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| A truck carries salt water, used in drilling for shale gas |
After their father died 15 years ago, Mike Smith’s six siblings wanted nothing to do with the tract of land the old man had gradually acquired from his income as a pipeline welder. The land, 365 acres of it, lay in a quiet and sparsely populated corner of Louisiana: nothing but pine trees for miles around. In a county so poor that about a fifth of the population lives below the poverty line, the bequest wasn’t good for much.
But for Smith, a tall, slim man of 61 with a kindly face, DeSoto parish was home. “That’s where my roots are. I wanted the land,” he says. Smith paid $300 an acre – $109,500 in total – to his siblings. And while he kept his home in Shreveport, 40 miles to the north, he travelled down to DeSoto regularly to walk his acres, or hunt squirrel and deer. His plan was to sell the trees for lumber one day, and use the income to fund his retirement. Until then, he would pass the years frugally, making a living as a property valuer and sharing his 50-year-old house with two dogs and a cat.
All the while, the county seat of Mansfield, home to 5,500 people, withered. With only coal and timber to support it, the parish could not even repair its roads. Across from the courthouse are telltale signs of the desperation that began to claw at the area – the dusty, vacant windows of the hardware shop and cinema, and beyond them the Community Bank of Louisiana. It opened its doors in 1901 but is now so run down that the visitor struggles to make out what colour the wallpaper would once have been. The phones are from another age and an old standard lamp in an upstairs office blinks fitfully into life and then goes dark again.
“When I came in, the town was dead. There was no sign of economic growth here,” remembers Curtis McCoy, mayor for the past seven years.
All that changed in 2008, when oil and gas companies began knocking on doors, offering locals a couple of hundred dollars an acre if they would lease their land for prospecting. Some, like Jim May, executive director of the DeSoto Chamber of Commerce, jumped at the offer and signed a three-year lease on his 100 acres for a total of $25,000. Nobody had shown any interest in the land in decades, he reasoned. Six months later, the goldrush was at its height and prices leapt to $25,000 or even $30,000 an acre. “I lost $2.5m,” says May with a wistful smile.
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| Mike Smith in the Cadillac he bought with part of the money he received from leasing his land |
Smith is sitting behind the wheel of a new gold Cadillac, parked outside this year’s Haynesville Shale Expo in Shreveport, an event that has attracted 5,000 people, most of them landowners who missed the leasing frenzy and are eager to see whether they still have time to cash in. It was Smith’s dream since he was a boy to own a new Cadillac, like the one his father always made sure his mother drove. He paid $52,000 cash for the car. “That was the first investment. It kind of hurt a little bit,” he smiles. A small wooden cross dangles from the rearview mirror.
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The prize that drew companies such as PetroHawk to Smith’s impoverished corner of Louisiana is known as shale gas. Smith’s acres sit on top of the Haynesville Shale, named after the town near which the prospect was discovered – a seam of black rock between 150 and 300ft thick that lies hundreds of feet underground and extends across 3,400 square miles of Louisiana and Texas. Trapped inside this rock are vast quantities of natural gas – estimated at between 112 and 245 trillion cu ft. At the upper end of this range, Haynesville gas could meet the US’s energy needs for about 12 years.
This isn’t the most extensive prospect of its kind in the US; that distinction belongs to the Marcellus Shale in Pennsylvania and neighbouring states, which is reckoned to cover 65,000 square miles, an area larger than Greece. But based on the wells drilled so far, the Haynesville may well turn out to be one of the most productive. “It was the Haynesville that turned the tide on how big shale could be for US supply,” says Jeff Fisher, senior vice-president of production at another US company, Chesapeake Energy.
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| The Chesapeake Trinidad 127 rig reflected in a pool of liquid on a rig deck |
To extract gas from shale involves drilling down, sometimes thousands of feet, and then sideways as much as 4,500ft. Once a well has been drilled, water with fine grains of sand is pumped through at high pressure; this fractures the shale and leaves behind the grains of sand, which prop open the fissures in the rock and allow the gas to escape.
Using this technique, Devon Energy, an Oklahoma-based oil and gas independent, sank a well last autumn in the Texas portion of the Haynesville shale (until then thought to be a low point in the “play”) that produced a flow rate of more than 30 million cu ft of gas per day, the highest ever from that area. This result led others to redraw the borders of the gas field, suggesting it was even more extensive than originally believed. “No one, us included, knows how that play is going to evolve,” says Larry Nichols, Devon’s chief executive. “We did not anticipate it would grow this much. Now we realise there are more opportunities for onshore growth than we ever thought would be possible.”
This realisation marks a volte-face for America’s oil and gas companies. By the 1970s, the majors had decided that onshore reserves of oil and gas in the US had been tapped, so they sold much of their acreage in order to focus on offshore and international exploration. This left the independent explorers, which drill 90 per cent of onshore wells in the US, to pursue what was left. “For years we have known that the United States holds vast quantities of so-called tight gas or shale gas – natural gas locked in formations denser than concrete,” Rex Tillerson, ExxonMobil’s chief executive, said in October. “But we did not have the technology to extract this so-called tight gas in a cost-effective way. Until now.”
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Credit for that breakthrough goes to George Mitchell, who at 90 is among the last of the original wildcatters still alive. His breed of oilmen spent their lives searching for the next Spindletop – the Texas oil well that in 1901 spouted a thick, black geyser, marking the birth of the US oil industry. Duke R. Ligon was senior vice-president at Devon Energy when, in 2002, Mitchell was preparing to sell his company to Devon and retire a billionaire. Few people realised it at the time, but Mitchell had already laid the groundwork for the shale boom by pioneering an effective and economic way to extract the gas. “You had to laugh in the negotiations because, according to him, everything was Spindletop,” Ligon recalls. He pauses, then adds: “He happened to be right.”
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| Well engineering manager Chris Furrh makes his way up to a hydraulic fracturing pond at a Devon Energy site. High-pressure water is pumped underground to fracture the shale and release its gas |
The technology and expertise developed by Mitchell Energy and refined by Devon has transformed the industry. In the past three years, estimates of US gas reserves have grown from 30 to 100 years’ supply at today’s rates of consumption. “We did all the work,” Mitchell says. “The majors didn’t do it; the independents did it. Now the majors are angling all around.”
Exxon, the biggest of them all, has built up positions in the Marcellus Shale and other fields across Oklahoma, Arkansas and Texas, and in December it took over XTO Energy, a US independent, in a $41bn deal that will further increase its exposure to onshore US natural gas. Exxon is also looking at making shale an international proposition and has holdings in Canada, Germany, Hungary and Poland. And all the while competitors from around the world are lining up, hoping to learn from the pioneering US independents and take that expertise with them wherever they can.
Hans-Martin Schulz, a German geologist, is co-founder of Gas Shales in Europe, a project funded by the oil and gas industry to explore the potential for development in Europe. “We are making the first steps in research,” he says. “It’s hard to estimate, at this point, what will happen.” National and international energy policies will dictate how much gas is extracted, but there is no doubt that countries from Poland to China want to get in on the act. On November 17, Barack Obama and China’s President Hu Jintao launched the US-China Shale Gas Resource Initiative, which aims to use experience from the US to assess China’s shale gas potential.
But gas has its critics. It is about 30 per cent less carbon intensive than oil and 50 per cent less than coal, but it still emits carbon, which makes it less desirable than renewable energy resources. Fracturing the rock requires large quantities of water laced with chemicals, which critics fear could leak into groundwater and aquifers. Shale developments have been blamed for contaminating wells and the death of livestock exposed to potassium chloride in the water used to fracture the rock; this has led regulators to consider buffer zones around reservoirs and aquifers.
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There has been no outcry in places such as Texas and Louisiana, where lawmakers have long supported the oil and gas industry. Indeed, Louisiana is offering tax incentives for people to install fuelling equipment that will allow vehicles to run on compressed natural gas. But in the north-eastern states, where the mood is less welcoming, Chesapeake Energy recently abandoned plans to drill in the New York watershed, which supplies unfiltered water to nine million people. “Why go through the brain damage of that, when we have so many other opportunities?” says Aubrey McClendon, its chief executive.
The Riverkeeper, an environmental group, has called for a permanent ban on drilling in ecologically sensitive areas such as the Catskills region. But local governments are torn, given the number of jobs shale developments create at a time of high unemployment. A study by IHS Global Insight reported that gas contributed $385bn to the US economy in 2008 and more than $180bn in labour income alone; by comparison, the coal industry contributed $79.9bn. More than 30 US states boasted at least 10,000 jobs directly or indirectly attributable to the gas industry.
At the end of 2008, the US Department of Energy says domestic proven gas reserves rose by 3 per cent to reach their highest level since the US Energy Information Administration first reported them in 1977. Discoveries of 29.5 trillion cu ft of gas during 2008 represented the sixth consecutive annual increase, with reserves from shale reservoirs up 51 per cent over 2007.
“It is very significant,” says Richard Newell of the US Energy Information Administration. Under most scenarios of future energy and climate legislation, US natural gas production will increase during the next 20 years. But further ahead, the picture becomes less clear. By 2050, if the US built more nuclear and wind-generating capacity and managed to capture and store the carbon emitted from coal-fired power stations, then it would be cheaper to use those technologies than to burn more gas and capture its carbon emissions, Newell says. “The size of the role natural gas would play depends on the availability of those other options.”
In its favour, he notes, gas-fired power stations can be built faster and more cheaply than coal equivalents and offer a better fit with renewable sources because they are easier to turn on and off to supplement wind and solar when the wind drops and the sun doesn’t shine. “Price is the main impediment,” Newell says.
And natural gas prices are unpredictable. In recent months, when gas fell below $3 per million British thermal units (mBtu) – a seven-and-a-half-year low – that hardly seemed a cause for concern. But as recently as 2008, US gas prices reached a record $13.69 per mBtu. Even at $3.20 per mBtu, however, developing shale gas is profitable.
“Every square inch of my district has natural gas under it,” says Tim Murphy, a US congressman, referring to Pennsylvania’s Marcellus Shale, which runs from New York to Tennessee. “It’s going to have an impact on the whole nation.” T. Boone Pickens, the 81-year-old oilman who has become a spokesman for the natural gas industry, told Congress in October that the US has more natural gas than all the oil in Saudi Arabia. If the country converted 6.5 million of its heavy trucks to run on that gas, it could reduce its oil imports from Opec producers by 2.5 million barrels a day. To make that happen, Murphy says the US must create incentives for public gas refuelling stations, or in-home gas refuelling, and plug-in vehicles. This can be funded, he argues, from the additional revenues the government will receive from gas producers if they have incentives to increase output. “It’s a solution that grows upon itself.”
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The biggest believers are in the Haynesville area, where last year gas projects produced $3.9bn in household earnings and accounted for 33,000 new jobs, according to Loren C. Scott & Associates, an economic consultancy. It estimates state and local tax revenues increased by at least $153.3m in 2008 as a result. “It’s going to turn this parish upside down over the next five to 10 years,’’ says Tommy Craig, of the Community Bank of Louisiana. Deposits are already up 25 per cent from late 2007.
Next: shale oil?
US energy companies may be able to use technologies they acquired in the hunt for shale gas to tap oil trapped in dense rock formations.
Oil is often harder to extract, given its viscosity and bigger molecules, so engineers are tweaking the process. “We believe this is going to be game-changing technology,” said Mark Papa, chairman of EOG Resources. “We believe there is enough oil in rock across the US and Canada to be of significant impact.”
While increasing the size of the world’s third-largest oil production base would be difficult, success could slow the decline in US oil output that has continued since the 1970s. Papa believes the process will prove economic with oil prices at $45-$50 a barrel, compared with around $80 today.
While nobody knows how much oil might be freed by the new techniques, Edward van den Heuvel, commercial opportunity manager for Shell Chemicals, said that on average about a third of the oil in a field is recovered. With two-thirds of the oil left in the ground, it makes sense to revisit reserves once believed to be trapped in impermeable rock.
The biggest success so far has been in the Bakken Formation of Montana and North Dakota, where there are an estimated 3.65bn barrels of recoverable oil. Bill Albrecht, vice-president of Occidental Petroleum, the biggest US independent, says: “There is a huge resource here.” But the technique needs refining before it will win widespread adoption. “Relative to gas, it’s still an emerging technology,” he admits.
Mike Smith is one of the few spending his windfall. Whereas others have run only to a new pick-up truck, he does not have a wife or children, so the money is his to spend. He has bought a couple of large-screen televisions and invested some of his payout, buying stock in Ford Motor Company when it hit $2 – “I have a bunch of it,” he says. But after years of thrift, even he has mostly held on to the money, using it for necessities such as medical bills. He was able to pay upfront to have a cancerous growth removed from the side of his nose, rather than cover the costs in instalments.
Other big winners from the shale rush remain cautious about spending their signing bonuses, despite the promise of royalty cheques once production begins. The Marshburn family, who own 400 acres, including a share in the most productive Haynesville well to date, are one example. Mike Marshburn, a 59-year-old former rodeo star in a black cowboy hat and a shiny silver buckle he won as a rider in the 1970s, has already banked his bonus but continues to work on the gas fields as a contract welder, while raising bucking bulls on the side.
His wife, Celia, a retired schoolteacher, lifts up her boots to reveal holes in the soles. And their daughter, Mila, 25, is working her way through 14-hour days in nursing school, despite her family’s sudden wealth. “I just tell my friends, ‘Hey, that’s my parents’ money. I’m going to make my own way.’” Her mother wants to create a beach on the lake their home overlooks, while her father has his eye on a new bull. But they are biding their time. “If these royalty checks are big enough, I might retire,” Mike says.
Smith’s bonus will carry him through retirement, regardless of how big his royalty cheques turn out to be. His contract guarantees him 20-25 per cent of what the company receives for gas under his land, and production is due to begin within months. He has a twinkle in his blue eyes when he talks of the dreams he can now afford to live out – hunting bears in Alaska; golfing at the Masters in Augusta; seeing the vast expanses of Wyoming and Montana; building a new home amid the pine trees on his acreage. “I’m more or less a homebody,” he says. “I think it’s time I get out.”
In the meantime, he is training his nephew to take over the business so that he can retire next year. And on the weekends, he still heads out of town, to hunt on his land, among the pine trees and the well pads.
Sheila McNulty is the FT’s US energy correspondent. Her most recent piece for the magazine was about natural gas producers’ battles with environmentalists. Read it at www.ft.com/gasfight
