Market outlook: Consider the water challenge in the global shale game

15 March 2013 17:30  [Source: ICB]

Largely as a result of unconventional onshore gas development, the US is now the number one natural gas producer in the world. Outside of the US, there are shale gas resources that are potentially equally large. Yet recovery of these reserves will be challenged by the water, geology and infrastructure situation unique to those countries.

 

Development of shale gas resources faces many challenges

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The initial estimate of technically recoverable shale gas in the 32 countries examined by the Energy Information Administration (EIA) in 2011 is 5,760 trillion cubic feet (tcf) (160 trillion cubic metres). Argentina, China and Mexico have estimated shale gas resources of the same order of magnitude as the US.

Development of this scale would change not only the energy security of countries, but would also have an impact on the global landscape.

However, estimates of shale resources are imprecise and some countries have since published their own revised estimates. There are also other challenges in many areas in the development of shale, including lack of infrastructure, lack of skilled resources, scarcity of water and disposal options, and high population density.

Water, in particular, is a key factor that all markets that want to develop shale resources need to consider carefully. We will examine water regulation, water use and water movements, taking lessons learned from the US and applying them to four countries that are in the early stages of the shale gas development: Argentina, China, Poland and South Africa.

Argentina
Argentina is the largest natural gas producer in South America, with an annual output of 1,416bn cubic feet (bcf) in 2010. The Neuquen Basin holds more than half of the country's estimated 774tcf of resources.

This basin largely overlaps with existing natural gas production regions. Its geological formation is very similar to major US shales, with an average depth in the Vaca Muerta formation within the basin of 2,400m (7,900ft). Geological features and existing local natural gas infrastructure make future development in the Neuquen Basin very promising.

China
The shale gas industry in China remains at an early stage, with most activity in exploration and drilling of test wells. Data from a recent Ministry of Land and Resources (MLR) geological survey shows China has 882tcf of technically recoverable shale gas resources, a lower figure than the EIA's estimate.

The Sichuan Basin in the Upper Yangzi and southwest China region has 350tcf of shale gas, which equates to 40% of total national reserves. The shale-bearing layers in many Chinese formations are at 3,000-5,000m, deeper than most US shales.

Poland
Poland has the most significant shale gas potential in Europe. Poland's shale gas resources are located in the Baltic-Podlasie-Lublin Basins, creating a strip across the country from northwest to southeast.

A report released in March 2012 by the Polish Geological Institute confirmed 67tcf of technically recoverable shale gas resources, a lower figure than the EIA's estimate. The average depth of shale formations in Poland is 2,500-3,800m.

South Africa
According to the EIA, South Africa has an estimated 485tcf of technically recoverable shale gas located in the Karoo Basin. The average depth of shale gas in South Africa is 2,500m, which is quite similar to the Barnett Shale in the US.

However, the Karoo Basin contains significant areas of volcanic intrusions that impact the quality of the shale gas resources, limit the use of seismic imaging and increase the risk of shale gas exploration.

REGULATION
In the US, there are both oil and gas industry federal and state regulations. Most shale-producing states have more rigorous standards that take primacy over federal regulations, as well as additional regulations that control areas not covered at the federal level. These include:

  • different depths for well casing;
  • level of disclosure of drilling and fracturing fluids;
  • requirements for water storage;
  • water supply/quantity/withdrawal limits
  • management of flowback and produced water; and
  • disposal of wastewater by under-ground injection.

Specific regulations for shale gas in Argentina, China, Poland and South Africa are still in early stages.

Disclosure of the chemicals used in fracturing fluid is only required in Poland, but we expect this to be introduced everywhere.

We also expect some form of water tracking in all countries, but the level of detail and process is likely to be the area with the greatest disparity across regions. We do, however, expect that there will be stringent regulation for wastewater discharge.

In all regions, there is a high level of public concern, which will drive operators to continuously improve their emissions and water footprint.

WATER USAGE AND DISPOSAL
The amount of water used in shale gas development varies significantly across shale plays, but on average it is approximately 5m gal per well.

The amount of water required depends on a number of factors, including the depth, length and number of horizontal segments fractured, and the geological characteristics of the shale play (depth, thickness, total porosity). The volume and quality of flowback and produced water also varies by shale play.

The quality of the returned water will shape the decision on the levels of treatment required to reuse the water.

Operators have a number of options for reuse and disposal of wastewater. They can:

  • haul to disposal site - landfill or underground injection well;
  • filter and reuse;
  • treat to drilling fluid quality;
  • treat to surface disposal (currently not allowed in most regions);
  • treat for agriculture use; or
  • treat to freshwater.

China and South Africa will face competition for access to fresh water. In China, there are seasonal water shortages and a dense population, and in South Africa, the shales are in a water stress area.

In all markets, there will be an emphasis on the management of wastewater and waste streams from wastewater treatment.

Water Movements
In some plays, 60-80% of logistics activity is attributable to the movement of water. Water can also account for up to 40% of total hydraulic fracturing costs and 20% of total well completion costs. The average requirement of 5m gal per well equates to approximately 1,000 water truck movements.

New regions are likely to have limited alternatives to water or to road transport and limited opportunities to optimise water withdrawals in the early stages. The most relevant trends are onsite water treatment, reuse of water and implementing leading-practice logistics management.

There is an opportunity, particularly in new markets, to develop a more efficient basin. For example, operators could collaborate on infrastructure development and on developing local suppliers, share excess carriers' capacity, and even use a shared common software backbone, underpinned by transport management systems and water inventory management tools that would make more and better information available to multiple operators.

Development of shale resources is a significant opportunity for many countries. However, this development does not come without challenges, of which water management is critical.

Countries looking to develop their shale resources will need to develop regulation that allows operators to economically manage risks and incentivises technologies and practices that both reduce the amount of water required and encourage reuse and treatment.

Operators will need to consider their water strategies early in the development process and should work together to reduce the operating intensity of the basin.

Melissa Stark is a managing director with Accenture's Energy industry group and the lead for the group's new energy practice. She was the research lead for the "Water and Shale Gas Development, Leveraging the US experience in new shale developments" report on which this article is based. Melissa is located in London.

Water is a key factor that all markets that want to develop shale resources need to consider carefully


Author: Melissa Stark



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