Peter Voser, CEO, has announced that Shell will not be immediately pursuing shale gas or liquids. The company is taking a $2.2 billion (yes…with a ‘b’) write-down (see Reuters). Shell had heavily invested in North American shale properties and seemed poised to be a big winner in the shale game (sort of a pun). They had a patented process for extracting the oil in-situ and significant reserves in place. So what happened?
When first doing research for this posting I expected to find that Shell was the victim of unusual market conditions. We will discuss those here and they, no doubt, came into play. Nevertheless, I wonder if something more fundamental could have been happening. Not being on the inside of this long-term project (started in the early ‘80’s) it is hard to say, but I wonder if this may have included some technological and managerial hubris. We will talk about that also.
First let’s deal with market conditions. These affect all alternative and even conventional fuel plays. We are now seeing, and can expect to see for 10 to 20 years, a glut of natural gas. Back in the ‘70’s natural gas was in short supply and the global fortune-tellers were saying we needed to run a pipeline to Jupiter’s moon Titan to get enough methane to survive. Prices went from cents per MMBTU (i.e. “million BTU” – a measure of energy content) to a whopping $2.50 per MMBTU. Then deregulation stabilized domestic well-head prices at right around $2.00 per MMBTU for about 15 years.
In around 2000, weakness in the US dollar, unsettled international conditions and investor speculation caused all energy prices to fluctuate pretty wildly. Both oil and gas tended to fluctuate together. The new buzz word was “fungibility.” There was a naïve belief that one fuel was as good as another fuel. Although there is some interchangeability between natural gas and oil, they are quite dissimilar. They can both be used for heating homes and running industrial furnaces, but only oil is an effective source of transportation fuels. With the shrinking of US manufacturing and chemical industries, the domestic market for natural gas has significantly weakened compared to the market for transportation fuel. In this new era a MMBTU of natural gas is not as valuable as a MMBTU of oil. A barrel of oil contains about 6 MMBTU and costs around $90 to $100. The price for 6 MMBTU of natural gas is only around $18 ($3 per MMBTU X 6).
This disparity is feeding on itself. As producers go after crude oil, they often find that natural gas is in the way. This is especially true with coal seam formations and tight sand and shale formations. These formations produce high ratios of very light hydrocarbons like natural gas. Nevertheless, the amount of heavier hydrocarbons can be increased by new techniques in horizontal drilling and hydraulic fracturing. Often enough oil can be produced even from traditional high natural gas content formations to be profitable. Unfortunately the natural gas that is also produced has to be dumped onto an already weak natural gas market.
When producers can, they will put the natural gas in a pipeline and sell it. This adds to the glut and tends to drive down natural gas prices. Far too often this is not practical. Pipelines are just too far away from the gas well. Furthermore, given natural gas prices, transporters of natural gas are not keen about extending pipelines. When this is the case the producer will often just burn the natural gas in a flare. At this writing the state of North Dakota is lit up like a Christmas tree with burning gas flares (see “Natural Gas Flaring in North Dakota” and "Oil Companies Sued for Waste of Natural Gas" ). Until pipelines get constructed, this valuable resource will just add to the planetary CO2 burden without any useful benefit. A sad state of affairs.
The result of all of this is a new and quite different energy market. Natural gas is, and will remain cheap. It is, however, scattered over a very wide geography making the logistics of gathering a challenge. Solving these logistical problems could be a big opportunity. Schemes that make methane and other very light hydrocarbons will not fare well over the next 20 years. They will be plagued by competition with cheap natural gas.
Schemes that convert methane to more valuable products could be major winners – especially if the scheme solves logistical problems. Schemes that involve small plants that make a product that can be used in the oil and gas industry could be one such play. There are these types of ideas out there. Stites & Associates, LLC, is working with three such companies on a development basis. If you are interested in contacting one or more of these companies and learning more about their technologies, please feel free to contact Ron Stites at [email protected].
We have seen that the market conditions really have changed the landscape for energy players. Not every play is still a good play. So, is this what killed Shell’s play? I think only partially. Probably more important was just the complexity of their approach. Shell’s technology depended on heating the shale to a high temperature (650F to 700F) in place (“in-situ”) for several years. This had to be done without causing severe environmental damage. All previous schemes involving underground fires had long been rejected as too dangerous. Hence, Shell planned to heat the shale with electric heaters that they put down drill holes. This is clean, but not very efficient. It was going to be especially hard to do this in wet shale formation. The only practical way to do this was to first remove most of the water from the formation.
The only way to dry out a formation is to pump the water out while blocking new water from getting into the formation. The plan was to drill wells around the perimeter of the shale being produced and freeze the water around the perimeter creating underground “freeze walls.” The plan was to use liquid ammonia as a refrigerant to create the “freeze walls.” After the “freeze walls” were in place the water inside the perimeter would be pumped out of the formation. Additional wells would be drilled to place the electric heaters in the shale formation. Then the shale would be heated. The oil and gas formed by heating the rock would then be recovered from the wells that had been used to remove the water.
Although this sounds pretty crazy at first blush, Shell was actually able to show that they could do this. They demonstrated this on a 30 foot by 40 foot property in Colorado. On their Mahogany property test site 200 miles west of Denver they were able to produce 1,700 barrels of oil from their 30 by 40 plot in a few years. With these data and armed with some 70 patents, it was pretty easy to fall prey to all the hype surrounding shale oil.
I suspect that the whole project collapsed under the weight of its size and complexity. Once a detailed plan was put together for testing this approach on a 160 acre site, the immensity of the project had to become much clearer (see “Plan of Operations" ). When this 160 acre scale is extrapolated to a really large, commercial scale, infrastructure issues begin to appear. There wasn’t going to be enough electricity on the Western Slope of Colorado to run the heaters at full scale. It was probably going to require the construction of a coal fired power plant. That was highly unlikely in the business and coal unfriendly state of Colorado.
These infrastructure issues would have added to the overall risk of the project. When these additional risks were added to known risks such as constructing underground “freeze walls,” extracting and upgrading new products, marketing those new products and remediating the site(s); it is little wonder that Shell would begin to have second thoughts about such an ambition and complicated plan. It would not have taken much in the way of overall market changes to have tipped the scales in favor of mothballing the project.
Was there technological or managerial hubris? It is hard to say, but a $2.2 billion write down is a lot for any company. Heck, that’s almost real money for the US government. Hindsight would tell us that this project really had a lot of technological, logistical and even political risks. Given all these pretty obvious risks, it is hard to see how they could have failed to see the dangers and not mitigated their losses. Where was the guy who asked the tough questions? Do companies not employ such people anymore? They should.
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