– In other parts of the US where shale development is more established, waste water is disposed of in deep saline wells
Protecting drinking water
– An informal moratorium on shale gas drilling currently exists; a series of environmental impact reviews and draft regulations have been prepared. At present, it is unclear whether fracking will be banned altogether, or allowed under regulations designed to protect water resources
– In a series of studies, researchers at Duke University concluded that shale gas wells appear to be contaminating nearby groundwater overlying shale gas basins, and also referred to inadequate disposal of flowback water from shale gas exploration
– A new study published in the Proceedings of the National Academy of Sciences found no evidence that fracturing shale causes groundwater contamination
No. 1 Issue: availability of "source water"
Fracking requires large quantities of water for each well drilled
– are local supplies of water available?
– does the shale gas operation impact availability of local drinking water or agricultural supplies?
– how can water be delivered to the wellsite? Are roads sufficient for heavy cargoes of water by truck? Will smaller vehicles be required, and will a fleet of vehicles be available?
Operator may need to make long-term contract with vehicle supplier in order to gain use of vehicles
No. 2 issue: "flowback“
As water is used and pumped into well, there is "flowback" which must be handled
• Service company may have vehicle-mounted system that can recover some of chemicals and filter out sediment
• Some water can be used in other drilling operations
• Neither water nor sediment can be responsibly left on the drill site or put back into waterways without treatment because of chemical, minerals and metal contamination
No. 2 issue: "flowback“
Some parts of the US allow disposal wells – other areas do not have stratigraphic layers that can accept water, so handling is a big issue
• One solution is to transport flowback water to another location by truck for disposal – great expense
• U.S. companies are developing new technologies and systems to treat water – some use mobile treatment equipment to improve volume of recoverable water
• Treatment may be a big cost item for the Operator
No. 3 Issue: Disposal of water produced from the wells
Same problem encountered with conventional drilling operations – water produced from wells where hydrocarbons are recovered
• Solutions for "flowback" may also be used to deal with "produced water"
Other Major Issues:
Availability of infrastructure outside of conventional production areas
• Need for pipeline access to support natural gas production
• Need for gas and liquids processing
• Transportation of recovered liquids to market
U.S. shale gas operators engage large service contractors (e.g., Baker Hughes, Halliburton, Schlumberger, etc.) to work with experienced drilling contractors on shale gas drilling operations
• Essential to have both technology and experience in drilling vertical and horizontal wells – sensitive technology may be an issue with contractors
• Fracking operations also involve sensitive technology, formulas and proprietary processes
Shale development in US
U.S. Federal Government Regulation of oil and gas includes
– Federal Energy Regulatory Commission (“FERC”) which previously regulated the well head price of natural gas;
– Environmental Protection Agency; and
– Other Federal Departments
• U.S. states also regulate oil and gas (e.g., Texas Railroad Commission)
Federal Regulation of Hydraulic Fracturing
– excluded from regulation under U.S. Safe Drinking Water Act (SDWA)
– Federal government has largely left regulation of hydraulic fracturing to the states
State Regulation of Hydraulic Fracturing
– Primary source of regulation
– Most states regulate through state oil and gas agency, state environmental agency, or both
– State regulations continue to evolve as states take different approaches to regulating hydraulic fracturing
US Regulatory framework
Local Regulation of Hydraulic Fracturing
– Local governments are becoming more involved and in some instances have banned hydraulic fracturing within their jurisdiction (e.g., Syracuse, Albany and Buffalo in New York state); local government bans have been upheld by courts to date, but appeals are pending
• The U.S. Government hopes to avoid the safety and regulatory breakdowns that led to the Deepwater Horizon blowout as it oversees onshore drilling using hydraulic fracturing
Structure of Chinese Shale gas and liquids projects
Initial licensing of shale blocks will be done under the oversight of the PRC Ministry of Land and Natural Resources (“MLR”). Subsequent steps included in foreign participation in shale development are less clear at this time
• The Chinese Government is considering one of two possible models on how to develop shale projects in China
PSC Model: Foreign entity enters into PSC with Chinese co. holding the block license
Foreign Invested Entity Model (“FIE Model”): Foreign entity enters into a joint venture with Chinese co.; JV will hold the block license
Until the Chinese State Council makes a final decision concerning which model to utilize, it is unclear which model will ultimately be utilized in China
NOCs appear to be pushing PSC Model (as evidenced by CNPC-Shell PSC)
CNPC-Shell PSC still awaiting governmental approval
