Shale Gas Exposed?

You can't follow the Alaska Gas Pipeline without following the story of shale gas. On one extreme you'll hear tales of plenty, gas too cheap to meter. The average news story on the Alaska Gas Pipeline would have you believe that shale gas killed all hopes of a gasline. On the other extreme you will hear the occasional doubter - they doubt the reserve estimates, the productivity of the wells over time and the over all economics of shale gas wells.

This week the New York Times has a story titled "Documents: Industry Privately Skeptical of Shale Gas" which falls plainly on the side of the doubters. The story contains a lot of insider documents and the investor presentations of shale gas leader Chesapeake.

As the shale gas story develops some facts are bearing out - at $4/MMBTU you'll need plenty of natural gas liquids (NGL) to make a profit. For the past year or so Chesapeake has made it clear that their goal for 2016 is wells with 38% (NGL + oil) and a NGL+oil production of 250,000 BOE (see page 16 of the Chesapeake June Investor Presentation (LINK)).

The trend away from dry gas wells to wet gas wells is a clear indication that $4/MMBTU won't pay cost of drilling and completing a dry shale gas well. Based on Chesapeake's liquid production goal I estimate that $8/MMBTU is needed to justify drilling a dry gas shale well.

I don't think the Times article spells the end for shale gas but it highlights the possibility that every boom precedes a bust. Tough times for shale gas would glean out the dry gas shale production and make room for Alaska gas.

Update - ExxonMobil/XTO responds (LINK) and Chesapeake responds (LINK) the the New York Times article. As you might guess they are not pleased by the Times story.

GTL - News worth noting

Foster Wheeler has been awarded work on a Canadian Gas To Liquids (GTL) plant (LINK). From DownstreamToday.com:

Foster Wheeler AG announced Wednesday that a subsidiary of its Global Engineering and Construction Group has been awarded a contract by Sasol to perform the technical portion of a feasibility study for a planned gas-to-liquids facility in Canada, on behalf of the Sasol/Talisman Energy partnership. The technical portion of the feasibility study is expected to be completed during the fourth quarter of 2011.

Recent investor updates from Chesapeake have alluded to GTL plants that will sponge up cheap North American gas for conversion to liquids. This sounds like the first credible North American GLT plant.

Before reading this announcement I would have predicted that the first GTL plants would be sited on the Gulf Coast. Citing a GTL plant in Canada makes a lot of sense too. GTL plants convert gas into hydrocarbon liquids that require further processing into fuel. That processing requires capital investment. In Canada GTL liquids could be added to thick oil sand products as a diluent, thinning the oil sand product. This product would be easy to pump. The GTL cut of the blended product would be co-processed into fuels at the refineries that receive the oil sand oil. It's a great strategy the maximizes return on capital employed.

The press release says shale gas will be used for the GTL project however gas from the Alaska Gas Pipeline and / or the Mackenzie pipeline could contribute to other GTL projects or satisfy other market demand as GTL sponges up shale gas.

Press release did not mention volumes, however I assume the plant will be sized along the lines of the other Sasol GTL plants.

GTL in Canada is good news and it's worth keeping an eye on.

Qatar GTL Online

Shell reports the first cargo of GTL (gas to liquids) product sold from the Pearl project in Qatar (LINK).

Here's the math - at full production Pearl will produce 1.6 BCFD and produce 120,000 BPD condensate and 140,000 BPD GTL products. The cost was about $19 billion.

The Pearl gas volume is roughly one third of the proposed Alaska Natural Gas Pipeline. Direct comparisons for application to the Alaska gas volumes are difficult. It's fair to say that about 1.3 BCFD went to produce the 140,000 BPD of GTL liquids. If those liquids bring $100 per barrel the simple payout is 3 - 4 years.

Could a GTL plant in Alaska compete with exporting Alaska gas via pipeline? No. At a capital cost of $14/cu ft an Alaska GTL plant would cost $63 billion before adding a 30% "Alaska factor" for Arctic construction. $82 billion is my low side estimate for an Alaska GTL plant capable of processing the full 4.5 BCFD of North Slope gas. That's double or triple the cost of the pipeline.

So can GTL help Alaska? YES. Given Pearl's success, a Pearl sized Lower 48 GTL plant is now bankable. A Lower 48 GTL plant could cost less if less refined products were sold into existing refining infrastructure. If built, GTL plants would sponge up cheap shale gas, making room for Alaska gas.

Overall a large GTL success like Pearl is good news that should be replicated in North America, GTL products directly replace imported crude oil eliminating the need to convert vehicles over to compressed natural gas (CNG). Huge projects like a GTL plant will help put Americans back to work too.

The Txchnologist

Interesting new e-zine, the Txchnologist, info from GE. As builders of combined cycle turbines they support development of natural gas.

The e-zine is somewhat shale gas centric, aside from that there's some good information there.

Thanks to Alaska Dispatch for posting a story about the e-zine.

Natural Gas Prices - Up?

Lou Kilzer of the Pittsburgh Tribune-Review wrote this story "Natural gas prices set to jump with exports" taking issue with plans to export LNG from the lower 48. In the story he quotes Boone Pickens as saying "we're truly going to go down as the dumbest generation." referring to plans to export LNG.

He also details more LNG export plans, specifically:

Freeport LNG Expansion LP, together with Liquefaction LLC, applied on Dec. 17 to export 1.4 billion cubic feet of natural gas per day from a terminal port near Freeport, Texas. Lake Charles Exports LLC, a subsidiary of British-based BG Group and Houston-based Southern Union Company, applied to DOE on May 6 to export 2.0 billion cubic feet a day from its Lake Charles, La., facility.

If the DOE approves those requests, combined with the Sabine permit, the total 5.2 billion cubic feet a day proposed for export would represent 8.4 percent of U.S. production, a Tribune-Review analysis determined.

The story also bemoans the fact that the US imports 10% of our gas needs. According to the Energy Information Agency (EAI) gas imports in 2010 averaged 10.4 BCFD. For comparison the proposed Alaska Gas Pipeline will export 4.5 BCFD of gas to Canada, offsetting about half of our natural gas imports.

In summary, according to the article, exporting LNG is a bad idea according to the author because:

1. LNG exports will drive up gas prices
2. We would export clean energy and import dirty oil
3. We are dumb

Let's examine these outcomes and fill in the blanks;

1. Exporting LNG will drive up natural gas prices - GOOD. Current pricing in the $4/MMBTU range will not support job growth in America. $6/MMBTU gas puts Americans to work - building LNG plants, building pipelines, and building petrochem plants. Maybe even building the Alaska Gas Pipeline. I don't see a problem with that. For once we can export a product to Asia and keep the jobs at home.
2. Importing "dirty" oil sounds just awful doesn't it? The fact is that high sulfur, thick crudes are less expensive and our technological leadership in refining allow us to use the materials. American know how, cheaper products - can't beat that.
3. Are we dumb? I don't think in those terms. Markets are pretty smart at figuring out how to maximize returns. The Pickens Plan seeks to convert our trucking fleets over to compressed natural gas. I'd call that a pretty good idea, it would be even better if Boone was spending his money instead of reaching out for my tax dollars to fund the plan. Of course increased domestic use of gas for transportation will drive up price which is OK with me since that will spur development and build domestic employment.
   

I can offer a few ideas, and I think these will build a better America:

1. Support the conversion of LNG import terminals into export terminals. Conversion of these facilities is the most cost effective way to get into the LNG export market.
2. Let's get serious about Gas To Liquids. Our cheap natural gas and coal can be used to make clean liquid hydrocarbon fuels. Fuels that will burn in our existing cars trucks and trains without all the taxpayer funded investment required by the Picken's Plan. Domestic GTL will help protect us from overseas supply disruptions.
   
3. Let's build facilities in this country instead of building overseas. Let's build LNG export terminals, new petrochem plants, and new pipelines including the Alaska Gas Pipeline. Building here equals jobs here.
   

Shale Gas Liquids & Shell Gas Liquids

Larry Persily, the head of the office of the Federal Coordinator for Alaska Natural Gas Transportation Projects has an article in the Alaska Dispatch about shale gas economics (article link). The article focuses on the value stream from shale gas ethane and touches on the possibility of Gas-to-Liquids (GTL) projects in North America.

He quotes Harold York of Wood Mackenzie:

To illustrate just how important the revenue from gas liquids can be for a shale gas producer, York ran through some numbers:

A typical shale well needs $5 to $6 per thousand cubic feet (mcf) of output to make money.

Methane has been priced at about $4 most of the past year.

But the added value of the liquids makes the entire flow from the well worth about $7 to $8 per mcf.

"The natural gas liquids contribution is carrying the well," York said.

The same theme runs through the Chesapeake investor presentation. Page 16 of this presentation (LINK) Quoting:

Many reasons to be bullish on intermediate and long-term natural gas prices:

• U.S. natural gas producers are rapidly moving to an oilier production base. Once producers convert to drilling wells that produce $10-17/mcfe units and finish natural gas drilling to HBP land, why would they go back to drilling natural gas wells if prices increase from $4/mcf to $5/mcf to $6/mcf to $7/mcf? CHK believes this is the single biggest misunderstood aspect of the future bull case for U.S. natural gas...
  

• Conversion of U.S. liquefaction import facilities to LNG export facilities U.S. will be exporting gas via LNG by 2015, when this becomes obvious in 2012, out year strip prices will go up as clear pathway develops for U.S. to receive world natural gas prices
  

• Growing industrial demand U.S. natural gas prices are lowest in the industrialized world and well below oil-based naphtha prices
  

• Quickening momentum for CNG vehicles $4+ gasoline and diesel prices will cause the market to force policy changes
  

• Continuing and accelerating shift from coal to natural gas for U.S. electrical generationElectrical generation natural gas demand could increase 10-15 bcf/d over the next decade
  

• Construction of U.S. GTL plants. Several will be built in U.S. by 2015-16, when this becomes obvious in 2012, out year strip prices will go up as clear pathway develops for U.S. natural gas to receive world oil prices

Both Persily, and Chesapeake discuss future GTL plants. I'm interested to see if a North American GTL plant materializes. If it does I'll bet on a lower 48 plant location. Either way all the factors listed support higher gas prices and improved economics for an Alaska Gas Pipeline.

So what about ethane? This week I learned that Shell is looking at a lower 48 ethane cracker to take advantage of shale ethane (LINK), quote:"

Building an ethane-fed cracker in Appalachia would unlock significant gas production in the Marcellus region by providing a local outlet for the ethane," said Ben van Beurden, Shell Executive Vice President Chemicals. "This fits well with our strategy to strengthen our chemicals feedstock advantage and would be another step in growing our chemicals business to meet the increasing demand for petrochemicals."

I expect this plant to be sited somewhere in West Virgina or Ohio. In the odd math of the natural gas world the shale gas glut causes a ethane glut, ethane prices plummet hurting the economics of shale gas wells, less shale gas is produced and the price of natural gas rebounds.

Long story short - markets are re-normalizing to the available volumes of shale gas and shale gas liquids. New opportunities abound including the Alaska Gas Pipeline.

Gas Pipeline History

I have a policy to avoid mention of Sarah Palin if possible. From a gas pipeline perspective she's in the past, the damage is done and I keep focus on the market realities that shape the current and future pipeline design, economics and schedule.

Having said that, Palin's emails are posted here (LINK). Enjoy

Link of the week: Moving the Gas

Here's a good run down of North American gas pipeline routes and capacities from the Office of the Federal Coordinator (LINK to Bill White article).