Vexed: Drilling in shale has its opponents. Photo: Bloomberg
MY RECENT trip to the United States included two days as a guest of BHP Billiton, where I inspected America's shale gas and oil fracking boom.
BHP has spent $US20 billion on two US shale acquisitions, and the tour gave me greater confidence that it will get the return it requires for an investment of that size, despite weakness in US domestic gas prices.
It's not in the bag yet, however. The group is boosting shale revenue and profits in the short to medium term by developing oil and liquid-rich acreage, but it needs stronger gas prices to extract full value from its investment.
For that to happen, the US has to allow the shale boom to develop, and has to lift a ban on gas exports to create new markets overseas and a price arbitrage mechanism that drags the US price higher. BHP chief executive Marius Kloppers said on Thursday it could take five to 10 years, and there's a big, complicated cost-benefit analysis to do.
Lifting the ban on US gas exports would shrink ''domestic'' reserves and push domestic prices higher, for example, but would also buttress an oil and gas production boom that could make the US energy self-sufficient.
Environmental concerns about shale throw up similar social, economic and political trade-offs. For BHP and the other shale players, one commercial risk is that rock-fracturing technology will create an environmental shock or series of shocks that interrupt production, or trigger new regulation that increases development costs.
My feeling so far, informed by what I saw and heard in the US, is that the most commonly cited environmental risk from fracking, groundwater contamination, is overstated, but that the shale boom is not risk-free.
Shale fracking involves drilling down through water tables that typically extend down as far as 300 metres to shale beds that are between 1500 and 2000 metres below the surface - much deeper by the way than the fracking of coal beds for methane gas that is occurring in northern Queensland, where it underpins an LNG export investment boom.
Wells in the US shale fields that have reached their target depth are angled until they extend horizontally inside the shale for a few hundred metres. The shale is then perforated with explosive charges, and a mix of 90 per cent water, 9.5 per cent sand and 0.5 per cent chemicals is injected under pressure into the shale to create a network of fractures, freeing up gas, oil and other liquids.
Although the chemical cocktail is only 0.5 per cent of the total volume injected that is still about 5000 barrels per well, and it is not benign. It includes acids used in pool cleaning products, polyacrylamide (a soil conditioner), glycol (better known as automobile anti-freeze) and isopropanol, a viscosity agent that is also found in glass cleaners and antiperspirants.
Almost all of the slurry returns to the surface after the rock has been cracked and, as noted, in a typical shale well there is about a kilometre of impervious rock between the fracking area and the water table.
The risk of contamination of the water from fracking that occurs that deep is therefore low. More than a million producing wells have already been drilled using the technology, and America's Environmental Protection Agency has documented only one clear case of groundwater contamination, near the town of Pavillion in Wyoming. That well was fracked at a much shallower depth, and much closer to the water table.
The Pavillion incident shows, however, that regulations that ensure that fracking occurs deep below the water table are a minimum requirement, and there are other important environmental issues.
About 100,000 barrels of water are needed to frack each well, for example. Sourcing it is already a major logistical task in the US, and it will be a bigger one in other places around the world where shale exists, notably in China.
Processes for either recycling or safely disposing of the fracking slurry are also not yet fully developed, and because the fracking liquid is basically a slippery gel, it can and has caused rock fault slippage, and minor earth tremors. Claims that fracking slurries are ''earthquake Viagra'' are almost certainly hyperbolic, but this is a subject that needs exploring.
Another risk is that it takes considerably more wells to extract a given amount of oil and gas from a shale resource than it takes to extract the same amount of oil or gas from conventional reservoirs. If you get on Google and take an aerial view of the shale fields in Texas, for example, you will see drilling pads dotting the landscape like stars in the Milky Way. Every one of those wells has to go through the water table.
There is, however, a well-established process in which wells are drilled down below the water table, a smaller drill casing inserted, and the outer ring backfilled with cement to create a watertight case.
It works when done properly, which it almost always is, and companies such as BHP that use high-end drilling contractors are further minimising the risk. BHP's main contractor is Schlumberger, which in terms of technical proficiency is about as good as it gets.
It is also a fact what while more drill rigs per barrel of oil increases drilling risk, the flip side - lower production per well and lower well pressure - teams up with the fact that fracking occurs on land to reduce the risk of a major accident being caused by a single mistake. Risk is distributed more widely in a fracking field, just as it is, say, in consumer lending compared with corporate lending.
One final thought: if environmental concerns about fracking are overcome and the boom continues, the push for lower emission energy sources is going to be more difficult.
There is enough oil, liquids and gas in the shale fields that are amenable to fracking around the world to suppress ''peak oil'' price pressure for decades. Oil and gas use might still be discouraged by carbon pricing regimes, but the base price will be lower in a world where fracking is ubiquitous - and the economic and geopolitical dividends from a boom that could end OPEC's stranglehold will be hard for policymakers to ignore.