The Oil Price Swoon Won’t Stop the Shale Boom
Still profitable at lower prices, fracking is ripe for technology gains
that would help it weather further declines
By Mark P. Mills
With oil prices sliding, energy investors are worried, while Saudi
Arabia and Russia no doubt hope, that low prices will cap America’s boom in
shale-oil production. Green-energy types sit by, happy to see turmoil in the
fossil-fuel sector.
But price dips are common in oil and other markets subject to cyclical
swings. True enough, sellers of any product prefer high prices to low; but the
current slump sets the stage for what I call America’s shale boom 2.0.
Three factors make it unlikely that the decline in oil prices will
bring the shale revolution to an end.
First,
shale production is profitable at today’s lower prices. We know this because
the boom began during the Great Recession years of 2008-09, when prices fell
below $50 a barrel. The price U.S. shale producers got for their oil during the
boom averaged around $85 to $90, even though the world price stayed well over
$100.
That spread—the difference between the West Texas Intermediate (WTI)
and world (Brent) price—was a direct consequence of too much domestic oil
chasing too little capacity to move, store and use it. Yet in the past five
years alone more than $500 billion of private investment went into hydrocarbon infrastructure.
U.S. shale output was obviously profitable enough to spur the stunning growth
in production and infrastructure when domestic prices were in the same range as
world prices today.
Second, shale production is getting more efficient, which means that profits
are possible at prices even lower than today. Smart drilling
techniques—horizontal drilling, hydraulic fracturing and information
technologies that accurately locate where to place rigs and enable precise
steering of the drill through meandering horizontal hydrocarbon-rich shales—are
far more productive than when the boom started.
According to the
Energy Information Administration, the quantity of shale or natural gas
produced per rig has increased by more than 300% over the past four years.
This rise in productivity matches (in equivalent terms of capital cost per unit
energy out) the improvements in solar power, but it took 15 years for solar’s
gains. Solar is now experiencing a slow-down in efficiency improvements; there
is no sign of a slow-down in shale technology.
The third
factor is the profound economic leverage afforded by the enormous scale and
diversity of America’s hydrocarbon infrastructure. Many oil-producing nations
have only a few big oil fields and a handful of companies, sometimes just one. The U.S. has dozens of
world-class fields, thousands of production companies, tens of thousands of
related businesses, and millions of miles of pipe and rail.
Among the thousands of shale producers, you can guarantee there are
pioneers just like those who started the shale revolution. As profit margins
erode due to low or even lower future prices, the pioneers will try out the
revolutionary new shale techniques that have yet to be deployed.
You might think that the latest drilling technologies are already in
use, an easy sell when cash is gushing. Not so. Businesses rationally resist
spending to disrupt existing machinery and operations simply to learn new tools
and techniques. But they will chase profits through efficiency-boosting
innovation in leaner times.
The pipeline of next-generation shale tech has been piling up with unfielded
advances. These include automated drilling, micro drilling that allows for far
faster deployment with a smaller rig footprint and new types of drills (some
may use lasers soon), and big-data analytics to maximize yields by tapping into
the surprising volume of data from complex shale operations. There is also nanotechnology to
radically improve chemical formulations and safety, on-site water recycling and
even water-free fracturing, and new classes of high-resolution subsurface
imaging to radically improve exploration and production using real-time and
microseismic imaging.
In a few years, as new technologies are adopted, journalists will be
writing again about the “surprise” that U.S. production expanded by another
three million barrels per day on top of that much growth over the past few
years. The bounty will in due course spread to other nations where the
geophysical shale resources easily match the thousands of billions of barrels
in the U.S.
Oil prices will continue to experience cycles as technologies are
deployed. And the world will stay awash in oil.
Mr. Mills, a
physicist, is a Manhattan Institute senior fellow and co-author of “The
Bottomless Well” (Basic, 2006).
barkleypeschel.com
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| Shale oil & gas produced per drilling rig in the US has increased 300% over the past 4 years |
