COLUMN-Improving the odds: why shale really is revolutionary: Kemp

Sun Jul 6, 2014 10:00pm EDT

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(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON, July 7 (Reuters) - Exploring for oil and gas is like gambling: it's all about playing probabilities, and using technology and skill to improve the odds.

Until a well is bored into the ground - possibly thousands of feet below the surface, at a cost of millions or even tens of millions of dollars - it is impossible to know for sure whether it will find hydrocarbons in commercially producible quantities.

Some exploratory wells prove to be "dry holes" or "dusters". Others find some useful oil or gas but often in only modest amounts. Only a few turn out to be "elephants". Success in the exploration business depends on maximising the number of profitable elephants while minimising the number of costly dusters.

Exploration companies spend a fortune on seismic, gravity and magnetic surveys, as well as acquiring old well records and employing massive computers to crunch all the resulting data to improve their odds of finding large accumulations of oil or gas, a process known in the industry as "de-risking".

Some of the world's fastest supercomputers are owned and operated by companies such as ENI, Total, BP and Saudi Aramco to help search for oil and gas, and are run by some of the world's brightest mathematicians and scientists.

Oilfield services companies such as Schlumberger, Halliburton and Baker Hughes offer incredible data interpretation and visualisation software to help other firms decide where to drill.

In the end, though, the only way to prove the oil or gas is really there is to hire a drilling rig and wait nervously until it reaches the target depth. With the best preparation in the world, there remains a large element of luck.

But the shale revolution has considerably improved the odds. Conventional production targeted small, discrete and hard-to-find accumulations. Shale production, by contrast, targets formations which stretch continuously over tens of thousands of square kilometres.

MAKING PETROLEUM

Hydrocarbons occur naturally over large parts of the planet's surface. But finding them in sufficient concentrations to make them worth producing is far harder.

Oil and gas are the remains of long-dead organisms, which have been buried and transformed into hydrocarbons through the action of bacteria and heat.

Most organic material is broken down on the surface of the planet in the presence of air by bacteria and returned to the atmosphere in the form of carbon dioxide.

But a small proportion, perhaps no more than 1-2 percent, is buried before it can decompose fully. The buried material is broken down by specialised bacteria without oxygen into a rich chemical stew.

As the material is buried deeper and deeper, it is gently cooked by heat in the earth's crust - most of which comes from the natural decay of uranium and other radioactive materials below the surface.

The deeper the chemical broth is buried, the hotter it gets. At about 60 degrees Celsius, it starts to be converted into heavy oil. As burial depth increases and temperature continues to rise, the larger oil molecules are cracked and only light oils and natural gas (methane) are produced. Beyond 170 degrees Celsius, only gas is formed. Beyond 225 degrees, gas formation stops and only graphite (solid carbon) is found.

Oil and gas are both less dense than water, so, unless stopped for some reason, they tend to migrate upwards to the surface, where they evaporate. Most of the oil and gas that has ever been produced has been lost in this way.

Small amounts of oil and gas from surface seeps in the Middle East and China have been used for almost 3,000 years. Only in the last 150 years, however, have petroleum producers drilled below ground to locate pockets of oil and gas that got trapped and bring them to the surface.

IMPROVING THE ODDS

Geologists refer to the process by which petroleum is produced and migrates below ground as a "total petroleum system". Understanding the petroleum system, coupled with improvements in seismic surveying and computer technology, has made finding oil and gas much more scientific.

But it still remains hard. To appreciate how hard, think of the conditions that must be fulfilled to find a large pool of concentrated oil or gas. For anyone with a mathematical mind, multiply up the probabilities.

First the organic matter must have been buried quickly before it can decompose fully. The most favourable environment is on the floor of an ancient sea, lake, river or estuary - where oxygen levels tend to be low and there is lots of silting so dead animals and plants are buried swiftly.

Second the organic material, once covered, must be buried to a sufficient depth and temperature for conversion to oil and gas to begin, but not too deep, or the oil and gas will be lost.

The most favourable environment is one of the planet's giant sedimentary basins, where the basement rocks are covered by thousands, sometimes tens of thousands, of metres of thick sediments laid down over thousands of years.

Sedimentary basins cover about 70 percent of the planet's surface, and all are potentially prospective for oil and gas to some extent. But the best source rocks for oil and gas are marine and lacustrine shales formed on the bottom of ancient seas and lakes.

Until the shale revolution, oil and gas could not be produced directly from shale. The pores in the rock were too small and too poorly connected with one another to allow the oil and gas to flow through the shale to a well.

That leads to the third set of conditions. Exploration companies needed to find areas where the oil and gas had produced in a source rock, such as shale, then migrated to a porous reservoir rock, before becoming trapped by another layer of dense rock or a naturally occurring fault so it did not seep to the surface and evaporate.

Critically, the source rock, migration pathway, reservoir rock, and trap, must be found together and in the correct geological sequence. This combination of circumstances is extremely rare.

But shale is both the source of the petroleum and the trap (because it is so impermeable). Rather than hunting for small pools of oil and gas trapped by faults or rock seals, shale producers can go straight to the source.

NOT QUITE SO HARD

Finding oil and gas in shale formations is easier than conventional exploration, but it is still not easy to produce.

Some shales have been buried too shallow or too deep. In others, the organic content is too low. Some are too clayey and do not fracture well. Or the fractures extend in the wrong direction and allow the oil and gas to escape away from the well.

Shale formations can be quite variable even over quite small distances of a few hundred metres or a kilometre.

Producing oil and gas is not just a case of finding a sedimentary basin with a layer or marine or lacustrine shale, drilling to depth and then turning on the high-pressure pumps.

Successful exploration and production companies increasingly rely on seismic surveys and oil field visualisation software, as well as experience, to identify the areas which are likely to be most productive and cost effective (known as "sweetspots").

Conventional and unconventional oil and gas are often found in the same areas. Shale formations in North Dakota and Texas were the source of much of the conventional petroleum produced in both states over the last 80 years.

In general, however, shale oil and gas should be differently and more broadly distributed than conventional fields. The prospect of finding, and producing, oil and gas in areas which have not previously been put into commercial production is what makes shale technology truly revolutionary.

The combination of horizontal drilling and hydraulic fracturing mean that oil and gas can be produced from many more formations than before, in many more areas.

Not all these formations will prove technically and economically feasible. Shale formations must compete with one another, and with conventional oil and gas fields, in terms of the cost of production. Some shales will prove too expensive to produce.

But the shale revolution has dramatically increased the range of production possibilities, and will broaden the petroleum industry to include new companies and new countries, and that's what makes shale such a revolutionary and disruptive force.

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