7 supplement to chapter - mcgraw-hill

October 11, 2011

Fostering Continuing Innovation in Unconventional Oil and Gas

JAF028371.PPT1

Prepared By:

Vello A. Kuuskraa, PresidentADVANCED RESOURCES INTERNATIONAL, INC.

Arlington, VA

Prepared for:

Plenary Session: Energy Technologies:From Development to Deployment

Sponsored by:

30th USAEE/IAEE North American Conference“Changing Roles of Industry, Government and Research”

October 11, 2011, Washington, DC

Fostering Continuing Innovation in Fostering Continuing Innovation in

Unconventional Oil and GasUnconventional Oil and Gas

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Discussion OutlineDiscussion Outline

1. The Impact of Innovation in Unconventional Gas and Gas Shales

2. How Did the Innovation Occur?

• Model for Innovation

• Key Success Factors

3. Learnings for Other Energy Sources

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1. The Impact of Innovation in 1. The Impact of Innovation in

Unconventional Gas and Gas ShalesUnconventional Gas and Gas Shales

Driven by a new understanding of the massive size, technology

readiness and economic viability of unconventional gas and shales, a

“paradigm shift” is underway for natural gas supplies.

This “paradigm shift” began a decade ago in the U.S. with only

modest fanfare.

• Low cost coalbed methane in the San Juan Basin of Colorado and New

Mexico led the way.

• Next was the introduction of highly productive tight gas development at

Jonah and Pinedale fields in western Wyoming.

• Third was the emergence of the Barnett and now the other deep North

American gas shales.

Now this “paradigm shift” is underway worldwide including Canada, China,

Europe, Indonesia and numerous other areas.

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Year 2000

13 Bcfd

53 Bcfd

24 Bcfd

16 Bcfd

0

10

20

30

40

50

60

70

TOTAL

Conve

ntional

Onsh

ore

Gas

*

Unco

nve

ntional

Gas

Offsh

ore

Gas

Dry

Gas

Pro

duct

ion (Bcf

d)

The Paradigm Shift in U.S. Natural Gas SuppliesThe Paradigm Shift in U.S. Natural Gas Supplies

*Includes onshore associated, non-associated and Alaska.Source: U.S. Energy Information Agency (2010); Advanced Resources Int’l (2010).

JAF2011_028.XLS

The 21 Bcfd growth in unconventional gas production has more than replaced a

decade long decline in U.S conventional onshore and offshore production

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Source: Advanced Resources International (2010)

(e)

Annual Shale Gas Production, Wet (Bcfd)

How Much Does U.S. Shale Gas Contribute?How Much Does U.S. Shale Gas Contribute?

Production of shale gas has grown by ten-fold. It provided 14 Bcfd,

equal to nearly a quarter of U.S. natural gas production, last year.

2000 2009 (p) 2010 (e)

(bcfd) (Bcfd) (bcfd)

Haynesville/Bossier 0.0 1.0 3.5

Marcellus 0.0 0.3 1.2

Woodford 0.0 0.7 1.0

Fayetteville 0.0 1.4 2.1

Barnett 0.2 4.8 5.1Other 0.9 0.8 1.1

Sub-Total 1.1 9.0 14.0

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JAF02052.CDR

How Has Shale Gas How Has Shale Gas

Impacted U.S. Natural Gas Prices?Impacted U.S. Natural Gas Prices?

Prior PerceptionPrior Perception New UnderstandingNew Understanding

Gas Resources Gas Resources

Gas S

upply

Costs

Gas S

upply

Costs Conventional

Gas

UnconventionalGas (Shale Gas)

UnconventionalGas (Shale Gas)

ConventionalGas

Unconventional gas (particularly the higher quality gas shales) is today the low cost portion of the U.S. natural gas price/supply curve.

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2. Shale Gas And Unconventional Gas 2. Shale Gas And Unconventional Gas

Are A R&D And Policy Success StoryAre A R&D And Policy Success Story

Innovation and progress in technology converted an un-producible shale/source rock resource into a large, low cost domestic supply of natural gas plus oil:

• The DOE/NETL helped build the essential resource and science

knowledge base.

• The Gas Research Institute and industry launched the early

technology demos.

• Section 29 tax credits (now expired) helped attract capital and build

economies of scale.

However, we are still in the early, emerging stages of having anoptimum set of technologies, particularly for tight (shale) oil.

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2. How Did the Innovation Occur?2. How Did the Innovation Occur?

Four factors were essential for successful technology innovations in shale gas:

1. Building a foundation of data and science on self-sourcing, low

permeability resources. (1980s U.S. DOE and 1980s/1990s GRI

research built the foundation.)

2. Understanding the true size and potential of the resource. (Mid-1990s

U.S. DOE/EIA-sponsored studies and models.)

3. Capturing insights for optimizing recovery efficiency. (“Innovation

follows insights”.)

4. Providing information and knowledge transfer to help the private

marketplace work. (Supporting capital investment and risk taking.)

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The 30 Year The 30 Year ““Overnight SensationOvernight Sensation””

Much of the popular media tends to calls shale gas an “overnight sensation”. However, 30 years of research and innovation are behind this “overnight sensation”:

• The “innovation pathway” stared in the early 1980s with DOE/NETL

research program in Devonian shales:

− Natural fracture and stress orientation cores (early 1980s)

− Comprehensive resource assessment for Devonian shales (NETL/ARI reports).

− Impact of horizontal wells on shale gas recovery (NETL/ARI technical report

1984).

• Next was the GRI-sponsored field research in the Antrim Shale (late 80s

through early 90s):

− Demonstration of two stage fracturing

− Quantifying the volume of adsorbed gas

− Developing new resources characterization tools

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Key Research InitiativesKey Research Initiatives

Three key research initiatives provided evidence that the Barnett Shale could become an economically-viable resource:

• A rigorous reservoir characterization (supported by GRI) showed

that the resource in-place was nearly twice as rich as previously

assessed.

• The Stella Young #2 intensively stimulated slant well (drilled by

Mitchell Energy and GRI), the best well drilled to date,

demonstrated that increased reservoir contact would lead to

better wells.

• Completing the entire Barnett Shale vertical interval, rather than

a “high graded” interval, was cost-effective.

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Information Disseminated Also Played a RoleInformation Disseminated Also Played a Role

A series of publications and information dissemination activities helped transfer research findings and spur continuing innovation:

• The quarterly GRI publication “Gas Shales Technology Review.”

• The Oil and Gas Journal article on the Barnett Shale (Kuuskraa,

et al., 1998) that argued:

− Vertical wells were draining only 10 to 30 acres.

− Porosity as well as adsorbed gas are key gas storage mechanisms

− The size of the Barnett Shale resource was at least 10 Tcf

recoverable.

• The initial EIA unconventional gas module included the use of

horizontal wells in gas shales in the “high technology” case,

helping define the benefits of utilizing this innovation.

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The Final InsightThe Final Insight

The final “game changer” insight came from refracturing the older, vertically drilled Barnett Shale wells.

• The second (or third refracture) was contacting additional shale

reservoir.

• The refracs significantly increased gas reserves.

• The volume of gas recovery in deep shales is related to how much

of the shale formation one contacts and stimulates.

• Less costly and less damaging “slick water” fracs provided superior

performance to traditional gel fracs.

The key insight was the recognition that one could “create a permeable reservoir” and high rates of gas production by using intensively stimulated horizontal wells in deep gas shales.

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Refracturing Refracturing

Gas Shale WellsGas Shale Wells

Devon Denton Creek Trading Co. No. 1 Well

Fracture Reorientation

(Barnett Shale/Newark East Field)

10

100

1,000

10,00019

92

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Time, Years

Gas

Pro

duct

ion, M

cf/d Initial EUR: 1.0 Bcf

Final EUR = 2.9 Bcf

Johnson No. 2 Well

10

100

1,000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Time, Years

Gas

Pro

duct

ion, M

cf/d

Initial EUR: 0.4 Bcf

Final EUR = 2.9 Bcf

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Where Are We Today?Where Are We Today?

Horizontal Well with Multi-Stage Fracturing

Source: EnCana

Stage 3

Early Horizontal Well Completion Practices

Latest Gas Shale Well Completion Practices

Stage 2 Stage 1

5,000’

1,500’

Stage 4

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1. The oil and gas marketplace tends to avoid incurring private costs with

public benefits (R&D market failure).

2. In-depth, credible information on the size and economic viability of

resources is essential for helping the marketplace work.

3. Multiple parallel public and private investigations on high impact

topics will accelerate learnings and technology progress.

4. High impact domestic oil and gas resource innovation opportunities:

• Integrating CO2 storage and enhanced oil recovery

• Accelerating pursuit of tight oil

• Cracking the “technical nut” on lacustrine, clay-rich shale gas (and oil).

3.3. Lessons For Other Unconventional Lessons For Other Unconventional

Oil and Gas ResourcesOil and Gas Resources

Four “lessons learned” have emerged from the successful innovation in unconventional gas and shale gas.

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Integrating COIntegrating CO22 Storage andStorage and

Enhanced Oil Recovery (EOR)Enhanced Oil Recovery (EOR)

Integration of CO2 storage with “next generation” CO2-EOR technology

would provide multiple energy security and environmental benefits:

• Economically recoverable* domestic oil supplies equal to 67 billion barrels.**

• Major new revenues for Federal, state and local governments and the electric

power industry.

• Market for 18 Gt of anthropogenic CO2, equal to 30 years of CO2 emissions

captured from 100 (1 GW-size) coal-fired power plants.

Additional benefits would accrue from application of CO2-EOR and

storage technology to the large domestic Residual Oil Zone (ROZ) resource.

Credible information, incentives and joint industry/government R&D on

“next generation” technologies would help unlock this resource.

* At an oil price of $85/B, a CO2 market price of $40/mt and a 20% ROR, before tax.

** The U.S. DOE/NETL-sponsored report, “Improving Domestic Energy Security and Lowering CO2 Emissions with “Next Generation” CO2-Enhanced Oil Recovery (CO2-EOR)”, prepared by Advanced Resources Int’l., states that this volume of economically recoverable oil is sufficient to support nearly 4 million barrels of domestic oil production.”

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Accelerating the Pursuit of Tight OilAccelerating the Pursuit of Tight Oil

In addition to natural gas, large volumes of oil are contained in

domestic tight shale and sand formations, such as:

• Eagle Ford Shale

• Granite Wash Tight Gas

• “Oily” portions of the Barnett, Marcellus and Utica shales

The innovations developed for shale gas (such as “sweet spot”

exploration, horizontal drilling and intensive hydraulic stimulation) are

necessary, but are not sufficient, for efficient production of tight oil. Key

new innovations requiring R&D investment include:

* The recent NPC North American Resource Development Study, “Prudent Development”, estimated that up to 3 million barrels per day of oil production would result from application of advanced technologies for tight oil.

• Increased reservoir contact plus identification and/or creation of higher

conductivity natural/induced fractures.

• Deployment of secondary reservoir drive mechanisms.

• Efficient displacement of residual oil.

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Closing CommentsClosing Comments

The U.S. has a bountiful, but complex set of unconventional oil and gas resources, as argued in numerous reports by Advanced Resources and as documented in the recently completed NPC study: “Prudent Development – Realizing the Potential of North America's Abundant Natural Gas and Oil Resources”.

Converting these complex resources into commercially viable domestic oil and gas reserves requires further innovations and technology progress.

The private marketplace can provide much of this innovation once the foundation (data, science, first-generation technologies) is set in-place by high impact public/private R&D initiatives.

October 11, 2011


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Advanced

Resources

Internationalwww.adv-res.com

Office LocationsWashington, DC

4501 Fairfax Drive, Suite 910Arlington, VA 22203

Phone: (703) 528-8420Fax: (703) 528-0439

Houston, Texas11490 Westheimer, Suite 520

Houston, TX 77042Phone: (281) 558-6569Fax: (281) 558-9202

7 supplement to chapter - mcgraw-hill

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