America’s shale-gas bonanza (1)

In the backwoods of Louisiana, energy companies are handing out money in their dash to tap a vast new source of gas. The discovery has global implications, Sheila McNulty reports.

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 – 148 hectares — 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 US$300 an acre (less than half a hectare) –$109,500 in total – to his siblings. And while he kept his home in Shreveport, 65 kilometres 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 DeSoto county seat, 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 gold rush was at its height and prices leapt to $25,000 or even $30,000 an acre. “I lost $2.5 million,” says May with a wistful smile.

“People went to bed one night and woke up the next morning to find themselves rich,” says McCoy. That included Mike Smith, whose land was so sought after that in May 2008, PetroHawk Energy, a small, independent oil and gas company, handed him a $1.4-million signing bonus in return for permission to drill for natural gas on his late father’s property. “It changed my whole life,” he says. “I don’t have to cut my trees anymore.”

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 rear-view mirror.

. . .

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 300 feet thick (45 to 90 metres thick) that lies hundreds of metres underground and extends across 3,400 square miles (8,800 square kilometers) of Louisiana and Texas. Trapped inside this rock are vast quantities of natural gas – estimated at between 112 and 245 trillion cubic feet (roughly between three and seven trillion cubic metres). At the upper end of this range, Haynesville gas could meet the energy needs of the United States for about 12 years.

This isn’t the most extensive prospect of its kind in the United States; that distinction belongs to the Marcellus Shale in Pennsylvania and neighbouring states, which is reckoned to cover 65,000 square miles (nearly 170,000 square kilometres), 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.

Indeed, the impact is expected to extend well beyond America’s borders. Industry consultants at PFC Energy in Washington, DC, believe that developing supplies trapped in shale deposits could more than quadruple the world’s known gas reserves. “This is a transformational event,” says its chairman, Robin West. His consultancy puts global reserves of natural gas from “unconventional” sources such as shale beds at 3,250 trillion cubic feet (92 trillion cubic metres), a total based on 1997 geological estimates that he believes will rise as the techniques available to extract the gas improve. By comparison, global reserves of natural gas from “conventional” sources total 620 trillion cubic feet (17.5 trillion cubic metres). Not all of these shale reserves will ever be tapped, but the technology to do so is available and, for the first time, companies are putting it to use.

To extract gas from shale involves drilling down, sometimes thousands of metres, and then sideways as much as 4,500 feet (1,370 metres). 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 cubic feet (850,000 cubic metres) 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 United States 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% of onshore wells in the country, 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.”

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.”

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 $41-billion 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.

NEXT: What lies ahead?

Sheila McNulty is the Financial Times’s US energy correspondent.

Copyright The Financial Times Limited 2010
Homepage image from US Energy Information Administration