Operations in Pennsylvania & Shale Plays I. INTRODUCTION II. GENERAL DESCRIPTION OF A SHALE PLAY A. WHAT IS A SHALE PLAY B. WHERE ARE THEY C. WHAT MAKES THEM DIFFERENT III. MARCELLUS PLAY A. AREA B. HISTORY C. GEOLOGY IV. DOING BUSSINESS IN PENNSYLVANIA A. LAND OWNERS AND LEASING B. REGULATION C. PERMITTING TABLE OF CONTENTS INTRODUCTION A decade ago natural gas from shale was just becoming significant but hardly anyone fathomed its tremendous potential or its parabolic growth. Today natural gas from shale is an essential and rapidly growing part of the E&P portfolios of independents and majors alike in the US and Canada. The number of productive basins is proliferating. Both interest and exploratory investments in natural gas from shale are spreading worldwide. There is growing recognition that natural gas shale basins are widely dispersed globally and several of these basins may well rival or exceed the most famous shale play in the world: the Barnett in Texas. Shale Operations Charlie Scott 1
What is a Shale Play? What is a Shale Play? Shale gas has become an increasingly important source of natural gas in the United States over the past decade. One analyst expects shale gas to supply as much as half the natural gas production in North America by 2020. Because shales ordinarily have insufficient permeability to allow significant fluid flow to a well bore, most shales are not commercial sources of natural gas. Shale gas is one of a number of unconventional sources of natural gas; other unconventional sources of natural gas include coalbed methane, tight sandstones, and methane hydrates. Shale gas areas are often known as resource plays (as opposed to exploration plays). The geological risk of not finding gas is low in resource plays, but the potential profits per successful well are usually also lower. Shale has low matrix permeability, so gas production in commercial quantities requires fractures to provide permeability. Shale gas has been produced for years from shales with natural fractures; the shale gas boom in recent years has been due to modern technology in hydraulic fracturing to create extensive artificial fractures around well bores. Shale Operations Charlie Scott 2
Horizontal drilling is often used with shale gas wells, with lateral lengths up to 10,000 feet within the shale, to create maximum borehole surface area in contact with the shale. Some of the gas produced is held in natural fractures, some in pore spaces, and some is adsorbed onto the organic material. The gas in the fractures is produced immediately; the gas adsorbed onto organic material is released as the formation pressure is drawn down by the well. WHERE ARE THEY LOCATED? Shale Operations Charlie Scott 3
Barnett Shale The Barnett Shale is a geological formation located in the Bend Arch-Fort Worth Basin. It consists of sedimentary rocks of Mississippian age (354 323 million years ago) in Texas. The formation underlies the city of Fort Worth and underlies 5,000 square miles (13,000 km 2 ) and at least 17 counties. Some experts have suggested the Barnett Shale may have the largest producible reserves of any onshore natural gas field in the United States. The field is proven to have 2.5 trillion cubic feet (7.1 10 10 m 3 ) of natural gas, and is widely estimated to contain as much as 30 trillion cubic feet (8.5 10 11 m 3 ) of natural gas resources. Oil also has been found in lesser quantities, but sufficient (with recent high oil prices) to be commercially viable. The Barnett Shale is known as a "tight" gas reservoir, indicating that the gas is not easily extracted. The shale is very hard, and it was virtually impossible to produce gas in commercial quantities from this formation until recent improvements were made in hydraulic fracturing technology and horizontal drilling, and there was an upturn in the natural gas price. Haynesville Shale The Haynesville Shale is a rock formation mainly composed of consolidated clay-sized particles deposited and buried in northwest Louisiana and East Texas more than 170 million years ago during the Upper Jurassic age. It is characterized by ultra-low permeability but has a high porosity compared to other shales. The Haynesville Shale came into prominence in 2008 as a potentially major shale gas resource. Producing natural gas from the Haynesville Shale involves drilling wells from 10,000 feet (3,000 m) and to 13,000 feet (4,000 m) deep. The formation is deeper in areas nearer the Gulf of Mexico. The Haynesville Shale has recently been estimated to be the largest natural gas field in the 48 states with an estimated 250 trillion cubic feet (7.1 10 12 m 3 ) of recoverable gas. Production has boomed since late March 2008, creating a number of new millionaires in the Shreveport, Louisiana region. Eagle Ford Shale The Eagle Ford Shale is located in South Texas. It produces from various depths between 4000 and 12,000 feet. The Eagle Ford Shale takes its name from the town of Eagle Ford Texas where the shale outcrops at the surface in clay form. The Eagle Ford is still an emerging shale play, however early well results appear promising. Unlike many other shale plays, thus far it does not exhibit natural fracturing within the formation. Eagle Ford Shale Geology The Eagle Ford Shale is a geological formation directly beneath the Austin Chalk Shale. It is considered to be the source rock, or the original source of hydrocarbons that are contained in the Austin Chalk and the Edwards formation above it. The Eagle Ford Shale is found at depths between 4,000 and 12,000 feet. The shale is up to 250 feet thick in some places, generally without natural fracturing present. Most of the production occurs at the convergence of the Stuart City Reef trend and the Sligo Reef Trend. Shale Operations Charlie Scott 4
Fayetteville Shale The Fayetteville Shale, is a black, organic rich rock of Mississippian age that underlies much of northern Arkansas and adjacent states. It produces natural gas in the central portion of the Arkoma basin. The productive wells penetrate the Fayetteville Shale at depths between a few hundred and 7000 feet below the surface and at elevations of between a few hundred feet above sea level and 7000 feet below sea level. The first wells to produce natural gas from the Fayetteville Shale were traditional vertical wells with low to moderate production rates. However, in the past several years vertical wells have been drilled down to just above the Fayetteville Shale, turned, and drilled horizontally through the rock unit. These horizontal wells intersect large numbers of vertical fractures which bring a flow of gas into the well and drain the surrounding rock. Fractures are also induced by pumping pressurized fluids down the well bore to fracture the rock unit. These additional fractures enhance the permeability of the Fayetteville Shale and allow more efficient gas production. III. THE MARCELLUS PLAY MARCELLUS SHALE FORMATION The Marcellus Shale is a rock formation that underlies approximately two-thirds of Pennsylvania and portions of the states of New York and West Virginia at a depth of 5,000 to 8,000 feet and holds trillions of cubic feet of natural gas and has long been considered prohibitively expensive to access. Recent advances in drilling technology and rising natural gas prices have attracted new interest in this previously untapped formation. The geology of the Marcellus formation suggests that areas in the southwest, northcentral and northeastern regions of Pennsylvania that have not traditionally seen much gas well drilling may be especially productive. PA Shale Operations Charlie Scott 5
NATURAL GAS EXTRACTION FROM THE MARCELLUS SHALE Extracting natural gas from the Marcellus Shale formation requires both vertical and horizontal drilling, combined with a process known as hydraulic fracturing. After the well is drilled, cased and cemented to protect groundwater and the escape of natural gas and other fluids, drillers pump large amounts of water mixed with sand and other fluids into the shale formation under high pressure to fracture the shale around the well, which allows the natural gas to flow freely to the well bore. FRAC ING THE MARCELLUS SHALE The amount of water typically required for hydraulic fracturing ranges from about one million gallons for a vertical well to approximately five million gallons for a vertical well with a horizontal lateral. Once the hydraulic fracturing process is completed, the used water, often referred to as frac returns must be reused in the next well or sent to an approved treatment facility. Shale Operations Charlie Scott 6
HISTORY OF OIL AND GAS IN PENNSYLVANIA The Drake Well When: 1859 Where: Titusville, PA How: Drilled with a Cable Tool Drilling Rig How Deep: 69 feet HISTORY OF OIL AND GAS IN PENNSYLVANIA Paraffin-based Pennsylvania Grade crude oil is renowned for its lubricating qualities. More than 350,000 oil and gas wells have been drilled in Pennsylvania since the Drake Well. In Drake s time, the main use for oil was to make kerosene for lamps and stoves. Now petroleum and natural gas fuel our modern world providing transportation, heating, electricity, and petrochemicals for manufacturing. Natural gas is used mainly for heating buildings and producing electricity at power plants, but it also fuels some vehicle fleets. In the late 1800s Pennsylvania was the leading producer of oil. Now, oil production is a trickle compared to the rest of the nation. However, Pennsylvania remains a significant producer of natural gas in the northeastern United States, but the Commonwealth consumes much more natural gas than is produced. OIL AND GAS IN PENNSYLVANIA In 2005 Pennsylvania produced: 3.6 million barrels of crude oil (1 barrel = 42 gallons), and 168 billion cubic feet of natural gas. Most oil wells in the state produce only a few barrels of oil per week, and average gas well production is less than 11 Mcf (thousand cubic feet) of natural gas per day (that s about enough gas to fuel one allgas household for a month). Though production per well isn t much, nationwide these stripper wells are an important part of our domestic energy supply because there are hundreds of thousands of stripper wells producing oil and gas in the United States. Shale Operations Charlie Scott 7
Geology The Marcellus Formation is a black shale that may contain limestone beds and concentrations of iron pyrite (FeS2) and siderite (FeCO3). Its sedimentary structure, or bedding, is moderately well developed. Like most shales, it tends to split easily along the bedding plane, a property known as fissility. Lighter colored shales in the upper portion of the formation tend to split into small thinedged fragments after exposure. These fragments may have rust stains from exposure of pyrite to air, and tiny gypsum (CaSO4 2H2O) crystals from the reaction between pyrite and limestone particles. The Marcellus also contains uranium, and the radioactive decay of the uranium-238 (238U) makes it a source rock for radioactive radon gas (222Rn). Measured total organic content of the Marcellus Formation ranges from less than 1% in eastern New York, to over 11% in the central part of the state, and the shale may contain enough carbon to support combustion. IV. DOING BUSINESS IN PENNSYLVANIA LAND OWNERS AND MARCELLUS SHALE LEASING In order to access Marcellus Shale natural gas, drilling companies must enter into a lease with landowners. A mineral lease is a private contractual agreement between the owner of a mineral tract (the lessor) who grants the right to develop deposits of the mineral to a producer (the lessee). Shale Operations Charlie Scott 8
LAND OWNERS & MARCELLUS SHALE LEASING Oil and gas mineral rights can be sold or leased separately to different parties. Usually, a lessee will insist on the right to sell or reassign a mineral lease to another party. A lease is usually secured by annual rental payments or a royalty on production paid to the lessor. Because a mineral lease gives the lessee a property interest in the mineral, leases should be recorded at the Recorder of Deeds office in the county where the leased tract is located. LAND OWNERS AND MARCELLUS SHALE LEASING You can negotiate lease payments and royalty amounts; well, road and pipeline locations; protections for crops, livestock, buildings and personal property; and expiration date of the lease. The commonwealth is not involved in regulating/negating lease agreements between mineral property owners and producers, and does not audit payments, read or calibrate meters or tanks, or otherwise get involved in lease matters. LAND OWNERS & MARCELLUS SHALE LEASING Shale Operations Charlie Scott 9
Government Regulation Oil and Gas Act 1984 Government Regulation With passage of The Oil and Gas Act in 1984 (58 P.S. 601.101 et seq.), Pennsylvania modernized environmental controls and resource management for development of crude oil and natural gas. Like previous laws, this Act required that All new wells be permitted by the Commonwealth before drilling. In addition, it required registration of any existing well not previously permitted, And established bonding requirements for wells. Government Regulation: DEP The Department of Environmental Protection s Oil and Gas Management Program develops and enforces regulations for: bonding, permitting, registration of wells; environmental requirements for drilling operations, waste disposal, cementing &casing of wells; proper plugging of wells upon abandonment. Shale Operations Charlie Scott 10
Government Regulation: DEP The Commonwealth does not get involved in the regulation of production or wellhead sales, and does not tax production or the value of oil and gas properties. Some county governments assess taxes on (projected revenues from) oil and gas property. PERMITTING To drill a new oil or gas well in Pennsylvania, the operator must Post a bond and Get a well permit from the Department of Environmental Protection (DEP). In the permit application, the applicant must show The location, proximity to coal seams, distances from surface waters & water supplies. Technical staff in DEP s Regional Offices review the permit application to determine whether the proposed well would cause environmental impacts, conflict with coal mine operations, or well spacing requirements. PERMITTING An oil and gas operator who plans to drill a group of wells that will disturb five or more acres over the life of the project, must: Apply to DEP for a separate permit for storm water management. This disturbed area includes well sites and associated roads, pipelines, and storage areas to be constructed. The affected surface landowner and coal deep-mine operator have the opportunity to file an objection about the location of the well. If DEP s permitting staff find that no adverse impacts would result, the operator will receive a permit to drill the well. Shale Operations Charlie Scott 11