Unconventional resources: Meaning, Criticisms & Real-World Uses

What Are Unconventional Resources?

Unconventional resources refer to vast deposits of hydrocarbons that are technically difficult or economically unfeasible to extract using traditional methods. Unlike easily accessible conventional resources, these reserves are trapped in formations with low permeability, requiring advanced technologies for their recovery. The management and investment in these resources fall under the broader category of Energy Markets and Investing. Key examples include shale oil, shale gas, tight oil, coalbed methane, and oil sands. Developing unconventional resources often involves significant capital expenditures and complex engineering processes.

History and Origin

The concept of extracting hydrocarbons from challenging geological formations is not new, with early attempts at stimulating wells dating back to the 19th century using explosives. However, the modern era of unconventional resources truly began to take shape with the development of sophisticated technologies. The significant breakthroughs came in the late 20th and early 21st centuries, particularly with advancements in horizontal drilling and multi-stage hydraulic fracturing (often referred to as "fracking").

Government-funded research in the United States, starting in the 1970s and 1980s, played a crucial role in developing these core technologies. This research, often spurred by concerns about energy independence, laid the groundwork for the commercial viability of extracting natural gas from shale formations.⁵ A pivotal moment occurred in the late 1990s when George P. Mitchell and his company, Mitchell Energy, successfully applied a combination of horizontal drilling and "slickwater" hydraulic fracturing in the Barnett Shale in Texas, proving the commercial viability of shale gas extraction. This pioneering work initiated what became known as the "shale revolution," fundamentally altering the global energy landscape.

Key Takeaways

Unconventional resources are hydrocarbon deposits requiring advanced extraction techniques due to challenging geological conditions.
Key technologies enabling their extraction include horizontal drilling and hydraulic fracturing.
The development of these resources has significantly increased global energy reserves and altered energy geopolitics.
Extraction often involves higher production costs and carries specific environmental and economic considerations.
They play a critical role in global energy security and the ongoing energy transition.

Formula and Calculation

The valuation and economic assessment of unconventional resources do not typically involve a single, universal formula like those for financial instruments. Instead, their commercial viability is determined by a complex interplay of geological factors, technological efficiency, and market economics. Key metrics for evaluating unconventional resource projects often involve:

Estimated Ultimate Recovery (EUR): The total volume of oil or natural gas expected to be recovered from a single well over its lifetime.
Initial Production (IP) Rates: The rate of production in the first 30, 60, or 90 days, used to project future decline curves.
Breakeven Price: The commodity price (e.g., oil per barrel or gas per MMBtu) at which a well or project covers all its costs, including drilling, completion, and operating expenses.

The breakeven price can be represented conceptually as:

$\text{Breakeven Price} = \frac{\text{Total Costs}}{\text{Total Estimated Production}}$

Where:

Total Costs includes all expenses associated with exploration, drilling, completion, and operations.
Total Estimated Production refers to the Estimated Ultimate Recovery (EUR) over the project's economic life.

Understanding the economic viability of these projects is crucial for investors.

Interpreting Unconventional Resources

The presence and extractability of unconventional resources are interpreted in terms of their potential to contribute to global energy supply. Unlike conventional oil fields that might flow naturally or with minimal stimulation, unconventional deposits require continuous technological innovation and substantial upfront investment. Their interpretation revolves around assessing the cost-effectiveness of their extraction given prevailing commodity prices, the scalability of the technology, and the regulatory environment.

For investors, understanding unconventional resources means evaluating the risk-reward profile of companies operating in this sector. This includes analyzing a company's technological expertise, its asset base (the specific unconventional "plays" it holds), and its ability to manage the high upfront capital requirements and often rapid decline rates of individual wells. Factors like the efficiency of the supply chain for materials and services also influence the success of these operations.

Hypothetical Example

Consider a hypothetical energy company, "ShaleCo," evaluating a new shale gas play in North America. The geological surveys indicate vast reserves of natural gas trapped in a shale formation. However, the rock has extremely low permeability, meaning the gas cannot flow freely to the surface without intervention.

ShaleCo's engineers determine that each well will require horizontal drilling extending 10,000 feet laterally, followed by 50 stages of hydraulic fracturing. The estimated cost per well for drilling and completion is $8 million. They project an average Estimated Ultimate Recovery (EUR) of 10 billion cubic feet (Bcf) of natural gas per well over 10 years, with 70% of that volume recovered in the first three years.

To assess the project's attractiveness, ShaleCo calculates the breakeven price for a well. If operating expenses over the well's life add another $2 million to the initial $8 million, the total cost per well is $10 million. With an EUR of 10 Bcf, the breakeven price would be ( \frac{$10 \text{ million}}{10 \text{ Bcf}} = $1.00/\text{thousand cubic feet (Mcf)} ). If current natural gas prices are $3.00/Mcf, the project appears highly profitable. However, if prices drop to $0.80/Mcf, the well would operate at a loss, demonstrating the price sensitivity inherent in unconventional resource development. This analysis informs ShaleCo's investment decision and helps manage expectations regarding potential fossil fuels output.

Practical Applications

Unconventional resources have reshaped global energy markets and have several practical applications across various sectors:

Energy Supply: The most direct application is increasing the overall supply of oil and natural gas, reducing reliance on traditional sources and enhancing energy security for importing nations. The U.S. shale boom, for instance, significantly boosted domestic oil and natural gas production, contributing to economic growth and a reduced trade deficit.⁴
Petrochemicals: Abundant and affordable natural gas from unconventional sources has provided a low-cost feedstock for the petrochemical industry, leading to a renaissance in manufacturing, particularly in regions with significant shale gas production.
Power Generation: The increased availability of natural gas has accelerated the shift from coal to gas in electricity generation in some regions, contributing to lower carbon emissions in the power sector.
Economic Development: Regions with significant unconventional resource plays can experience economic booms due to increased investment, job creation (in oil exploration and related services), and tax revenues, although this can also bring social and infrastructure challenges.

Limitations and Criticisms

Despite their significant contributions to global energy supply, unconventional resources face notable limitations and criticisms:

Environmental Impact: The extraction processes, particularly hydraulic fracturing, have raised concerns about potential environmental impact. These include issues related to water usage, groundwater contamination, surface water pollution from spills, and air emissions (including methane, a potent greenhouse gas).³ The disposal of wastewater from drilling also presents challenges.
High Production Costs and Volatility: While technological advancements have lowered breakeven costs, unconventional resources generally have higher production costs compared to many conventional sources. This makes them more susceptible to commodity price volatility. Economic activity in regions dependent on unconventional resource development can experience boom-and-bust cycles, leading to instability.
Induced Seismicity: The injection of wastewater (a byproduct of oil and gas extraction, including from unconventional wells) into deep disposal wells has been linked to an increase in seismic activity in certain areas.
Rapid Decline Rates: Unconventional wells often exhibit steep initial decline rates in production, requiring continuous drilling of new wells to maintain overall production levels, which necessitates ongoing capital investment.

Unconventional Resources vs. Conventional Resources

The distinction between unconventional and conventional resources lies primarily in their geological characteristics and the extraction methods required:

Feature	Conventional Resources	Unconventional Resources
Geological Setting	Trapped in permeable reservoir rocks (e.g., sandstone, limestone) with clear boundaries.	Dispersed within impermeable source rocks (e.g., shale, tight sand) or other complex formations.
Extraction Method	Typically flows naturally or with minimal drilling and pumping (e.g., vertical wells).	Requires advanced techniques like horizontal drilling, multi-stage hydraulic fracturing, steam injection (for oil sands).
Permeability	High	Very low, requiring artificial fractures for flow.
Production Profile	Often characterized by a relatively long production life with slower decline.	Typically exhibit high initial production followed by rapid decline rates, requiring continuous new well development.
Development Cost	Generally lower per unit of energy once discovered.	Higher upfront development costs per well due to complex technologies.
Environmental Footprint	Different, but generally less extensive surface disturbance per unit of output compared to some unconventional methods like oil sands mining.	Can involve larger surface footprints, significant water use, and concerns over methane emissions and water contamination.²

While conventional resources have historically been the backbone of global energy supply, the depletion of easily accessible reserves and technological advancements have pushed the industry towards developing unconventional resources. The rise of these resources, particularly U.S. shale, has significantly influenced the global energy market, including strategies of major producers like OPEC+.¹

FAQs

What are the main types of unconventional resources?

The main types include shale oil, shale gas, tight oil (oil or gas in low-permeability sandstone or carbonate reservoirs), coalbed methane, and oil sands (heavy oil mixed with sand and clay).

How do unconventional resources impact energy prices?

By significantly increasing the global supply of oil and natural gas, unconventional resources can put downward pressure on commodity prices, making energy more affordable. However, their higher production costs also mean that their output is more sensitive to price fluctuations.

Are unconventional resources considered fossil fuels?

Yes, all unconventional resources currently in widespread commercial production (shale oil, shale gas, tight oil, coalbed methane, and oil sands) are derived from fossil fuels and release greenhouse gases when produced and consumed.

What are the primary environmental concerns associated with unconventional resource development?

Key concerns include the large volume of water used in hydraulic fracturing, the potential for groundwater contamination from drilling fluids or wastewater, methane emissions (a potent greenhouse gas) during production, and localized impacts such as increased truck traffic and potential induced seismic activity from wastewater disposal.

Why are unconventional resources becoming more important?

As easily accessible conventional resources become scarcer and demand for energy continues to grow, advancements in extraction technology have made previously uneconomical unconventional deposits viable. They contribute significantly to global energy security by diversifying supply sources.