Intro To Unconventional Resources
The American energy landscape is rapidly changing. Between 2008 and 2012, coinciding with an economic recession, coal consumption declined by 8% and oil production declined from 19.5 million barrels per day to 18.5 million barrels per day. Bucking the trend, natural gas consumption increased by 10% in the same period, according to the EIA. In 2012, the United States produced 95% of the natural gas consumed domestically, and, for the first time, natural gas surpassed coal as the leading source of electricity. And in 2019, coal consumption fell by 15% and U.S. renewable energy consumption surpassed coal consumption for the first time in 130 years. In that same year, renewables accounted for 11 % of total U.S. energy consumption.1United State Energy Information Administration, 2020, U.S. renewable energy consumption surpasses coal for the first time in over 130 years, https://www.eia.gov/todayinenergy/detail.php?id=43895 (accessed August 21, 2020).
The shift from coal to gas represents an historic change in the U.S. energy landscape, a change that is expected to have long-term economic, environmental, and geopolitical implications. Professionals going into the industry today need to have a strong understanding of unconventional oil and gas resources.
Let’s take a look at the causes behind the recent shift.
Why Now?
The unconventional resource revolution is based on the development of a new class of resources that were not utilized until recently. These resources include shale gas, tight gas, and tight oil. (When geologists refer to a formation as “tight,” they mean the rock is highly compressed and has low permeability. This makes it hard to extract hydrocarbons from such formations, even though hydrocarbons may be rich in them.)
So why now? Why is the production of these unconventional resources increasing?
A combination of geopolitical and economic forces have ushered in this revolution. Let’s take a look at these forces.
Historical Background
The unconventional resource revolution is moving the U.S. towards one of its longstanding goals: energy security.
Energy security has been an important consideration throughout history, although its significance has increased markedly in recent years with the development of the modern energy-intensive global economy.
The event that really brought energy security to the forefront in modern times was the oil shock of 1973. A series of geopolitical maneuvers by the U.S., Israel, and the members of OPEC (the Organization of Petroleum Exporting Countries) lead to OPEC announcing an oil embargo. This embargo caused significant price increases and had an negative effect on the global economy.
The embargo raised awareness of the vulnerability of the American energy supply and economy to decisions made by foreign producers of oil. The only way to assure American sovereignty, it seemed, was to produce all our oil and gas domestically.
Over time, U.S. energy policy began to evolve towards the goal of domestic production. Energy legislation began to encourage investment in domestic resources.
Unfortunately, economic forces slowed American attempts at energy independence – most conventional oil and gas plays in the U.S. had already passed their peak production rates, and unconventional resources were uneconomical.
Despite the desire for energy security, domestic production in the U.S. would not get started until economic and environmental forces began to change the rules of the game.
Development of Hydraulic Fracturing and Horizontal Drilling
Two technologies, hydraulic fracturing and horizontal drilling, finally tipped the economic scales in favor of U.S. production of unconventional resources.
The first is hydraulic fracturing, often referred to as fracking. This technology, first developed in the 1940s, allows drillers to fracture rocks deep underground, which helps oil and gas escape from otherwise impermeable rock formations. Although the technology had promise in the early days, it was mainly used for improving the flow of gas through pores that had been clogged up by drilling operations, not to stimulate formations that wouldn’t otherwise produce oil or gas.
Hydraulic fracturing came into its own after the development of horizontal drilling, which has really taken off in the last fifteen years or so. Horizontal drilling allows drillers to follow along the most productive rock layers, which greatly increases the amount of gas that can be accessed from one well. As horizontal drilling technology developed, it became cheaper and more effective to drill these wells.
Horizontal wells can be hydraulically fractured in “stages”. Once fractures are created, a single well, passing through an impermeable formation, can produce economically viable amounts of oil or gas. This development was responsible for the recent large increase in proven reserves across the globe.
Impacts of Shale Gas
The impact of the development of unconventional gas resources in the U.S. has been enormous. As wells have gone in, prices of gas have fallen drastically, especially in areas near the gas development, such as the Northeastern U.S.
Some economists have predicted that a manufacturing boom will follow the natural gas boom, as companies begin to switch to cheap gas energy. In addition, many companies use natural gas as a “feedstock” – a raw material that is used in the production of other products such as chemicals and fertilizers. As the price of this feedstock goes down, product prices are expected to fall.
The shale gas boom is also influencing the U.S. power industry. Natural gas has recently surpassed coal as the leading source of energy for electricity generation. There are a few reasons for this:
Depending on the market, natural gas is now either cheaper or the same cost as coal per BTU of energy generated.
Environmental legislation, including clean air laws that limit emissions, has forced many companies to decide between upgrading coal plants to reduce emissions and switching over to natural gas. In most cases, the switch to natural gas has proven to be the cheaper option.
The Future of Unconventional Resources
The EIA has predicted that U.S. gas production will increase from 21.3 trillion cubic feet (Tcf) per year in 2010 to 45 Tcf by 2050.2United State Energy Information Administration, 2020, EIA expects natural gas production and exports to continue increasing in most scenarios, https://www.eia.gov/todayinenergy/detail.php?id=42875 (accessed August 21, 2020). This vast increase, coupled with the recent approval by the U.S. Congress of new natural gas export laws, has changed the landscape for natural gas in the United States. In 2019, the United States was a net exporter of natural gas for the third year in a row, and total annual U.S. natural gas exports were the highest on record.3United State Energy Information Administration, 2020, Natural Gas Explained: Natural Gas Imports and Exports, https://www.eia.gov/energyexplained/natural-gas/imports-and-exports.php (accessed August 21, 2020).
In the short term EIA expects U.S. crude oil production to fall in 2020 and 2021 as mitigation of the spread of COVID-19 continue to result in a drop in demand for petroleum products and crude oil prices.4United State Energy Information Administration, 2020, EIA forecasts U.S. crude oil production to fall in 2020 and 2021, https://www.eia.gov/todayinenergy/detail.php?id=43735 (accessed August 21, 2020).
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