An introduction to shale gas

June 2011
Shale Gas vs Conventional Gas
Natural gas resources are typically divided into two categories: conventional and unconventional.

Conventional gas typically is found in reservoirs with permeabilities greater than 1 millidarcy (mD)
and can be extracted via traditional techniques. A large proportion of the gas produced globally to date
is conventional, and is relatively easy and inexpensive to extract. In contrast, unconventional gas is
found in reservoirs with relatively low permeabilities (less than 1 mD) and hence cannot be extracted
via conventional methods.

There are several types of unconventional gas resources that are produced today but the three most
common types are tight gas, coal bed methane and shale gas. Given the low permeability of these
reservoirs, the gas must be developed via special techniques including fracture stimulation (or
fraccing) in order to be produced commercially.

Shale Play Properties

Shale gas is natural gas that is produced from a type of sedimentary rock derived from clastic sources
often including mudstones or siltstones, which is known as shale. Clastic sedimentary rocks are
composed of fragments (clasts) of pre-existing rocks that have been eroded, transported, deposited
and lithified (hardened) into new rocks. Shales contain organic material which was lain down along
with the rock fragments.

In areas where conventional resource plays are located, shales can be found in the underlying rock
strata and can be the source of the hydrocarbons that have migrated upwards into the reservoir rock.
Shales contain organic matter (kerogen) which is the source material for all hydrocarbon resources.
Over time, as the rock matures, hydrocarbons are produced from the kerogen. These may then
migrate, as either a liquid or a gas, through existing fissures and fractures in the rock until they reach
the earths surface or until they become trapped by strata of impermeable rock. Porous areas beneath
these traps collect the hydrocarbons in a conventional reservoir, frequently of sandstone. The
diagram below shows how the gas-rich shale strata are typically the source rock for conventional oil
and gas reservoirs.

Schematic Geology of Natural Gas Resources

Source: US Energy Information Administration

Shale gas resource plays differ from conventional gas plays in that the shale acts as both the source for
the gas, and also the zone (also known as the reservoir) in which the gas is trapped. The very low
permeability of the rock causes the rock to trap the gas and prevent it from migrating towards the
surface. The gas can be held in natural fractures or pore spaces, or can be adsorbed onto organic
material. With the advancement of drilling and completion technology, this gas can be successfully
exploited and extracted commercially as has been proven in various basins in North America.
Aside from permeability, the key properties of shales, when considering gas potential, are total organic
content (TOC) and thermal maturity. TOC is the total amount of organic material (kerogen) present
in the rock, expressed as a percentage by weight. Generally, the higher the TOC, the better the
potential for hydrocarbon generation. The thermal maturity of the rock is a measure of the degree to
which organic matter contained in the rock has been heated over time, and potentially converted into
liquid and/or gaseous hydrocarbons. Thermal maturity is measured using vitrinite reflectance (Ro).

Because of the special techniques required for extraction, shale gas can be more expensive than
conventional gas to extract. On the other hand, the in-place gas resource can be very large given the
significant lateral extent and thickness of many shale formations. However, only a small portion of the
worlds shale gas is theoretically producible and even less likely to be producible in a commercially
viable manner. Therefore a key determinant of the success of a shale play is whether, and how much,
gas can be recovered to surface and at what cost.

The Rise of Shale Gas in the US

Shale gas technology has been largely pioneered in the US and the emergence of US shale gas plays
has fundamentally altered the US natural gas supply picture.

The first shale gas well in the US commenced production in 1821 from a well near Fredonia, New
York. Low levels of shale gas production occurred between this period and the year 2000 and it has
only really been since 2006 that the shale gas industry in the US has started to gain significant
momentum.

Overview of Key US Shales

The figure below shows an overview of the key US shale plays. Whilst the distribution of oil and gas
bearing shales across the US subsurface is much larger than shown in the map, only a relatively small
number of these are currently being developed.

US Shale Gas plays

The chart below shows the estimated volumes of technically recoverable resources in four of the
leading US shale plays compared with some of the worlds largest conventional gas fields (Source:
Chesapeake2010 Institutional Investor and Analyst Meeting, 13/10/2010). The Marcellus shale and
the Haynesville shale stand out as two of the three largest known gas resources in the world.

Comparison of us shales and global conventional gas resources

Source: Chesapeake2010 Institutional Investor and Analyst Meeting, 13/10/2010 (slide 47)

Gas Shale Challenges and Solutions

As mentioned earlier the gas storage properties of shales are quite different to conventional reservoirs.
In addition to having gas present in the matrix system of pores similar to that found in conventional
reservoir rocks, shales also have gas bound or adsorbed to the surface of organic materials in the
shale. The relative contributions and combinations of free gas from matrix porosity and from
desorption of adsorbed gas is a key determinant of the production profile of the well.

The amount and distribution of gas within the shale is determined by, amongst other things, the initial
reservoir pressure, the petrophysical properties of the rock, and its adsorption characteristics. During
production there are three main processes at play. Initial gas production is dominated by depletion of
gas from the fracture network. This form of production declines rapidly due to limited storage
capacity. After the initial decline rate stabilises, the depletion of gas stored in the matrix becomes the
primary process involved in production. The amount of gas held in the matrix is dependent on the
particular properties of the shale reservoir which can be hard to estimate. Secondary to this depletion
process is desorption whereby adsorbed gas is released from the rock as pressure in the reservoir
declines. The rate of gas production via the desorption process depends on there being a significant
drop in reservoir pressure.

Pressure changes typically advance through the rock very slowly due to low permeability. Tight well
spacing can therefore be required to lower the reservoir pressure enough to cause significant amounts
of adsorbed gas to be desorbed.

These overlapping production processes result in the characteristic hyperbolic production profile that
declines sharply (typically by 60-80 per cent.) over the first year. The diagram below shows how
production rates for shale wells in four plays in the US vary over time
US Shale Gas plays

12.0
Pro du ction Rate (mmcfe/d)

10.0

8.0

6.0
Marcellus
4.0 Haynesville
Barnett
2.0
Fayetteville

0.0
0 1 2 3 4 5 6 7 8 9 10
En d o f Ye ar

Source: Chesapeake2010 Institutional Investor and Analyst Meeting, 13/10/2010 (slide 54)

Due to these particular properties, the ultimate recovery of the gas in place surrounding a particular
shale gas well can be in the order of 28-40 per cent. (whereas the recovery per conventional well may
be as high as 60-80 per cent.). The development of shale gas plays, therefore, differs significantly from
the development of conventional resources. With a conventional reservoir, each well is capable of
draining oil or gas over a relatively large area (dependent on reservoir properties). As such, only a few
wells (normally vertical) are required to produce commercial volumes from the field. With shale gas
projects, a large number of relatively closely spaced wells are required to produce large enough
volumes to make the plays economic.

As a result, many wells must be drilled in a shale play to drain the reservoir sufficiently. In the Barnett
play in the US, the drilling density can exceed one well per 60 acres.

Key Shale Gas Production Techniques

As stated earlier, shales have very low permeability (measured in nanodarcies). As a result of this,
many wells are required to deplete the reservoir, and special well design and well stimulation
techniques are required to deliver production rates of sufficient levels to make a development
economic. Horizontal drilling and fracture stimulation have both been crucial in the development of
the shale gas industry.

Horizontal Drilling
Horizontal drilling is a technique that allows the wellbore to come into contact with significantly larger
areas of hydrocarbon bearing rock than in a vertical well. As a result of this increased contact,
production rates and recovery factors can be increased. As the technology for horizontal drilling and
fraccing has improved, the use of horizontal drilling has increased significantly. In the Barnett shale in
the US, for example, the number of horizontal wells drilled in 2001-03 was 76. In 2007-08 this
number had risen to 1,810. Over the same interval, the number of new vertical wells in the Barnett
declined from 2,001 to just 131.

Hydraulic Fracture Stimulation

Hydraulic fracture stimulation, or fraccing, is a process through which a large number of fractures
are created mechanically in the rock, thus allowing the natural gas and/or crude oil trapped in
subsurface formations to move through those fractures to the wellbore from where it can then flow to
the surface. Fraccing can both increase production rates and increase the total amount of gas that can
be recovered from a given volume of shale. Pump pressure causes the rock to fracture, and water
carries sand (proppant) into the hydraulic fracture to prop it open allowing the flow of gas. Whilst
water and sand are the main components of hydraulic fracture fluid, chemical additives are often
added in small concentrations to improve fracturing performance.

Pad Drilling
In shale drilling it is becoming increasingly common to use a single drill pad to develop as large an
area of the subsurface as possible. One surface location may be used to drill multiple wells. Pad
drilling increases the operational efficiency of gas production and reduces infrastructure costs and
land use. Any negative impact upon the surface environment is therefore mitigated.

Stacked Wells
The drilling of stacked horizontal wells may be possible where the shale is sufficiently thick or
multiple shale rock strata are found layered on top of each other. One vertical well bore can be used to
produce gas from horizontal wells at different depths. One area where this technology is being
employed is in the Pearsall and Eagle Ford plays in southern Texas. Cost savings and efficiencies can
be achieved as surface facilities are shared. As in pad drilling, the environmental impact on the surface
is mitigated as a result of reduced land use. This technology can be particularly beneficial in the
thicker shales.

Multilateral Drilling
Multilateral drilling is similar to stacked drilling in that it involves the drilling of two or more
horizontal wells from the same vertical well bore. With multilateral drilling, the horizontal wells
access different areas of the shale at the same depth, but in different directions. With the drilling of
multilateral wells it is possible for production rates to be increased significantly for a reduced
incremental cost.

The diagrams below show examples of pad drilling (Source: Tyndall Centre ReportShale Gas: A
Provisional Assessment of Climate Change and Environmental Impacts, January 2011) and multi-
lateral wells (Source: Baker Hughes INTEQ).

Pad drilling Multi-lateral drilling

Benefits of Technology Improvements

Decline in Drilling Costs

Due to the extensive reliance on horizontal drilling and hydraulic fracturing, the costs associated with
the development of shale resources can be significantly higher than for conventional oil and gas.
However, these costs have been driven down over the past decade in North America due to efficiency
improvements resulting from large scale drilling programmes and the use of pad drilling and stacked
or multilateral wells. Thus, Chesapeake Energy reported achieving significant improvements in
drilling times and costs in the Barnett shale in 2010. The graph below shows improvements in drilling
times and costs achieved by Encana in the Piceance Basin from 2006 to 2010.
Development of Piceance Shale Development of Piceance Shale
Days to Drill Drilling Cost

Source: EncanaDivision Overview March 2010

Decline Mitigation and Increased Recovery

A combination of improved technology and shale-specific experience has also led to improvements in
recovery factors and reductions in decline rates. Each shale play requires its own specific completion
techniques, which can be determined through careful analysis of rock properties. The correct selection
of well orientation, stimulation equipment, fracture size and fraccing fluids can all affect the
performance of a well.

The initial production (IP) rate from a particular well is highly dependent on the quality of the frac
and the well completion. In the US it has been seen that IP rates have been augmented over time as
the play matures (see below in the Haynesville). IP rates can be increased by several techniques, in
particular by increasing the number of frac stages and increasing the number of perforations per frac
stage. The quality of the frac is also improved as fluid properties are developed. Microseismic data can
also be used to improve the efficiency of the fraccing process.

Development of Haynesville IP Rate

Source: Chesapeake Energy2010 Investor and Analyst Meeting Presentation

For developed shales in North America the combined benefits of improved technology and increased
experience have resulted in the upward shift of well type curves (expected well production curves)
over time. Both the expected ultimate recovery per well and the peak production per well have been
seen to increase as plays have matured.
Environmental Considerations

Water Usage and Recycling

A large volume of water is needed for the development of shale gas plays. Water is used for drilling,
where it is mixed with clays to form drilling mud. This mud is used to cool and lubricate the drill-bit,
provide well-bore stability and also carry rock cuttings to the surface.

Water is also used in significant volumes in hydraulic fracturing. In addition to water and sand, a
small concentration of other additives is added to the fluid to improve fraccing efficiency. Chesapeake
Energy cites a figure of 4.5 million gallons of fluid for the fracturing of a typical horizontal well. This
significant volume of water needs a plentiful source. In the US, the water is typically trucked to the
drilling location or transported via temporary pipelines.

A typical fraccing fluid

Source: ChesapeakeHydraulic Fracturing Fact Sheet

A typical fraccing fluid is more than 98 per cent. water and sand. The other 2 per cent. is made up of a
number of additives which may vary depending on the particular well and operator (Source:
ChesapeakeWater Use Fact Sheet). Typically additives include many substances that are commonly
found in small measure in various household products. The range of additives shown in the diagram
above, and the purpose of each, is set out in the table below.
Product Purpose Downhole result Other common
uses
Water and
Sand: >98%
Water Expandfractureand Somestaysinformationwhileremainderreturns Landscape,
deliversand withnaturalformationwaterasproducedwater manufacturing
(actualamountsreturnedvaryfromwelltowell).
Sand Proppant Allowsthefracturesto Staysinformation,embeddedinfractures(usedto Drinkingwater
remainopensothegas propfracturesopen). filtration,playsand,
canescape concreteand
brickmortar
Other
additives: <2%
Acid Helpsdissolveminerals Reactswithmineralspresentintheformationto Swimmingpool
andinitiatecracksinthe createsalts,water,andcarbondioxide chemicalandcleaner
rock (neutralised).
Corrosion Preventsthecorrosionofthe Bondstometalsurfaces(pipe)downhole.Any Pharmaceuticals,
Inhibitor pipe remainingproductnotbondedisbrokendownby acrylicfibresand
microorganismsandconsumedorreturnedin plastics
producedwater.
Iron Control Preventsprecipitationof Reactswithmineralsintheformationtocreate Foodadditive;food
metal(inpipe) simplesalts,carbondioxideandwaterallofwhich andbeverages;lemon
arereturnedinproducedwater. juice
Anti-Bacterial Eliminatesbacteriainthe Reactswithmicroorganismsthatmaybepresent Disinfectant;steriliser
Agent waterthatproduces inthetreatmentfluidandformation.Thesemicro formedicaland
corrosivebyproducts organismsbreakdowntheproductwithasmall dentalequipment
amountoftheproductreturninginproduced
water.
Scale Inhibitor Preventsscaledeposits Productattachestotheformationdownhole.The Householdcleansers,
downholeandinsurface majorityofproductreturnswithproducedwater deicer,paints,and
equipment whileremainingreactswithmicroorganismsthat caulk
breakdownandconsumetheproduct.
Clay Stabliser Preventsformationclays Reactswithclaysintheformationthrougha Lowsodiumtablesalt
fromswelling sodiumpotassiumionexchange.Reaction substitute,medicines,
resultsinsodiumchloride(tablesalt)whichis andIVfluids
returnedinproducedwater.
Friction reducer Slicksthewatertominimise Remainsintheformationwheretemperatureand Cosmeticsincluding
friction exposuretothebreakerallowsittobebroken hair,makeup,nail
downandconsumedbynaturallyoccurringmicro andskinproducts
organisms.Asmallamountreturnswithproduced
water.
Surfactant Usedtoincreasetheviscosity Generallyreturnedwithproducedwater,butin Glasscleaner,
ofthefracturefluid someformationsmayenterthegasstreamand multisurface
returnintheproducednaturalgas. cleansers,
antiperspirant,
deodorantsand
haircolour
Gelling Agent Thickensthewaterinorder Combineswiththebreakerintheformation Cosmetics,baked
tosuspendthesand thusmakingitmucheasierforthefluidtoflowto goods,icecream,
theboreholeandreturninproducedwater. toothpaste,sauces,
andsaladdressings
Breaker Allowsadelayedbreakdown Reactswiththecrosslinkerandgelonceinthe Haircolouring,asa
ofthegel formationmakingiteasierforthefluidtoflowto disinfectant,andin
theborehole. themanufactureof
Reactionproducesammoniaandsulphatesalts commonhousehold
whicharereturnedinproducedwater. plastics
Crosslinker Maintainsfluidviscosityas Combineswiththebreakerintheformationto Laundrydetergents,
temperatureincreases createsaltsthatarereturnedinproducedwater. handsoapsand
cosmetics
pH Adjusting Maintainstheeffectivenessof Reactswithacidicagentsinthetreatmentfluidto Laundrydetergents,
Agent othercomponents,suchas maintainaneutral(nonacidic,nonalkaline)pH. soap,watersoftener
crosslinkers Reactionresultsinmineralsalts,waterandcarbon anddishwasher
dioxidewhichisreturnedinproducedwater. detergents

Source: ChesapeakeWater Use Fact Sheet

During a typical hydraulic fracturing process the frac fluid is transmitted down a cased well-bore to
the target zones and then forced deep into the targeted shale gas formations. In order to minimise the
risk of any groundwater contamination, good drilling practice normally requires that one or more
strings of steel casing are inserted into the well and cemented into place so as to ensure that the entire
wellbore, other than the production zone, is completely isolated from the surrounding formations
including aquifers. Most oil or gas-bearing shales in the US tend to be at least 1,500m below the
surface, whereas aquifers are generally no more than 500 metres below the surface.

Given the thickness of rock separating target shale formations from overlying aquifers, and the
extremely low permeability of shale formations themselves, and also assuming the implementation of
good oilfield practices (such as casing and cementing), it is considered by the industry that the risk of
contamination of overlying aquifers as a result of hydraulic fracturing operations is remote. Instances
where contamination of aquifers has been alleged are generally believed to have involved poor drilling
practices, in particular poor casing and cementing of a well or poor construction of surface storage
facilities.

Currently, most of the flowback fluid from fraccing operations is either transported from well sites for
disposal or is processed for re-use in further operations. Suspended solids must be removed from the
water before re-use. The recycling of this water can be costly and is a major focal point of many
environmental groups and environmental regulators. New, more efficient, technologies have been
developed which allow frac fluid to be recycled on-site at reduced cost.

Fluids other than water may be used in fraccing processes, including CO2, nitrogen or propane,
although their use is currently much less widespread than water.

The Shale Gas Industry in Poland

The Emergence of Shale in Europe

Following on from the dramatic advances in shale hydrocarbons technology and shale oil and gas
production in the US, a number of oil and gas companies have started to look for opportunities to
apply the techniques developed in North America in new geological basins and markets outside North
America. A considerable number of regions around the world have been the focus of interest for their
shale potential. In a report commissioned by the US Energy Information Agency World Gas Shale
Resources: An Initial Assessment of 14 Regions Outside the United States published by the EIA in
April 2011 (the EIA Report), 48 major shale basins are identified in 32 countries around the world.

48 Major Shale Basins in 32 countries

Source: EIA

The EIA Report identifies a number of plays across Europe where organic-rich shales are present,
including:
I. Lower Paleozoic shales, spreading from Eastern Denmark and Southern Sweden to Northern
and Eastern Poland;
II. Carboniferous shales, spreading from North-West England through Netherlands and North-
West Germany to South-West Poland; and
III. Lower Jurassic bituminous shales, spreading from the South of England to the Paris Basin in
France, the Netherlands, Northern Germany and Switzerland.

The EIA Report further identifies Poland and France as countries with some of the largest estimated
shale gas technically recoverable resources in Europe. Both countries are also highly dependent on
imported gas to meet domestic demand.

Shale in Poland
Of the various European shale plays, Poland is among the most advanced in terms of exploration for
and appraisal of unconventional gas resources.

The shales are deposited in three basinsthe Baltic in the north, the Lublin in the south, and the
Podlasie in the east (see map below). The organically rich shales in these three basins appear to have
favourable characteristics for shale gas exploration.

Major Shale Basins of Poland

Source: Advanced Resources International, Inc. / EIA

The EIA Report estimates that Poland has 792 TCF of risked shale gas-in place, comprising 514 TCF in
the Baltic Basin, 222 TCF in the Lublin Basin and 56 TCF in the Podlasie Basin. The EIA Report
estimates a risked technically recoverable shale gas resource of 187 TCF from these three basins.

The 8,846 square mile shale gas prospective area in the Baltic Basin was determined by the EIA
Report using the depth and thermal maturity of the Llandovery Formation. The formation shallows to
the northwest, where its prospective area is limited by lack of sufficient thermal maturity. In the deep,
western margin of the basin, the Llandovery Formation is highly thermally mature, values greater
than 5.0 per cent. However, the basin becomes very deep in this area. In the western areas, the
prospective area is limited by the 5,000 metres depth contour interval.

Onshore Baltic Basin, Lower Silurian Llandovery shale depth and structure

Entry of Major Players in Recent Years

One of the first organisations to recognise the potential of shale gas in Poland was the 3 Legs
Resources Group. Following the entry of 3Legs Resources Group, there was a rapid take up of acreage
in 2009 and 2010 both by smaller exploration and production companies, and by some of the major
international companies including ExxonMobil, ConocoPhillips, Chevron, Marathon Oil, Eni and
Total.

As at the date of this note, exploration drilling is being either contemplated or carried on by these organisations.
Only when this work has been carried out will the true potential of Polish shales be understood.

June 2011.