Marcellus Shale - What's all the commotion about?

The Marcellus shale is a natural gas reservoir that extends over a wide geographic area underlying parts of Ohio, West Virginia, Pennsylvania and large areas of southern New York. The figure below is a map of the Marcellus shaded in gray.

For a long time, extracting natural gas from low-permeability shales like the Marcellus was  not seen as an attractive opportunity by e&p's given the technical challenges  associated with unconventional reservoirs. However, advancements in unconventional gas production methods such as horizontal hydraulic fracturing have made companies re-evaluate their  position on the economic potential of the Marcellus. The successful development of the Barnett in Texas also a low-permeability shale play, was proof of concept that reservoirs such as the Marcellus were viable opportunities.

Interest in the Marcellus was further heightened by studies from geologists like Terry Engelder (PSU) and Gary Lash (Suny Fredonia) who published estimates that placed a 50% probability that 489 trillion cubic feet (TCF) of natural gas could ultimately be recovered from the reservoir. The recovery estimate is around 250 TCF when the confidence interval is >90% probability of success but even this conservative estimate of 250 TCF took the e&p world by surprise when it was announced. Assuming a $6.00 per mmbtu price for natural gas, 250 TCF is equivalent to a  $1.54 trillion dollar resource making the Marcellus one of the richest deposits of hydrocarbons in the United States. To contextualize this, 500 TCF is roughly equal to 83 billion barrels of oil  equivalent whereas the combined oil and natural gas reserves of the North Sea is 98 billion barrels of oil equivalent. In other words, there is a 50% chance that the Marcellus is the about size of the North Sea and >90% chance that it is about half the size of the North Sea.  Since late 2009, the following deals have occurred:

• Shell acquired East Resources for $4.7 billion. 
• ExxonMobil acquired XTO for $40 billion. 
• Statoil bought a $253 million stake in Marcellus from Chesapeake Energy. 
• Atlas Energy and Reliance signed a $1.7 billion Marcellus JV.

Despite the economic promise of the Marcellus, environmental concern linger particularly over the large use of water (~2-4 millions gallons per well) needed in hydraulic fracturing operations. Like the empty space in a jar of marbles, natural gas is trapped within the pore spaces of the shale rock and water has to be injected down a well at high pressures to mechanically break/fracture the shale to allow the gas to flow and be recovered at the surface. Where will the water come from? More importantly, what will happen to the waste flow back fluid? A portion of the water that is injected ~15-20% returns back to the surface with contaminants. These are not terribly difficult challenges to over come and the environmental issues can be addressed just like they are at chemical plants, nuclear facilities, refineries, etc. The question is whether the regulation of these activities will be carried out in a sensible manner. More to come about this in follow up posts.