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America’s shale gas revolution has an audience from Blackpool to Algeria

The shale revolution sweeping America is one that the rest of the world will have to start paying attention to as the battle for gas steps up.

Shell’s shale exploration in Haynesville, Louisiana. Photo: NEIL JOHNSON
Richard Blackden
By Richard Blackden, US Business Editor Houston, Texas 6:00AM GMT 14 Mar 2011

Blackpool residents are used to a mix of sand and water.

For a British seaside town, it’s the natural economic fuel. Add in some chemicals, though, and you’ve got the ingredients of a drilling technique that is radically reshaping America’s energy market and may do so for the rest of the world. It’s also drawing a growing chorus of critics concerned at its potential environmental impact.

Hydraulic fracturing, or fracking, involves blasting the mix at high pressure to unlock gas trapped in shale rock formations deep underground. And there’s a formation, known as Bowland Shale, near Blackpool in North West England, that US company Cuadrilla Resources wants to start fracking this month.

Cuadrilla’s venture into Lancashire, however, is dwarfed by the British companies that have taken their chequebooks across the Atlantic to secure a share of America’s biggest onshore drilling bonanza in at least a century.

BP paid more than $3bn (£1.9bn) for shale formations in 2008; Royal Dutch Shell beefed up its presence last year with the $4.7bn purchase of East Resources, handing it assets in the Marcellus Shale, a rock formation running down the country’s east coast that’s roughly the size of Greece. Even the FTSE-listed miner BHP-Billiton coughed up almost $5bn last month for control of shale assets in Arkansas.

“They all seem to be fighting over the acreage at the moment,” said Jason Kenney, an analyst who tracks the oil and gas industry for ING. “The US gas market is pretty weak at the moment, but the longer-term outlook is that gas will play a major role.”

From states deep in the Rocky Mountains such as Wyoming to those like Louisana on the Gulf of Mexico coast, the US Energy Department estimates that Americans are sitting on about 827 trillion cubic feet of gas. Though trapped for thousands of years, the drive to release the gas is enjoying significant tailwinds at the moment. There’s lots of it. It has about half the carbon dioxide emissions of coal and it could take the US a step closer to energy independence, an ambition of most occupants of the White House since the oil crisis of the 1970s.

Far removed from the offices where executives at Britain’s biggest energy companies inked their massive bets on shale, it’s earthier concerns that occupy drillers. One of them is Bruce Palfreyman. He manages Shell’s shale operations in Haynesville, a vast wooded area that straddles the border between Texas and Lousiana.

He’s been busy since Shell and its joint venture partner, US producer Encana, arrived here in 2007. They’ve since signed more than 3,000 leases with local landowners in a system that encourages companies to get their wells dug as quickly as possible. After paying the landowner a bonus upfront on what’s typically a three-year lease, the operator can only extend it if they’ve found and started to sell gas within three years. The landowner then enjoys royalties of between 18pc and 25pc.

“You see a tremendous amount of activity as operators secure their leases,” explains Palfreyman. It’s hard to dispute that it’s proved a boon to the local economy. A study for the Louisiana Oil and Gas Association, a trade body for the operators, claims drilling in Haynesville has created more than 50,000 jobs.

Once the leases are signed, it’s Dave Carpenter’s job to deliver the wells as soon as possible for fracking. A chart inside a hut at one of the wells in Haynesville tracks his team’s progress in meeting a target of completing the 18,000 foot well within 38 days, which compares to about 60 days a few years ago.

With the natural gas trading below $4 per million British thermal units, the standard volume measure for the industry, there’s pressure to drive costs lower. The company currently spends between $8m and $11m on a well that should provide gas for about 30 years.

“The most time-honoured way to reduce your drilling costs is to reduce your cycle time,” Carpenter says. Shell doesn’t disclose whether it’s currently making money from its North American shale operations. But like rivals that are gambling on shale, Shell will be hoping that new regulations force the closure of more coal-fired power stations, lifting both demand and prices for natural gas. The US Energy Department forecasts that shale will account for 45pc of all natural gas production in the US by 2035 compared with 14pc in 2009.

Fracking, meanwhile, typically takes three to six days. The site where Shell was in the midst of fracking a well was marked by a huge container of sands and 20 pumping trucks. Shell says it recovers about 15pc-20pc of the water it pumps soon after fracking is completed and expects to get the rest back overwell’s lifetime. But some may be left underground.

And the real action over the role shale gas has to play in America is increasingly taking place above ground. The Gulf of Mexico oil spill has helped to get the voices heard of those anxious about the environmental impact of fracking, particularly on drinking water.

Reports of contaminated water, an Oscar-nominated documentary called Gasland and the spread of shale drilling into areas with higher populations have all prompted greater scrutiny of an industry that’s still regulated at the state, rather than the national level.

The oil and gas industry contends that the fracking takes place so far below the acquifers that hold drinking water that there’s no chance of contamination, and that water that does come to the surface is safely treated. But the Environmental Protection Agency (EPA) is re-examining whether fracking poses a threat to drinking water having last looked at the issue in 2004. Should the EPA’s report find it does, then the pressure will grow for the industry to be regulated at a federal level. Like the rest of the industry, Shell insists the industry is better regulated at state level.

Paul Goodfellow, who heads up Shell’s shale operations in North America, says that “clearly the conversation at a national level needs to become more serious about the place gas has in an energy future.”

It’s a conversation that will force America to examine whether shale gas has the ability to be a cheap and cleaner source of energy over the next half century without compromising the environment. The conclusion will be listened to not just in Blackpool but in countries stretching from Algeria to Poland, where the hunt for shale has spread.


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