Myths and realities of the shale revolution. Shall the shale continue?

Photo: Depositphotos.com/alexma

That period was replaced with one of euphoria and soaring growth, which has engulfed the entire U.S.  The US shale phenomena has effectively changed the architecture of global oil production. Now as it seems the shale revolution is cooling down entering the state of maturity, when this resource of fossil hydrocarbons is perceived calmly and realistically, among all other kinds of resources.

For almost thirty years of its history, the shale fracking technology has been quite thoroughly studied, optimized, evaluated and well described in publications. Some of the aspects of it, especially the environmental and economic ones, have been used controversially, often speculatively, giving grounds to diametrically spread political agendas, fueling financial bubbles.

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George Mitchell is often regarded as the father of the US shale revolution. Though, as of the record, hydraulic fracturing for shale oil production was first used in 1947 – long before George. But it was really Mitchell who started what is now called “the shale revolution”. The idea is to apply hydraulic fracturing technology in a horizontal well drilled in a layer of oily shale – an oil-source rock, in the sealed microscopic pores of which carrageen is being incubated while developing into oil and gas. Fracking allowed some these of those pores to be unsealed and connected with the well through which the gas and oil could be intensely produced.

Today it is hard to comprehend why the idea of "fracking" for twenty long years was making its way to the minds and hearts of investors and oil executives, but it is so. It took Mitchell that much time, lots of capital and incredible perseverance, to get recognition from investors, and after ten years of active application of this method - the whole industry. From about the middle of the first decade of this century the "fracking rush" in the United States has begun. Permian, Barnett, Eagle Ford, Bakken, Marcellus, Utica, Haynesville here is not a full list of shale oil and gas basins in the U.S., developed in the wake of the success of George Mitchell. Fracking is the best thing that's ever happened to the American oil industry. It is the source of America's great success in securing energy independence, the basis of President Trump's doctrine of achieving U.S. energy dominance in the world.

But there are nuances, or rather myths, turned into problems.

Myth one is the notorious environmental safety of fracking, which has had problematic environmental consequences associated with this method. In 2011, France legally banned the production of shale gas by hydraulic fracturing. This is despite the fact that France has the largest shale gas reserves in Europe, and the country's highly developed industry is in dire need of natural gas as a source of energy. This seemingly politically suicidal decision was made by President Sarkozy in 2011 and confirmed by President Hollande in 2012, despite pressure from the industrial lobby.

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This decision is related to the obvious damage that shale gas extraction causes to the environment with the use of hydraulic fracturing and horizontal drilling. The drilling sites after the completion of the works resemble the sites of the nuclear disaster, turning into an environmental disaster zone. If for the U.S., with its vast and sparsely populated areas of West Texas, Oklahoma and North Dakota, the problem of allocating acreage for mining and the associated environmental risks is not so obvious, in France in particular and in Europe as a whole, and in the densely populated U.S. states such as Pennsylvania, Virginia, New York, the situation is very different. In France, with its powerful scientific potential, quickly realized the potential risks of shale gas extraction, which allowed critics of the "shale revolution" to say that the use of American technology is tantamount to export to Europe environmental disaster and will turn France into a "global burial ground". The obvious risk of poisoning not only soil, but also groundwater with a solution of poisonous chemicals used in hydraulic fracturing (slick water), causes the most serious concerns for both environmentalists and the ordinary population.

Environmental problems associated with uneven loading of an array of rocks and man-made faults caused by fracking and shale oil and gas production:

1. Subsidence and sinkholes in significant areas, earthquakes and low-intensity tremoring

Hydraulic fracturing with the pumping of large volumes of chemical solution with proppant, the subsequent intensive extraction of gas and oil covers a limited volume of subsoil in the total array of rocks. All this creates enormous internal stresses in the array, often leading to faults and subvertical failures. Hence the environmental risks associated with the disruption not only of the landscape of drilling areas, but also of the structure of the subsoil. There is a phenomenon of landscape subsidence, sinkholes and growth of seismic activity in those regions where shale gas is extracted by hydraulic fracturing. Fact: Oklahoma came out on top in the U.S., overtaking California in the number of earthquakes.

2. Pollution of underground fresh water reservoirs

The mechanism of subvertical cracking in crossections of rocks above the fracked zones, resulted with the fracking followed with intense extraction of oil and gas from such zones and uneven loading and the local vertical shifts, sinkholes and subsidence caused by it - the same mechanism that causes earthquakes in Oklahoma, predetermines the problem of freshwater pollution. Methane and chemically induced fracking fluids can migrate thousands of meters along the faults into the ground water horizons and penetrate those contaminating the water bared in those.

3. Contamination and pollution of surface

Spills on the surface of poisonous chemicals used for fracking occur regularly. No precautions, such as lined pits, hermetically tight tanks for storing and cleaning of waste fluids, constant monitoring for integrity of those to prevent leaks of harmful substances on the surface, do not remove the risks of emergency spills of the waste fluids on the surface of the area with all the ensuing consequences.

4. Air pollution with methane

Methane can seep to the surface during the gas production via producing wells, technogenous faults formed by vertical shifts in the massif of overlaying rocks. Should the work be carried out in the area of dense population, this gas can accumulate in cellars, basements and other premises, poison people and animals. Gas emissions from wells in Pennsylvania and West Virginia during work at the Marcellus shale field highlight the human risks and environmental risks associated with drilling and hydraulic fracturing.

5. Other adverse effects of shale gas production

Noise accompanying drilling and fracking causes headaches and nervous disorders.

The vapors of chemicals used in fracking fluids can cause vision problems, respiratory and skin infections, and affect brain activity, digestive and nervous systems. Moreover, problems can arise not only for workers directly at the mining site, but also for the population adjacent to the well site. In Europe, compared to the US states of Texas, Oklahoma and North Dakota, population density is several times higher and there are stricter environmental laws.

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To date, European countries containing most of shale gas and oil reserves, followed by France, have banned the extraction of these minerals by fracking. The latest state in this row was the United Kingdom, which passed a law in November this year prohibiting the use of fracking as a method of oil and gas extraction. In Ukraine, where the government issued permits for shale gas production in the nearby suburb of Kharkiv, the population actively advocates, up to the threat of a social explosion, demanding a ban on drilling. The accumulated experience and knowledge make it possible to draw an unequivocal conclusion about the inadmissibility of the use of fracking technology in areas where people live or actively farming. The use of fracking in these areas should be legally prohibited wherever it is not done yet.

The second debunked myth of fracking, as a method of extracting shale gas and oil, is its profitability. Today it has become a huge problem that the extraction of shale gas and oil is objectively expensive. Low profitability, and sometimes loss-making, even in the price range in the WTI area of +/-$50 per barrel is a confirmed fact.

The most intense growth in fracking in the U.S. occurred during a period of rising global oil prices, exceeding $100/bbl in 2014. Opec and Russia (OPEC+) countries have had to push back and take a number of drastic production cuts to limit their own levels of oil production and exports to prevent a new collapse in world prices.

By the end of this year, 2019, the growth rate of shale oil and gas production has reached a maximum. The U.S., for the first time in many decades, brought, and even exceeded, the level of oil production on its territory to the level of its consumption and has become a net oil exporting country. It's a colossal success, but...

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Slightly hooked world oil prices revealed the so-called "secret of Polichinel", that is, the one that is known to all - extremely high creditworthiness of oil companies and inability, even with a slight drop in prices to average (+/-$50 WTI and +/-$60 Brent), to service loans. Experts' forecasts agree that world oil prices will pass another eight to ten dollars (this is under the crisis scenario), and this, accordingly, will push a large number of companies into the default zone.

In the context of negative profitability, the cashflow surplus is ensured by an increase in capex from external capital injection, which gives growth in the volume of sales. In other words, it is necessary to increase the rate of drilling of new wells, increase sales of extracted oil and, thus, to ensure the flow of cash sufficient to cover the cost of production, payment of loans and all other burden expenses of the company.

The high well production rates as they are commissioned after fracking are hyperbolically falling in the first two to three months of production. It is necessary to bring new wells into production faster so to stay afloat, and the prospects for return on investment are elusive. The refusal of investors to finance new drilling companies, the debt ratio of which is already at breaking point, in practice means the verdict of bankruptcies as it has no other sources of capital to pay its financial obligations.

The number of bankruptcies and pre-bankruptcies in the American oil industry for 9 months of 2019 has already exceeded the level of all 2018. In the near future, we should expect an accelerated series of pre-bankruptcies in the camp of shale drillers. Small and medium-sized oil companies are losing their capitalization and becoming easy prey for majors and large independent oil producers with a diversified asset package and cash in their accounts.

Drilling new horizontal wells for shale oil and fracking in the United States makes no sense. If we abstract from geopolitical factors, there is no real prospect of recovery of oil prices above WTI of $50/bbl. Which means there's no prospect of reviving fracking.

Summing up the above, we can state the end of fracking as a method of shale oil extraction

1. On environmental grounds: the use of fracking in human areas or in agricultural land areas is unacceptable. It should be banned by the Laws of States;
2. Fracking, as a method of oil production, objectively expensive and, in the face of lower oil prices, makes no economic sense.

Technological breakthrough is needed to solve the shale problem, as well as for all the hard-to-recover oil. Such technologies already exist and they can become the basis of a new round of growth in shale oil and gas production.

For example, S-BTF (“better than fracking” – as people like calling it) technology, owned by Galex Energy, which uses fundamentally new physical mechanisms for the oil industry, offers an alternative to fracking process. The technology ensures the creation of a dense network of microfractures in the shale range, combining pores containing oil or gas into a single hydrodynamic system and giving the array super-permeability. At the same time, a new pressure is formed in the reservoir - the energy of oil and gas drive from pores to the production wells. Thus, the complete extraction of oil and gas from the pores (SWEPT), providing high production rates of wells and many times higher RF (recovery factor), including already depleted wells with "exhausted" reserves.

Tens of thousands of wells have been drilled in the U.S. oil and gas basins - Permian, Eagle Ford, Bakken and others - which at best have reached the RF limit for fracking - a level of 6-7% of confirmed OOIP (original oil in place) reserves. These wells will have a chance of revitalization for the extraction of residual oil and gas reserves several times greater than those already extracted. The cost of oil production using this technology will not exceed $3-$5 per barrel.

Being extremely economical, this technology also meets the environmental restrictions of EU countries, which legally prohibit fracking, but not the extraction of gas and oil. That is, there is the possibility of environmentally friendly hydrocarbon production in France, Great Britain, Poland, Ukraine and other European countries.

Perhaps we are on the verge of a new round of shale revolution.

Alex Barak, CEO, Galex Energy Corporation (Houston TX)