Of the $317 billion worth of oil and gas deals struck in 2011, $66 billion were shale-related transactions, up from $55 billion the year before. That trend is set to continue, and at the expense of investment in traditional renewables, says Ernst & Young’s Asia-Pacific Oil & Gas Leader Sanjeev Gupta.

The 2012 year has already started off strongly for shale, with China Petrochemical Corp. or Sinopec, making its first entry into the U.S. shale market through a $2.5 billion deal with Devon Energy Corp.

France’s Total SA also paid $2.3 billion for a stake in Chesapeake Energy Corp.’s shale fields in Ohio. On Friday, a unit of China National Petroleum Corp., PetroChina Co., said it had bought a 20% stake in Royal Dutch Shell PLC’s shale asset in Canada for undisclosed terms.

Despite all the attention surrounding the shale craze in North America, it’s China that has the world’s largest shale reserves, or 19% of global resources, according to Ernst & Young. The U.S. Energy Information Administration estimate China’s shale reserves to be as much as 1,275 trillion cubic feet, more than the agency’s combined estimates for the volumes in the U.S. and Canada.

“If the potential in this asset base can be unlocked, this could transform the oil and gas landscape in years to come,” said Ernst & Young. That could be many years away as China doesn’t have the technology to exploit its own reserves yet, particularly as much of China’s deposits are located on hostile terrain. But every foreign deal China does brings it closer to acquiring that technology and using it at home, so that it becomes less dependent on foreign energy sources.

This post by Isabella Steger originally appeared in the WSJ

Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields where too few wells have been drilled to assess potential production, said Sven Del Pozzo, a senior equity analyst at IHS Inc.

Marubeni Corp., the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas. The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. paid last year for nearby prospects owned by KKR & Co.’s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped 10-fold in five weeks to almost $15,000 an acre, according to IHS figures.

“I don’t feel confident that the prices being paid now are justified,” Del Pozzo said in a telephone interview from Norwalk, Connecticut. “I’m wary.”

Vast New Resources

The world’s largest energy producers, including Exxon Mobil Corp. and Royal Dutch Shell Plc, are revisiting onshore U.S. prospects passed over in recent decades in favor of deep-water finds in West Africa and the Gulf of Mexico. New drilling techniques developed in the Barnett shale of north Texas have enabled companies to crack previously-impervious formations.

Overseas explorers such as China Petrochemical Corp. and Total SA want to learn from U.S. partners so they can exploit vast shale resources in Europe and Asia, said Mark Hanson, an analyst at Morningstar LLC in Chicago.

The U.S. holds an estimated 2,543 trillion cubic feet of gas, enough to meet domestic demand for more than a century at current rates of consumption, according to the Energy Department in Washington. Shale accounts for 862 trillion of that total, or 34 percent. In China, shale formations hold an estimated 1,275 trillion cubic feet of gas, 12 times as much as the nation’s so- called conventional fields.

Buying to Continue

The buying spree is likely to continue because international oil producers are eager to amass reserves in the U.S., which surpassed Russia in 2010 as the world’s largest source of gas, said Christian O’Neill, an analyst at Bloomberg Industries in Princeton, New Jersey.

Oil production also has blossomed in the world’s largest economy, rising to a 9-year high of 5.78 million barrels a day in October, the most recent month for which the Energy Department in Washington has figures.

Hunt, the closely held Dallas company founded by Texas tycoon H.L. Hunt in 1934, has only drilled “a handful” of wells in its Eagle Ford shale acreage, which means it doesn’t yet know how extensive or rich those holdings are, Del Pozzo said. Similarly, because drilling in the Utica shale still is in its infancy, the geological characteristics and potential bounty of the region are hard to assess, said Manuj Nikhanj, head of energy research at ITG Investment Research Inc.

“The big risk is that people are jumping in with both feet too early,” Nikhanj said in a telephone interview from Calgary. “Of course, the other side of that is that if they wait, they risk missing out on what could turn out to be a big deal.”

Carizzo, Magnetar

Private-equity firms also are showing increasing interest in US shale assets, Sylvester “Chip” Johnson, chief executive officer of Carrizo Oil & Gas Inc., said in a Jan. 4 presentation at a Pritchard Capital conference in San Francisco.

Carizzo, based in Houston, has been selling fields in some of its first shale plays, such as the Barnett region, to raise money for drilling higher-profit Utica and Eagle Ford prospects that contain oil, he said.

Chesapeake sold $750 million preferred shares last month in a subsidiary created to finance development of its Utica shale holdings. The transaction entitles Magnetar Capital, Blackstone Group’s GSO Capital Partners LP and an investment group that includes EIG Global Energy Partners LP to 7 percent annual distributions and a 3 percent overriding royalty interest in the first 1,500 wells.

More Science

Buyers are studying fields more closely before committing, Nikhanj said. Total, Europe’s third-largest oil producer by market value, was selective about what sections of the Utica shale will be included in the 25 percent stake it acquired on Dec. 30 in 619,000 acres controlled by Chesapeake Energy Corp. and EnerVest Ltd.

Total’s outlay, including drilling costs, will be $2.32 billion, or the equivalent to about $15,000 an acre, based on Bloomberg calculations. That’s more than four times the average per-acre price from seven Utica shale transactions tracked by IHS from March 2011 to September 2011.

“We are seeing prices move up quite dramatically in these exploratory shale plays,” Nikhanj said. “But the Total joint venture also shows us that these companies with deep pockets are doing more science” before signing deals.

High-Risk Prospects

The quirky nature of shale geology means the risks are high that an investment made in a sparsely drilled prospect will go bust, Nikhanj said. Rock density, porosity and pressure levels vary widely within each field, which means one parcel may hold enough fuel to justify prices of $30,000 or $50,000 an acre, while the adjacent land is almost worthless to drillers.

Brent oil futures, the London-traded benchmark for two- thirds of the world’s crude, jumped 26 percent to an average of $110.91 a barrel in 2011, the highest on record, spurred by supply disruptions in North Africa and escalating worldwide demand for fuels to run trains, airplanes and trucks.

As long as crude commands such lofty prices, explorers will continue to seek out geologic formations soaked in oil and gas components such as propane, Dan McSpirit, a Denver-based analyst for BMO Capital Markets, said in a telephone interview.

China Petrochemical, the Beijing-based crude producer known as Sinopec Group, and Total expect to glean expertise from their U.S. partners in the horizontal drilling and high-pressure water injection necessary to extract oil and gas from shale, said Hanson, the Morningstar analyst. Ultimately, the know-how will be transferred to virgin shale prospects in Europe, Asia and Latin America, he said.

‘Massive Land Grab’

U.S. gas explorers including Chesapeake and Devon Energy Corp. are selling interests in shale fields to international energy companies such as Total and Sinopec to finance drilling on leases acquired during a “massive land grab” in 2007 and 2008 as oil and gas prices soared to record highs, O’Neill of Bloomberg Industries said.

The plunge in energy prices that followed Lehman’s bankruptcy and subsequent global financial crisis left operators like Chesapeake too poor to fulfill clauses that set deadlines for finishing wells on pain of forfeiting the leases, O’Neill said.

“These deals give the domestic exploration companies capital to drill so they won’t lose those assets, and gives the foreign companies the learning process they’re going to need to exploit shale resources on their own,” O’Neill said.

Source: Bloomberg

One of the central arguments on Wednesday was over whether allowing fracking would really create tens of thousands of badly needed jobs in New York state, as some studies have suggested.

Read the full Article from the Financial Times HERE

Shell Oil Co. and others are taking steps – some required and others voluntary – that soon may be the norm for reducing the environmental impact of gas drilling and the extraction process called hydraulic fracturing, or fracking.

Shell, for instance, now recycles more than half the water it uses in fracturing local wells, reducing the need for locally sourced fresh water.

It also has installed equipment that is sharply cutting emissions from drilling rigs and has shrunk its surface footprint by drilling more wells at a single site, rather than spacing them out checkerboard style, as is done in some other fields.

Shell Oil, the U.S. arm of the European oil giant Royal Dutch Shell, says its operations at the Pinedale Anticline Project Area reflect broader operating principles that should be adopted industry-wide.

It says that would help raise standards for the 7,000 producers drilling for gas in the U.S. and allay fears about development in shales and other tight rock formations, where huge quantities of gas have been discovered in recent years.

Click here to read more about the Pinedale Anticline Area Project

The other theory of natural gas formation is the inorganic theory which speculates that hydrocarbons did not originate from buried plant and animal material, but instead were trapped inside the Earth as it formed. This theory is most likely not applicable to shale gas.

HOW IS SHALE GAS FOUND ?

Exploration for gas shales is similar to exploration for conventional reservoirs which, for an unexplored basin, usually includes:
• review of existing information
• aerial surveys to gather data regarding magnetic fields, gravity and radiation
• seismic surveys to locate and define subsurface structures capable of trapping natural gas
• exploration drilling to test subsurface structures for the presence of hydrocarbons
• logging the wells to determine porosity, permeability and fluid composition

In the case of shale gas, the primary targets are shale formations with interbedded porous and permeable fine-grained sediments and natural fracture systems. Down-hole tools used to find fractures include density compensation, caliper and temperature logs, and formation microscanner imaging. Low-altitude, airborne multispectral imaging is a new tool used to locate subsurface microfractures and prospectivity of shale formations.

WHERE IS SHALE GAS FOUND ?

Shale gas in the United States
There are five major shale basins in the United States from which shale gas is produced. To date, more than 40,000 wells have been drilled. There are seven other shale basins from which there has been no production.

Shale gas in Canada
Currently, there is no commercial shale gas production in Canada. Canada has a number of prospective shale gas targets in various stages of exploration and exploitation in British Columbia, Alberta, Saskatchewan, Ontario, Quebec, and Nova Scotia.

HOW IS SHALE GAS PRODUCED ?

In order for a shale play to produce, the rock must have geochemical attributes that indicate that the organic content (kerogen) has been sufficiently heated to produce natural gas in the formation. If the shale does not reach a high enough temperature over the millions of years that it was buried, then it is not prospective for thermogenic gas generation. Conversely, if the rock reaches too high a temperature, the natural gas (methane) that is produced can break down into non-combustible gases such
as carbon dioxide.

To understand the geochemical (maturity, organic content), mechanical (stress, brittleness) and in-situ rock properties (permeability, porosity, water saturation, reservoir pressure, gas content), wells are drilled, and rock samples from core and cuttings are recovered and sent to specialized laboratories. Traditional logging tools do not provide sufficient information for evaluating shale prospectivity, and can be misleading unless calibrated to lab results from actual rock samples.
Because shale has such low permeability, gas will generally not flow unless the rock has been fractured. This involves injecting high volumes of water, mixed with sand, at high pressure into the targeted shales. This fractures and props open the rock, thus allowing the gas trapped in the reservoir rock to flow to the wellbore.

Generally, vertical wells are used to explore the shale resource and determine the best places for development, and then horizontal wells are drilled for commercial production.

Horizontal well drilling and multi-stage fracture stimulations have been the key to obtaining economic productivity in most shale reservoirs. Horizontal wells can be drilled over 1000 meters laterally through the productive shale and then 5-10 individual intervals are fracture stimulated. This technique connects larger volumes of the resource into a single wellbore, resulting in higher rates and reserves, and ultimately, a commercially viable project.

Shale plays can hold an enormous amount of natural gas and are capable of producing gas at a steady rate for decades.

C. Keddy