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April 11, 2017
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The Shale Oil Revolution in the USA – Can it Continue?
Maurice B. Dusseault
Professor of Geological Engineering, University of Waterloo
WISE Member
As one may deduce from a number of recent articles, shale oil in the US (and slightly in Canada) has come to play a remarkable and novel role in the world of oil prices. Although once viewed as a challenging and difficult “unconventional” resource, drilling improvements, hydraulic fracturing improvements, and an “assembly line” approach to multi-well pad development have driven costs down. From a supposed $US65/b average price needed for profitability in early 2014, these efficiencies, plus major drops in service company rates (everything from fracturing operations to housing of workers), have pushed this level down to perhaps $40-45/b. Combine these events with the remarkably positive response of Permian Basin tight oil strata to stimulation (two charts below, from the US-EIA). Include an ability to quickly mobilize rigs and fracturing operations, and several other factors, and the USA has emerged as a major World force behind oil prices, with unprecedented increases in production, and an unexcelled ability to respond quickly to price signals. The US is even exporting LNG now! No one would have predicted that 15 years ago.
Can the remarkable shale oil saga of the last 6-8 years continue? Speaking as a technical person, I think the following trends are inexorable:
So, the short answer from a technical point-of-view, neglecting commodity price fluctuations and economic factors, is that in the US, cost-per-barrel of production will remain stable for the foreseeable future (5-8 years) and may even drop slightly.
What are the World implications? The World has been slow in adopting the new technologies for various social and economic reasons. Drilling companies outside of the US and Canada have been reluctant to abandon old iron in favor of the new-era automated rigs; it is always hard to abandon the old approaches – remember how the USA auto industry pooh-poohed the advent of the Japanese industry in the 1970’s. Nevertheless, a re-tooling of the World’s rig fleet, both onshore and offshore, has begun and will continue. New technology gradually subsumes old technology. Look at your Smart Phone.
It seems that Saudi Arabia in 2014 felt that it could drive the shale oil developers out of business. Events have shown that it is wise to not underestimate the ability of the US – Canada oil industry to adapt quickly. Even though the economies of Canada and the USA are partially dependent on oil prices and production, the degree of this dependency is far less than elsewhere (Saudi Arabia, Russia, Iran, Iraq, Kuwait, UAE, Venezuela, Ecuador, Sudan, Oman, Libya, Algeria, Nigeria…). The sharp downturn in oil prices hurt Canada’s economy, but deeply wounded the economies of a number of other countries. A reasonable expectation is that the new technologies for shale oil and shale gas development will gradually diffuse around the World, and the overall effect will be to sustain the level of production of fossil fuels to meet demand for at least a generation to come, although demand is expected to peak about 10 years from now. Whether this future is desirable or not, in the context of climate change issues, is another matter.
Another World issue, echoed in the Canadian Maritimes and New York State through moratoria, is the social opposition to large-scale hydraulic fracturing. This opposition often uses “fracking” as a proxy for the oil and gas industry in general (i.e. big oil is to be resisted on principle), as a proxy for climate change action (i.e. all fossil fuels are evil), or as a proxy for general opposition to development (e.g. no fracking trucks on my roads please). The merits of these various reasons to opposing development are difficult to discuss rationally in an ideologically charged atmosphere. Opposition seems strongest in “post-industrial” societies that are unfamiliar with the industry (e.g. downtown New York, rural England).
Despite a demonstrably low impact on the environment, compared to industries such as agriculture, forestry, coal use, and chemical manufacture, oil and gas development has been effectively prohibited or stalled in many jurisdictions (Victoria and New South Wales in Australia, much of Europe, Quebec, the UK until recently…). These prohibitions have not and will not have significant effects on slowing shale oil and shale gas technology from gradually spreading around the World, given that the jurisdictions where moratoria exist are not those where large oil and gas deposits exist. The establishment of moratoria has not continued to spread; given many reports that hydraulic fracturing and oil and gas development can be done with a modest to small local environmental impact (reports in Germany, USA, Canada, UK), further significant barriers to shale oil and shale gas development should not develop. As stated before, whether this is desirable in the context of climate change is another issue.
Where is Canada in this picture? We Canadians sit on the World’s largest resource of oil, albeit viscous oil, and technology advances are also affecting the costs of its in situ production (solvent-steam methods, better heat recovery, lowered development costs, higher recovery ratios…). The “accepted technically recoverable reserves” are about 170 Bb in Canada for viscous oil, about 10% of the entire resource base in Alberta alone, and everyone in the industry is well aware that this figure is unrealistically low. Canada has, courtesy of drilling and fracturing advances, combined with new geological studies, increased its technically recoverable reserves of natural gas to beyond 400 years’ supply at current consumption rates. Again, everyone in the industry knows that this is unrealistically low; a conservative estimate of 1000 years’ resource base is more reasonable, as technology continues to be developed and implemented, and as the basins in northern Canada are better understood.
Canada is energy rich in oil and gas, but in oil we are the World’s marginal cost producer (difficult viscous oil), with the highest costs per barrel of any major oil-producing country. That will not change for the near future, despite technological developments. The gas picture is, however, very different. Natural gas can quickly replace coal use for electricity generation; it emits one half the CO2 per kilowatt-hour, plus no particulates emissions, no mining accidents, no groundwater pollution or tailings ponds, and no coal dust. A strong incentive thus exists to ramp up natural gas use quickly, to help the World fight climate change as we gradually learn how to factor more renewable energy sources into our electrical grids (a two-generation effort). Reducing the particulate matter emissions around Chinese and Indian cities alone will add tens of millions of additional years of productive and healthy life to these populations, each year! Alberta and British Columbia should be aggressively moving toward LNG exports of natural gas to generate electricity to power the new generation of electrical vehicles in other countries. Natural gas powered cars and trucks are a viable option. Natural gas could be taxed differently than oil and coal, if the broad outcomes are deemed desirable socially and for World health. Overall, Canada remains in an enviable position in the World, whatever the energy outcomes. Of course, a low population and vast resources help a lot.
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