Shale gas and coal bed methane

Potential sources of sustained energy in the future

Content
Introduction .................................................................................4
Shale gas .....................................................................................6
Introduction.............................................................................................. 06
Worldwide shale gas development ............................................................. 08
Shale gas development: India .................................................................... 11
Technological development ....................................................................... 13
Costs and economics................................................................................. 14
Risks and challenges ................................................................................. 15
Outlook .................................................................................................... 16
Coal bed methane ........................................................................18
Introduction.............................................................................................. 18
CBM vs. conventional gas .......................................................................... 21
CBM development: worldwide .................................................................... 21
CBM development: India ............................................................................ 22
Technology: drilling and extraction............................................................. 24
Cost and economics .................................................................................. 24
Key investment considerations .................................................................. 25
Outlook .................................................................................................... 26

2 Shale gas and coal bed methane

Potential sources of sustained energy in the future
 Abbreviation
BCM Billion Cubic Meters
BCF Billion Cubic Feet
BTU British Thermal Unit
CBM Coal Bed Methane
DGH Directorate General of Hydrocarbons
DOE US Department of Energy
EIA US Energy Information Administration
IEA International Energy Agency
GEECL Great Eastern Energy Corporation
MCF Thousand Cubic Feet
MoPNG Ministry of Petroleum and Natural Gas, Government of India
MMBTU Million Metric British thermal units
MMSCMD Million Standard Cubic Meter Per Day
NPC US National Petroleum Council
ONGC Oil and Natural Gas Corporation Ltd.
PGC Potential Gas Committee
PSC Public Service Commission
RIL Reliance Industries Ltd.
RPWR Reliance Power Ltd.
R&R Rehabilitation and Resettlement
TCM Trillion Cubic Meters
TCF Trillion Cubic Feet
TPWR Tripwire Inc

Shale gas and coal bed methane 3

Potential sources of sustained energy in the future
Introduction
 





 Although global production declined attributed by declining conventional
Iran around 2000 BC as seeps from 

 gas reserves, increasing demand from
the ground were ignited by lightning, the US experienced the world’s largest developing countries such as India and
but it was not until 211 BC that the increase in production for a third China and improvements in technology

 



 consecutive year driven by increased
Chinese reaching a depth of 150 meters
using bamboo poles and primitive
percussion bits.
The use of natural gas has come a long
way since then; global consumption in
2009 is estimated at 2,940 BCM, and
has been growing at a CAGR of ~3.5%
since 1965. Globally, proven natural
gas reserves have grown steadily in
the past decades to 187.5 TCM by
the end 2009. About 4% of this is
unconventional gas, of which more than
half is in North America.

for extraction.
supply from unconventional gas
The main differences between
sources. International Energy Agency
conventional and unconventional gas
(IEA) estimates world’s remaining gas
sources are the permeability of the gas
resources to be 785 TCM, of which ~48%
and resource distribution. Conventional
(380 TCM) is unconventional. Although
gas resources have high permeability
unconventional gas production has
and hence, are easier to extract as
been mainly restricted to the US, the
 !
global unconventional resources are
conventional resources are far less
expected to be abundant. However, it is
abundant compared to unconventional
not always feasible to correctly estimate
resources despite the fact that
unconventional resources.
conventional resources are denser, i.e.,
In the last decade, the development contain more gas per km2.
of unconventional gas resources has
Unconventional gas can be of the

 
 
following types:

4 Shale gas and coal bed methane

Potential sources of sustained energy in the future
Figure 1: Conventional vs. unconventional gas Shale gas: Shale gas is a natural gas
produced from shale rock contained
in shale formations and extracted by
Higher concentrations way of horizontal drilling and hydraulic
fracturing. Currently, the largest
Conventional Easier to develop
producer of shale gas is the US. Other
More permeable
countries such as Australia, Canada,
High quality reservoirs
France, Germany, China and India are
also in the process of developing their
Low quality reservoirs
own shale resources. According to data
from the US National Petroleum Council,
Tight gas Larger volumes the global shale gas resources were more
Unconventional More advanced than 16,000 TCF in 2007.
Coalbed Shale gas
methane technology needed
Coal bed methane (CBM): As the name
Gas hydrates
implies, CBM is a gas contained in coal
Volume beds that are usually not commercially
viable for mining. CBM is also referred to
as Coal Seam Gas and is mainly produced
Source: EIA in the US, Canada, Australia, India and
China. Global CBM resources as per the
US National Petroleum Council were
estimated at ~9,000 TCF in 2007.

Shale gas and coal bed methane 5

Potential sources of sustained energy in the future
 Shale gas
Introduction
What is Shale gas? Though the shales may be as porous
as other sedimentary reservoir rocks,
Shale gas is a type of natural gas
their extremely small pore sizes make
produced from shale. Shale is the earth’s
them relatively impermeable to gas
most common sedimentary rock, and




consists mainly of consolidated clay-
occur. Although it has low permeability
sized particles. In most conventional oil
and releases gas very slowly, shale can
  



  
hold an enormous amount of natural
seal that retains oil and gas in porous

"



sandstone and carbonate or limestone
#   
reservoirs, preventing hydrocarbons
the formations are so large that their
from escaping to the surface. This “gas-
wells will continue to produce gas at a
cap” that accumulate over petroleum,
steady rate for decades.
has historically been the source of most
commonly produced natural gas. But
in other locations, layers of shale —
sometimes hundreds of feet thick and
covering millions of acres — are both
the source and reservoir of natural gas.
These shales are rich in organic carbon,
and typically, the methane in organic
shales was created in the rock itself over
millions of years.

6
 Shale gas and coal bed methane 7
Potential sources of sustained energy in the future
 Figure 2: schematic geology of natural /
 

 < 

 
gas resources of shale gas from the Ohio Shale in the Big Sandy Field of Kentucky during the 1920s.
However, it was not until the 1980s that development began to expand rapidly, with
development of the natural gas resources in the area around Fort Worth, Texas.

Although shale gas has been produced for more than 100 years, shale gas production
was not generally considered economically viable because of the low permeability and
slow release of gas. Development of the Barnett Shale play grabbed the industry’s
attention in 1990’s. More particularly in the recent years, steadily increasing natural
gas prices, advances in hydraulic fracturing and new horizontal drilling technology have
made shale gas a more viable source of energy.

Source:EIA Worldwide shale gas development

Figure 3: shale rocks While the initial wave of shale gas development has largely been a U.S. story, the wave
is gathering international force and momentum. As per Schlumberger, shale deposits
are located in 688 different shale resources in 142 separate basins around the world.
Outside the U.S., the most developed shale resources are in Canada. While Europe and
Australia has no shale gas production yet, exploratory projects are underway on a large
scale. Further, it is estimated that China’s shale resources could rival those of the U.S.
As per the U.S. National Petroleum Council (NPC) the global shale gas resources were
more than 16,000 TCF in 2007, with more than 75% of that outside North America.

Table 1: World unconventional resource estimates, TCF

CBM Shale gas Tight gas Total
Source:EIA, energy techstocks North America 3,017 3,842 1,371 8,228
Latin America 39 2,117 1,293 3,448
Western Europe 157 510 353 1,019
Brief history and background1
Central and Eastern Europe 118 39 78 235
Shale formations across the U.S. have
Former Soviet Union 3,957 627 901 5,485
been developed to produce natural gas in
small but continuous volumes since the Middle East and North Africa 0 2,548 823 3,370
earliest years of gas development. Sub-Saharan Africa 39 274 784 1,097
"
   
$' Centralled planned Asia and China 1,251 3,528 353 5,094
was completed in 1821 in shallow =>/?@*J 470 2,313 705 3,487
*+  

/Q
+= 0 314 549 862
Fredonia, New York. These early supplies
of natural gas were derived from shallow South Asia 39 0 196 235
gas wells that were not complicated to World total 9,051 16,112 7,406 32,560
drill and from natural gas seeps.
Source: National Petroleum Council, 2007

1
“Modern Shale Gas Development in the U.S. A Primer, April 2009,” U.S. Department of Energy; “Shale Gas White Paper,” Schlumberger Inc.

8 Shale gas and coal bed methane

Potential sources of sustained energy in the future
The US
' 




 Proven US shale gas reserves at the
across much lower-48 states of the
US.Each of these gas shale basins is
different and each has its unique set
of exploration criteria and operational
challenges. The following graphic depicts
the major US shale basins.
Figure 4: shale gas basins in the U.S.
Source: : U.S. Department of Energy, Modern Shale Gas Development in the U.S.: A Primer, April 2009
2
“U.S. Proved Reserves of Crude Oil, Natural Gas, and Natural Gas Liquids Annual Report 2008, November 2009,” U.S. Department of Energy.
3
"=X
@

given the changes in SEC reserves
end of 2008 were estimated by the US
Department of Energy (DOE) at 32.8 TCF,
a little more than 13% of the total US
natural gas reserves of almost 245 TCF.2
Proved shale reserves should increase
sharply when the 2009 data are reported,
estimation and reporting that allow for
more unconventional resources to be
included as proven.
However, proven reserves of shale gas
are thought to be relatively small in
comparison to technically recoverable
reserves. In the recent Potential Gas
Committee (PGC3) report on US natural
gas resources (June 2009), the total
US gas resource base as of end 2008,
was estimated at 1,836 TCF, with more
than 616 TCF or 33% of the US total,
accounted for by shale gas.4 The 2009
PGC estimates are more than 40% higher
than their estimates two years ago.
Further, different agencies estimate
different shale gas recoverable reserves
for the U.S., with EIA being the most
conservative. Analysts have estimated
that by 2011 most new reserves
growth (50% to 60%) will come from
unconventional shale gas reservoirs.
+ Z[



 


4
“Potential Gas Committee Report 2009,” Colorado School of Mines press release, 18 June 2009.

Shale gas and coal bed methane 9

Potential sources of sustained energy in the future
 Figure 5: Shale gas resource estimate from different sources (2008)

1,000 50.0%
842
756
800 40.0%
616
600 30.0%
(tcf)

385
400 20.0%
274

200 125 10.0%

0 0.0%
Navigant All PGC 2008IC ICF Navigant EIA-AEO
consulting consulting consulting 2008
(max) (2008) (mean)

Total shale reserves (tcf) Percentage of total NG reserves (RHS)

Source: Analyst Research Reports

US shale gas production in 2008 was Table 2: Key characteristics of major US Shale Basins
estimated by DOE to be about 6 BCF per
day (~2.2 TCF). In its latest long-term Major US shale gas formations
energy forecast, the DOE expects shale Formation Approx Approx Approx Approx Approx Approx
gas production to reach more than square vertical thickness gas in recoverable production
12 BCF per day (~4.4 TCF) by 2020, miles depth (ft) (ft) place (tcf) reserves 2008
and almost 17 BCF per day (~6.2 TCF) (tcf) (MMcf/d)
by 2035.5 The DOE production forecast Barnett 5000 6500-8500 100-200 327 44 5000
is considered conservative, given the Woodford 11000 6000-11000 120-220 23 11 200
potential size of the shale resource base. Fayetteville 9000 1000-7000 20-200 52 42 650
For example, analysts at JP Morgan
Antrim 12000 600-2200 20-200 76 20 350
estimate US shale gas production to reach
close to 25 BCF per day (~9.13 TCF) by Haynesville 9000 >11000 200-300 717 35-251 60
2015.6 Currently, it is estimated that Marcellus 95000 4000-8500 50-2000 1500 35-392 na

 


+ New Albany 43000 500-2000 50-100 160 19 na
of the total natural gas production in the Bakken na >10000 8-20 na na 75
US, which, by some estimates can go
Huron na 1000-7000 200-2000 na na 25
up to 26%–42% of the total domestic US
production by 2015. Baxter na >11000 na na na 10
Pierre na 2500-5000 na na na 2
The following table summarizes some
Mancos na >13000 na na na 30
of the key characteristics of the major
US shale basins. Notably, much of the Eagleford na >11500 600-1000 na na na
key information on many of the basins is Lewis/ 10000 3000-6000 200-300 na 20 7
incomplete and/or under development. Mancos
While the recent history of the shale Source: Leon D. Brathwaite, Shale-Deposited Natural Gas: A Review of Potential, California Energy Commission
gas industry has centered around Staff Paper, May 2009; and U.S. Department of Energy, Modern Shale Gas Development in the U.S.: A Primer,
the Barnett Shale play in Texas, the April 2009.
resource potentials of the Haynesville
and Marcellus formations are considered
many times larger. “Annual Energy Outlook to 2035, December 2009,” U.S. Department of Energy.

“Shale Gas – a Game Changer for Global Gas Markets,” J.P. Morgan, 9 February 2010, via Thomson Research.

10 Shale gas and coal bed methane

Potential sources of sustained energy in the future
Other countries
Potential opportunities and/or attractive
geologies for shale gas include:
^ Canada: Development is underway
in western Alberta and British
Columbia — particularly the Montney
and Horn River plays; the eastern
Utica shale play in Quebec is still in

an in-principle agreement with the US
Shale gas Government to jointly cooperate for
development: India Shale gas exploration and production
in India. Some aspects to be covered
under the agreement include:
India7
^ Assessment of economics,
India has high natural gas prices,
technologies and investment potential
rapidly growing gas markets, increasing
dependency on LNG imports, and a ^ `

 
{
|
exploratory stages. nascent coal bed methane industry. programs
Thus, India appears to be a likely
^ E
 urope: Shale and other ^ }


'X

acolyte of the shale gas revolution.
unconventional gas resources
^ `  Z
  Q
 India has extensive organic shale
potential shale gas areas
France, Germany, Hungary, Italy, deposits across the gangetic plains,
Netherlands, Poland, Romania, Spain, Rajasthan, Gujarat and other coastal ^ <  
 

Sweden, Switzerland, and the UK. areas. However, since systematic be based on a case by case basis
Land acquisition and early-stage exploration is yet to commence, its
The government, through the Directorate
exploration is underway in a number prospectivity and questions about their
General of Hydrocarbons (DGH), is
of the countries. 
 
establishing policy guidelines for shale
mineralogical composition, or structural
^ C
 hina: China’s shale resources gas exploitation and auction of shale
complexity is yet to be ascertained.
could rival those of the US; gas blocks within the next two years
ongoing discussions are being Since, shale gas presents a credible (expected in latter part of 2011), even
held with Shell and BP with regard source of energy, which can contribute as various E&P players are moving
to joint development. substantially to meet the energy ahead with their pilot projects. ONGC
requirements of India, the Government has been implementing a pilot project
^ O
 thers: Shale/unconventional gas
of India (GoI) is seriously looking at in Damodar valley in partnership with

  
exploring shale gas potential. Schlumberger at a capital cost of
in South Africa, Morocco, Russia and
approximately USD28 million. Similarly,
the Ukraine. Recently, in May 2010, the Ministry
Oil India has initiated a project in Assam.
of Petroleum and Natural Gas signed
While some players are trying to source
7
Research reports; Media articles via Infraline

Shale gas and coal bed methane 11

Potential sources of sustained energy in the future
 shale gas technologies from foreign Types II and III kerogen, that is thermally mature (Roof more than 1.3%). Structural
players, Reliance Industries has [

 





 !

chosen to learn by working on live
The Krishna Godavari basin is located in onshore and offshore eastern India. The
projects. RIL has signed joint venture
Proterozoic Draksharama Shale has 1.2%–5% TOC and is thermally mature (Ro of
(JV) agreements to invest over
1.4%–2.0%). In addition, the much younger Cretaceous to Paleocene Raghavapurum
USD3.5 billion in three separate
and Chintalipalli Shales are rich organically (TOC 5%–9%) but thermally immature (Ro of
deals over the coming years to
0.5%–1.0%).
explore approximately 370,000
acres of shale in the US. Rajasthan basin in northwestern India is characterized by small faulted grabens. The
Permian Karampur Shale averages 1.5% TOC, consisting of Type III kerogen, and is
However, the project timelines, are
considered mature (Ro unavailable). The Cretaceous Parh Goru Pariwar Shale has
not short. ONGC, which has been
1%–10% TOC, Type II and III kerogen, and is mature in places (Ro of 0.5%–1.5%).
researching shale gas in India since
2006, is expected to spend the next
Figure 6: shale gas basins in India
two years gathering geological data

*   
by drilling and resource estimation by
2013. In 2014, the company will be able
to assess the feasibility and consider
production from this pilot project.

Characteristics of some potential shale

gas plays in India are as follows8 :

Cambay basin (Gujarat): Western India’s

main onshore oil and gas producing
region, the Cambay basin, is located in
the country’s highly industrialized state
of Gujarat. The lower Eocene Cambay
Shale (Chhatral Member) has thick
carbonaceous and sideritic shale inter-
bedded with thin conventional sandstones
pay zones. The Chhatral is dark grey and


€"/@`


high porosity (11%–20%) and permeability
(0.1–15.3 mD). However, the shale is
thermally immature (Ro of 0.44%–0.55%),
has high water saturation (35%–84%), and
consists mostly of clay minerals (kaolinite,
chlorite). The dry gas window for this
basin is estimated at 4,000 m, but only a
Source: Advanced Resources International, Inc
few wells have been drilled to this depth.

Assam basin in northeastern India

is structurally broken up into several
sub-basins with numerous faults. The
Kajrahat Limestone is up to 600 m
thick and comprises inter-bedded shale 8
“Shale gas revolution: Potential for a new energy paradigm,” CLSA report, 28 May 2010
and limestone with 1%–3.9% TOC,

12 Shale gas and coal bed methane

Potential sources of sustained energy in the future
 


  




Technological pipeline routes, and production facilities required.
developments Advances in horizontal drilling can be evidenced from the fact that as recently
as the late 1990s, only 40 drilling rigs (6% of total active rigs in the US) in the
In his book Basic Economics, Thomas US were capable of onshore horizontal drilling; the number has now grown to
Sowell, an economist at the Hoover approximately 519 rigs (28% of total active rigs in the US) by May 2008.11
Institution, pointed out that, “[how] much Figure 7: conventional vs. un-conventional drilling
of any given natural resource is known
to exist depends how much it costs to Un-conventional Conventional
know.” 9 Notably, in the case of shale
gas, technological breakthroughs in the
natural gas industry have driven down
the “costs to know” and have thus
enabled development.

The key elements in the emergence of

shale gas development and production


horizontal drilling and hydraulic fracturing
technologies. These two processes have
allowed shale gas development to move
into areas, which previously would have
been inaccessible and uneconomic.

Horizontal drilling10
The most recent and most important
advances in drilling technology is the Source: Advanced Resources International, Inc

ability to direct the drill bit beyond the

region immediately beneath the drill
rig. Horizontal drilling provides more
exposure to a formation than does a
vertical well. In the case of thin or inclined

 
Hydraulic fracturing12
Another technology used for the economic recovery of shale gas, and indeed, the more
controversial one, is hydraulic fracturing, which involves the pumping of a fracturing



 
#

shale formations, a long horizontal well  #"

 


increases the length of the well bore in economic quantities.
the gas-bearing formation and therefore,
Despite their abundant natural gas content, shales do not produce gas freely. Economic



 

  



 

into the well. This increase in reservoir
the gas. Typical “frac” treatments or “frac jobs,” as they are commonly referred to, are
exposure creates a number of advantages
relatively large operations compared to most drilling operations.
over vertical well drilling. Six to eight
horizontal wells drilled from only one well Fracturing involves isolating sections of the well in the producing zone, and then
pad can access the same reservoir volume  
 > 

 
  #



[
$
  open) down the wellbore through perforations in the casing and out into the shale. The
   


†

 #

as much as 3,000 ft in each direction from the wellbore.

9
Thomas Sowell, Basic Economics: A Common Sense Guide to the Economy, Basic Books, 2007.
10
“Unconventional Gas Shales: Development, Technology, and Policy Issues, October 2009,” Congressional Research Service; “Modern Shale Gas Development in the
U.S.: A Primer, April 2009,” U.S. Department of Energy; “Shale Gas White Paper,” Schlumberger Inc.
11
“EIA. 2008. Is U.S. Natural Gas Production Increasing?” 11 June 2008, U.S.Department of energy, the US government website, http://tonto.eia.doe.gov/energy_in_
brief/natural_gas_production.cfm.
12
“Unconventional Gas Shales: Development, Technology, and Policy Issues, October 2009,” Congressional Research Service; “Modern Shale Gas Development in the U.S.
A Primer, April 2009,” U.S. Department of Energy; “Shale Gas White Paper,” Schlumberger Inc.

Shale gas and coal bed methane 13

Potential sources of sustained energy in the future
 Cost and economics
@

    
shale gas will vary widely across regions
and companies. Back in 2007, major
companies in the US exploring shale
gas used a price of USD6–8 per million
BTUs for gas wells to break-even. But


  
 
advent of new technology. A review of
estimates by analysts from investment
houses shows that average break-even
costs today, including a 10% return, are
typically USD4–6 per million BTUs. Shale
costs in the Marcellus were generally
seen as the lowest, averaging
USD3.50–4.00 per million BTUs,
with core Barnett shale and
Fayetteville shale costs averaging
USD4.00–4.50 per million BTUs, and
Woodford shale costs a bit higher
at USD5.00–5.50 per million BTUs.
In contrast, new Rocky Mountain Figure 8: Breakeven analysis of major US shale gas plays
unconventional gas costs were
estimated in the USD4.50–5.00 6.4
7.0 6.2
per million BTU range, with new
conventional mid-continent gas at 5.6
4.0 4.3 4.3
USD6.00–6.50 per million BTUs, and 4.2 3.4 3.6 3.7
3.3
(USD)

new conventional Gulf of Mexico shelf

2.8
gas at USD7.00–7.50 per million BTU.13
1.4
Horizontal wells are generally two to
0.0
three times more expensive than typical
Pearsall
Marcellus

Lower Huron

Haynesville

Barnett

Fayetteville

Barnett Tier 2

Eagle Ford

Woodford

vertical wells, but for most shale plays,

the expected ultimate recovery of gas is
two to six times higher.14 Being closer to
the major East Coast natural gas markets,
Marcellus gas also enjoys a big basis
differential/premium to the spot Henry Breakeven Gas Prices (USD/mmbtu)
Hub price (~15%–20%), in contrast to core
Barnett shale gas, which typically trades Source: Scotia Waterous
at a 10%–15% discount to the spot price.

12
“Unconventional Gas Shales: Development, Technology, and Policy Issues, October 2009,” Congressional Research Service; “Modern Shale Gas Development in the U.S.:
A Primer, April 2009,” U.S. Department of Energy; “Shale Gas White Paper,” Schlumberger Inc.
13
“In Shale We Trust,” Scotia Capital, January 2010, via Thomson Research.

14 Shale gas and coal bed methane

Potential sources of sustained energy in the future
  Groundwater protection/  Greenhouse gas emissions: Although
Risks and contamination and life cycle water/ natural gas offers a number of
challenges waste management:"
 
hydraulic fracture operations used

Despite the relatively strong economics of
shale gas development, it is not without
some clear risks and challenges. There
is less geological risk for shale compared
to conventional gas, and technological
advances have substantially reduced
the economic risks. Larger residual
risks are environmental in nature.
Environmental risks
 Surface disturbances: Surface
preparation issues related to noise,
lighting, dust, and construction
in horizontal wells may require 3 to
4 million gallons of water per well.
Ground water is protected during
the shale gas fracturing process
by a combination of the casing and
cement that is installed when the well
is drilled and the thousands of feet of
rock between the fracture zone and
any fresh or treatable aquifers. Once
the fracture treatment is completed,
most of the fracture water, along with
 NORM: An additional consideration in
the chemicals that facilitate both the
suspension of the proppant and the
lubrication of the conveying medium,

sources of energy, particularly other
fossil fuels, some air emissions
commonly occur during exploration
and production activities. Emissions
may include NOx, volatile organic
compounds, particulate matter, SO2,
and methane. On a per million BTU
basis, total emissions from natural gas
produced from shale formations differ
little from that of natural gas from
conventional sources.
shale gas development is the potential
for low levels of naturally occurring





  radioactive material (NORM) that is
comes back to the surface and must be
to wildlife habitat and wilderness brought to the surface in the rock
managed in a way that conserves and
preservation makes shale gas pieces of the drill cuttings, remains in
protects water resources.
development challenging, particularly solution with produced water, or, under
near existing communities certain conditions, precipitates out in
scales or sludges.

Shale gas and coal bed methane 15

Potential sources of sustained energy in the future
 Outlook
Consolidation
"{

  $'
 

   

been the large and medium-sized independent E&P companies. While “late-for-the-party,” the majors are now taking an increasing
interest in shale gas, both in the US and particularly in Europe. ExxonMobil has moved aggressively by acquiring one of the US
“shale majors,” XTO; StatoilHydro has moved aggressively into the Marcellus with its JV with Chesapeake, and French Total SA has
substantially increased its North American presence with its Barnett Shale JV with Chesapeake. BP, Eni, and BG are also building
North American shale positions through asset acquisitions.

A European “land-grab” could swallow-up many of the smaller companies with local and regional shale positions. The Chinese
national oil companies are keen to develop their huge shale resources, and are turning to the international majors for assistance.

Table 3: recent shale gas deals in the US

Buyer Seller Year Shale play Stake Gross potential Gross acreage Deal value USD/ USD
acquired (in tcf) (‘000 acres) (USD mn) acre mn/bcf
BP Chesapeake 2008 Fayetteville 25% NA 540 1900 14074 NA
Exxon XTO 2009 Barnett 100% 14 1360 6970 5125 0.5
Total SA Chesapeake 2010 Barnett 25% 9 270 2250 33333 0.97
BP Lewis Energy 2010 Eagleford 50% NA 80 160 4000 NA
RIL Pioneer Resources 2010 Eagleford 45% 10 263 1315 11111 0.29
Chesapeake Statoil 2008 Marcellus 33% 16 1800 3375 5769 0.65
XTO Linn Energy 2008 Marcellus 100% NA 152 600 3947 NA
Ultra Petroleum Private Company 2009 Marcellus 100% NA 80 400 5000 NA
Corp.
Consol Energy Dominion res. 2010 Marcellus 100% 20 1460 3475 2380 0.17
Mitsui Anadarko (JV) 2010 Marcellus 33% NA 307.7 1400 14000 NA
EQT Corp. Private Operators 2010 Marcellus 100% NA 58 280 4828 NA
Chesapeake Epsilon Energy 2010 Marcellus 100% 3.5 11.5 200 17391 0.06
RIL Atlas Energy 2010 Marcellus 40% 13.4 300 1700 14167 0.32
BG Group Exco Resources 2010 Marcellus 50% 2.4 654 950 2905 0.79
Shell East Resources 2010 Marcellus 100% 16 1050 4700 4476 0.29

Source: Research Reports

16 Shale gas and coal bed methane

Potential sources of sustained energy in the future
Natural gas balances Russia stands to be particularly
challenged by the shale boom. The strong
The medium-to-long-term view of the
mid-to-long term market for LNG imports
US supply/demand dynamic for natural
into North America is greatly diminished,
gas has shifted dramatically in the last
and Russia’s strategic gas focus is now
The global gas battleground is still likely
to be Asia, with increasing LNG supply
capabilities into the region, both from
the Middle East as well Southeast Asia
and Australia, along with increasing

?[
 


 
has been reduced, while domestic
production expectations have been
raised, particularly from shale and other
unconventional sources, with a net
result of a substantially lower implied
need for LNG imports, affecting Atlantic
Basin LNG trade. Additionally, with the
continued de-coupling of oil and gas
prices, there will also be increasing
pressure on any oil-indexed gas prices.
Adding to the pressures, there has
been strong growth in global LNG
liquefaction capacity. Almost 6 BCF
likely to shift from “west” to “east.” pipeline capacity into Asia, from both
the Caspian region and Russia. But
Global gas demand forecasts are the
long-term growth in shale gas should
greatest unknowns. The baseline forecast
play an important role not just in North
from the International Energy Agency
America, but in Europe and Asia as well.
(IEA) at 1.5% per year growth through
203016 is seen as quite “conservative”
and alternative growth projections
range as much as several times higher.
As would be expected, gas demand
growth in China, India and other Asia is
the principal wildcard, but so too is the
uncertainty that surrounds the degree
of global commitment to natural gas as

 
 
per day ( approximately 2.2 TCF) of
carbon reduction strategy/agreement.
new liquefaction capacity was added
in 2009, and another 5.7 BCF per day
(approximately 2 TCF) is due on-line
by 2012.15 Further, LNG liquefaction
capacity of major exporters to the US
remained under utilized in 2009.

“Oil & Gas Exploration & Production,” Credit Suisse, 12 February 2010

“World Energy Outlook 2009, November 2009, ” International Energy Agency,

Shale gas and coal bed methane 17

Potential sources of sustained energy in the future
 Coal bed
methane
Introduction
Trapped in the middle of coal is an Coal seams have dual porosity system
unconventional natural gas whose comprising micro and macro-pores
vast untapped resource is still at a (as indicated in Figure 1). While the
very nascent stage. After a couple of micro-pores exist in the matrix, the
outbursts and explosions of methane gas macro-pores are made up of a system


 

 of natural fractures called cleats. There
quick to acknowledge that this gas could are two kinds of cleats: Face cleats,
be used as fuel and so coal bed methane which are parallel to the coal seam and
(CBM) was born. With abundant coal are continuous, and butt cleats, which
reserves around the globe, coupled with are discontinuous and perpendicular to
Figure 1: Coal has a dual depletion of the conventional source of the coal seam. These fractures are the
porosity system
energy such as fossil fuels, CBM offers a target points during drilling. Methane

 + gas, which has been adsorbed onto the
Matrix
growing energy demand. internal coal surface, requires a pressure
drop to be evacuated. The pressure
Fracture CBM is naturally occurring methane
drop is provided by dewatering. When
(CH4) gas with traces of other
the pressure is brought down below
hydrocarbons and non-hydrocarbons,
Butt cleats threshold value the gas starts to undergo
generated by chemical or bacterial
Matrix reactions in the coal matrix. This process
desorption and hence the methane gas
can be collected.

#
‰‰ 

methane is effectively ”adsorbed” in a
coal reservoir. Though the permeability
Face cleats of a coal seam is low compared to that
of a conventional gas reservoir, it can
 
 

Source: Reservoir Engineering for Geologists
conventional sandstone reservoir.

18 Shale gas and coal bed methane

Potential sources of sustained energy in the future
 Shale gas and coal bed methane 19
Potential sources of sustained energy in the future
20
CBM vs. CBM development:
conventional gas worldwide
CBM offers a lot of upsides as well as The global estimate for potential CBM
downsides just like any other natural production is expected to be more
resource. One such downside is that the than 7,000 TCF. The countries that are
estimation of recoverable volumes in 
 

@‹Š
the evaluation of CBM project is hard to are Australia, Canada, the US and a
determine. The production of the CBM few western European countries. Close
wells is about 100–500 Mcf/day, which is to 10% of the natural gas produced in
lesser than a conventional gas well. This the US is contributed by CBM. India,
means CBM drilling is likely to require Japan and China have a great potential
multiple low producing wells. In certain for new CBM explorations. China and
CBM projects, after hydraulic fracturing, Indonesia boast of a high CBM reserve
the quality and quantity of groundwater estimate but their production is still




 Š  
excess groundwater released during
the dewatering process in a way that is
environmentally acceptable, increases
the operational expenditure substantially.
Producing CBM is as much a water
management program as it is an energy
program. Considering that CBM projects
are onshore they have a tendency to
require locals to vacate the area and
very low as most projects are still in
exploration and estimation stages due
to absence of a formal licensing round
process. Indonesia offered the 1st round
of CBM bidding in 2009 and awarded 10
blocks to different companies. Russia
has a vast amount of unchartered
CBM resource and reserve (as seen in
Table 1) and is currently entering CBM
 Œ

@‹Š
settlements for them have to be provided. production facility in the Taldinskoye



'
Figure 2: CBM vs conventional
gas projects Table 1: CBM and coal resources across
the Globe

Country Coal resources CBM resource

(billion tons) (TCF)
Canada 7,000 229–2,697
Russia 6,500 469–2,598
China 4,000 579–1,200
US 3,970 449 –900
Australia 1,700 310–510
India 495 49.4–91.8
Source: Gaffney, Cline & Associates Germany 320 60.1–88.3
Indonesia 17 3.5–7.1

Source: DGH India presentation

Shale gas and coal bed methane 21

Potential sources of sustained energy in the future
 India being the third-largest producer
CBM development: of coal has reserve estimation of
India 248 billion tons. The CBM reserve
estimation, from these coal reserves
is in excess of 60 TCF covered over
The growing Indian economy requires
36 blocks.17 As can be seen in Figure

   
3, in 2007, DGH had estimated that
and sustain growth, thereby leading to
CBM production in 2010 is likely to be
increased demand for gas. Due to the
approximately 2.29 MMSCMD. However,
high pricing of LNG and fossil fuels, India
the current production is only 0.14
has resorted to developing resources
ŠŠ'@Š*

 
that are unconventional such as CBM.
than the DGH estimates. This indicates Chhattisgarh (three blocks), Andhra
The total gas demand (including latent
that a production forecast of 7.4 Pradesh (two blocks), Maharashtra
demand) has risen from 179 MMSCMD
MMSCMD in 2013, as predicted by DGH, is (1 block) and Gujarat (1 block).18
in FY08 to 197 MMSCMD in FY09 and
actually optimistic in nature. But even so,
~ 225 MMSCMD in FY10 while the In 1997, the GoI formulated the CBM
the production forecast of 7.4 MMSCMD
supply is currently expected to be ~170 policy*. The key terms were as follows:
is still well below the expected production
ŠŠ'@Š*Q
 
[ 
potential of the country at 38 MMSCMD. ^ ‹
 #
   
widen with the ever increasing demand,
open international competitive
it is critical for the country to ensure The main areas where CBM can be found
bidding system.
alternate sources of gas such as CBM in India are Jharkhand (six blocks), West
are developed to their full potential. Bengal (four blocks), Madhya Pradesh ^ "
 X` 

>#
J}{
>#
J participating interest.
Figure 3: CBM production in India ^ 
  
 
bonus.
8 7.4
^ Exemption from customs duty and
7
imports for CBM operations.
6 5.4
^ Walkout option at the end of
5
Phase I (exploration program)
4 3.7 and II (development and production
3 program).
2.2
2
1.1 ^ Freedom to sell gas in the
1 domestic market.
0.2
0
2007- 08 2008-09 2009-10 2010 -11 2011-12 2012-13 ^ =




^ Seven-year tax holiday.

Source: DGH India presentation

17 “Oil and gas,” Nomura Financial Advisory, 11 May 2010, via Thomson Research.

18 “Developments in India-CMM/CBM,” Essar Exploration and Production Ltd, March 2010 via Thomson Research.

* Subsequent changes in tax law may impact the provisions of the CBM policy.

22 Shale gas and coal bed methane

Potential sources of sustained energy in the future
 Table 2: rounds for CBM bidding in India

Round Blocks Resource (TCF)

Nomination 3 5.8
Round I 5 8.3
Round II 8 15.1
Round III 10 22.4
Round IV 10 13.5

Source: DGH India presentation

According to the terms of the exploration

1997 1997 license and PSC, all companies involved
will have to pay a royalty of 10% ad-
Well in MoU signed
Jharia tested between MoP&G valorem sale value at the well-head on
1997 2000
1993 successfull and MoC -09
the production of CBM to the particular
state government. In addition a monthly
Evaluation of CBM bidding
CBM basins,
CBM policy
initiated, 4
production level payment (PLP) on CBM
1995 formulated produced and saved in accordance with
pilot studies 1998 rounds
by ONGC conducted the provisions outlined in the PSC, will be
R&D well drilled in Model contract payable. Table 2 provides the resource
Raniganj and drafted potential of the blocks awarded during
Mehsana each of the above four rounds.

"
 @‹Š
was started at Raniganj by GEECL, with
a production of 0.11 MMSCMD in June
The Ministry of Petroleum & Natural 54 bids from 26 companies and all the 2007. As observed in Figure 4, ONGC
Gas offered the blocks for exploration blocks were awarded. Under the CBM IV has the largest CBM production potential
in four rounds as shown in Table 2. The Licensing Round, 26 bids were received according to resource base, followed by
blocks were offered on the basis of open, for 8 out of the 10 blocks on offer. Out Arrow Energy and Reliance Industries.
  '[` 
 of these 8 blocks, 7 blocks received Large opportunities do exist in the
in a total of 16 bids for the seven blocks multiple bids and a single bid was received CBM space, because it is an onshore
 @‹Š+`‘ for 1 block. A total of 19 companies, resource, which can provide quick access
were awarded. CBM-II, in 2003, attracted comprising three foreign companies and to customers in the “no gas” regions
‘’
>“` 
  16 domestic companies, participated in and has a lower Capex/Boe requirement
foreign company) for the 9 blocks offered this round. as compared to other unconventional
out of which8 blocks were awarded. The gas source such as shale gas. Also, the
10 blocks in CBM-III, in 2006, attracted production was initially spurred by tax
incentives. However, it is currently at
its infancy due to lack of connectivity
through pipelines to evacuate the gas and
under developed gas markets.19

19 “The Global Utilities Specialist,” Macquarie Equities Research, July 2010 via Thomson Research

Shale gas and coal bed methane 23

Potential sources of sustained energy in the future

Technology: drilling
and extraction
The drilling for CBM is an atypical
procedure than that followed for
conventional gas drilling. A well is
drilled at 1,000–1,500 ft (not as deep
as a conventional reserve, which is at
3,000ft). A casing is placed inside (as



Cost and economics
CBM Drilling and well development is
an ongoing process in order to maintain
a steady state of production to deliver
constant supply contracts. For example,
the Power River Basin in the US had 848
wells at the end of 1999, which increased
to 16,000 wells by the end of 2005
(~2,500 well increase per annum) with
It is critical to assess the prices of
alternate fuels, to assess the viability
of substitution by CBM. Table 3 provides
the current prices of liquid fuels in
equivalent energy terms. While natural
gas from conventional sources is priced
at approximately USD4 per MMBTU,
the long-term price estimate for CBM
is USD5 per MMBTU. Comparing the
same with the Table 3, the price for the

  
seen in Figure 5) the newly drilled hole of shallow depths to a maximum of around than that of CBM. In addition, when CBM
the bore well. Highly pressurized water, 500 m. An estimated 3,000 wells were is compared to other unconventional
#
 


 drilled in 2006. These wells take less gases such as tight gas, shale gas and
coal seam causing the coal to fracture. than a week to drill and complete and cost gas hydrates, it offers a very competitive
" 

 

 around USD100,000 per well. Thus, CBM pricing point as indicated in Table 4.
pumped to the surface using a pumpjack projects are quite capital intensive Although, CBM is more expensive than
by a process known as dewatering. The in nature. conventional natural gas, it is still very
pressure on the trapped methane gas
The operating expenditure of a CBM competitive when compared to other
is then released (desorption). Methane
project is USD0.5/MMBTU. Along with liquid fuels. This offers an economic

 



 


  advantage to both the suppliers and the
is collected and put into a system of
total cost for extraction of CBM from its consumers for a switch over to CBM from
underground piping. The pumped out
reservoir up to USD1.5-2/MMBTU.21 alternate fuels.
water is either treated or evaporated (not
recommended) or re-injected.20 Treated Table 3: prices of alternative The pricing of CBM at a global
water can be obtained by reverse osmosis fuel sources level also differs due to various
or pH adjustment and can be distributed geographical factors. In Australia CBM
to various industries. Fuel USD/MMBTU is for USD4–6/MMBTU and in China
Fuel Oil 15.3 USD5–7/MMBTU. The difference is
Figure 5: pumping methane gas from
a coalbed attributable to the methodology for
Light Diesel Oil 18.8
production, its distribution aspects and
LPG 18.8 the stage of development of the project.
Gasoline 31.2
Diesel 22.4

Source: GEEC, IOC, BPCL

Table 4: prices of unconventional

fuel sources

Unconventional Average min price

fuel (in USD/MMBTU)
CBM 5
Shale gas 6
20
“CBM sector Overview,” FD Capital, 2007 via
Tight gas 11.5 Thomson Research
Bio-fuels 6.29 21
“CBM sector Overview,” FD Capital, 2007 via
Source: Morgan Stanley report, Institute of Thomson Research
Defense studies

Source: U.S geological survey

24 Shale gas and coal bed methane

Potential sources of sustained energy in the future

Key investment
considerations
CBM projects are characterized by an
initial low capital expenditure to establish
production but relatively higher and
continuous expenditure as development
drilling is undertaken to progressively
add production. Just like coal production


Land acquisitions: CBM projects are
located on shore and require local
inhabitants to vacate the location or
drilling site. Huge compensations have
to be paid to acquire the land from the
land owners. In addition, rehabilitation
and resettlement (R&R) issues may
also lead to several delays before a
CBM project can take off.
Resource estimation: A coal seam
Environmental impacts: Water
treatment is an important issue for
many stakeholder groups in the CBM
industry. Due to dewatering, the
groundwater becomes polluted, cloudy
and decreases in content drastically.
As the quality of water is low, it cannot
be disposed of or used in irrigation or
for human consumption. Water is part
of the fabric of a geologic formation.
It holds the rock open. When water




   is said to be a favorable reserve if it
is removed from the rock, the pore
and technical factors, there are a produced 50–70 cubic feet/ton of coal.
spaces are left open, and the rock can
few important characteristics, which The resource estimation is generally
collapse. This is known as compaction
determine suitability of CBM production. 
@‹Š{
Reserve quality: Large amounts of
recoverable gas trapped in the coal
seam are the basic criteria for a CBM
project to be economically viable. This
typically requires coal seams that are
a minimum of 20 feet thick. Viability
of a project also depends on the rank
of coal, which should be 77%–87% of
carbon typically found in sub-bituminous
coal. CBM exists only in areas where the
dominant chemistry of the water in the
coal seam is sodium bicarbonate and
where the coal seam is buried deeply


 

 
or subsidence. There is also a high
Many wells are needed to describe a
possibility of spontaneous combustion of
CBM resource as it is relatively more
dewatered coal beds due to the reaction
heterogeneous and extensive than a
of the coal with atmospheric oxygen.
conventional gas reserve.
Permeability: Coal beds are generally
characterized as water-saturated
gas reservoirs with low permeability
through natural fractures and dual
porosity. They also vary widely from
basin to basin and can be highly
heterogeneous within the same basin.
Drilling, cementing, perforation, and
 for each situation to maintain reservoir
pressure to hold the gas in place. performance. All this invariably
increases the operational cost.

Shale gas and coal bed methane 25

Potential sources of sustained energy in the future
 Outlook
CBM development in India is moving
slowly yet progressively. In many
ways CBM in India is similar to the
coal industry. The impediment to CBM
development in India is acquisition of
land, a lengthy modus operandi for
environmental approvals due to CBM
production displacing large volumes of
`

to materialize. In Australia, gas projects
are typically underpinned by a long-term
gas sales agreement, which does not
provide an immediate, untapped, market
for CBM. This is not the case in the US as
ready gas markets are available due to an
established history of CBM production.
CBM looks ready to play a vital role
 
in the energy sector. The challenge it
investments in gas pipeline infrastructure
poses is the need to convert this huge
is critical for the evacuation of CBM Gas.
resource into reserves through developing
The increasing number of successful and innovative technology and feasible
viable CBM projects established globally techniques for commercial development.
gives investors a positive outlook on CBM.
The CBM industry is still evolving in some
countries such as China and Indonesia
where structured policies in CBM are yet

26
 Shale gas and coal bed methane 27
Potential sources of sustained energy in the future
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