Shale technology is a game-changer for the global oil market. Today, this new technology has been developed mostly in the U.S. And, over the past five years, shale oil production in the U.S. has increased by almost a factor of 10—“every two years a ‘new Norway’ has been put in production,” says Oliver Appert, President of the World Energy Council French Committee in an interview with R&D Magazine.
Despite the continuous increase of world oil demand, this has resulted in an over-supply of 1 to 2 Mb/d, million barrels per day, since 2004. “Surprisingly, the Organization of the Petroleum Exporting Countries (OPEC) didn’t react to this new situation by decreasing its production as it has during past decades,” says Appert. And, as a result, the price of oil has dropped dramatically. Today the price of oil has reached its lowest level since the economic crisis in 2008.
“At the same times, shale technology has had a dramatic impact on the global gas market,” says Appert. And thanks to shale gas, the U.S. is set to become self-sufficient for its gas supplies, and will start to export on the international market within the next few months.
Shale: The next “swing” producer in the global market
For the past 40 years, the OPEC has played the role of the “swing producer” in setting the price of oil on global markets. This means the OPEC producers increased their production when the market was tight, as was the case in 1990, and reduced their quotas when the prices dropped due to over-supply. “This happened in 1986, 1999 and 2008, after which, a few months later, the price went up,” says Appert.
Today, the OPEC has decided not to react to the over-supply due to shale oil in order to keep its market share. Shale production is more flexible than conventional oil, so if the price of oil is up, investments in shale will increase rapidly and production will follow.
“Experts were anticipating that shale oil production would decrease with lower prices; however, this hasn’t happened,” says Appert. “In fact, while the number of drilling rigs has dropped by almost a factor of two in the U.S. since Sept. 2014, shale oil production has remained almost stable.” This is due to the improvement of shale technology in just a few years. For example, the well cost has been reduced from $8.1 million in 2012 to $5.5 million in 2015. The drilling cost per foot has also been reduced by 44% in five years, and the completion costs by 34%
“So, in the present circumstances, if the OPEC decides to reduce its quotas, prices will go up and shale producers will restart investing massively with production going up again thank to the low inertia and the flexibility of the U.S. industry,” says Appert.
As a result, shale oil in the U.S. is setting the price on the market.
How is shale technology accessed
The bulk of oil production in the U.S. and elsewhere is still coming from conventional fields. And, those fields, require large initial investments. However, after many years of operation, they are still producing at low operating costs.
“As long as oil prices are higher than operating costs, oil companies will continue to produce using conventional methods,” says Appert. “However, the drop in oil prices has affected oil companies’ investments, which have dropped by 20 to 40% with the cuts mostly focused on exploration expenditures and postponement of new developments.” Over times, this will have a clear impact on oil production.
For the time being, shale is called “non-conventional,” according to Appert. “But experience in the oil sector shows that non-conventional technologies soon become conventional technologies,” says Appert. “Take for example ultra-deep offshore technologies.”
Shale technology, however, is based on two major components: fracking and horizontal drilling. Shale oil and gas is produced in very tight geological formations, so it’s necessary to increase the permeability of the rock by fracking the formation and increasing the contribution that horizontal wells make. “This increases dramatically the contribution to production compared to simply using vertical wells,” says Appert.
Fracking and horizontal drilling technologies have been known for many years. In fact, the first frack was done in 1949, and the first horizontal wells were drilled in the mid 1980s. “By efficiently combining these two technologies, it’s now possible to exploit new resources such as tight reservoirs or source rocks efficiently and cost-effectively,” says Appert.
Shale production has boomed in the context of high oil prices; and, thanks to an industrialization of both technologies, it’s now possible to produce shale resources in the present context of lower prices.
The issues with fracking
In many areas, fracking technology is facing strong opposition from environmentalists and local communities due to misplaced perceptions about the environmental impact it can have. “For example, fracking technology is banned in some countries, and even in some states in the U.S.,” says Appert.
The environmental impact of fracking may be minimized by implementing state-of-the-art technologies. “It is also mandatory to gain support of local communities and land owners before it can begin, which means greater transparency to the benefit of all stakeholders,” says Appert.
The International Energy Agency released a report recently on shale describing the “Golden Rules” to implement in order to mobilize the shale resources. And these rules must be put in place by industry and governments.
The future of shale technology
While worldwide shale resources are huge according to the U.S. Energy Information Agency, there are still uncertainties about the economics of its production and environmental issues. “Shale production in the U.S. has experienced a dramatic growth in the last five years, which will continue in years to come,” says Appert.
In fact, the U.S. Dept. of Energy anticipates a significant growth in shale oil production at least until the end of the decade, “but for it to grow globally in countries such as China, Argentina and the U.K., these countries must tackle their particular economic, industrial, environmental and legal issues,” says Appert.
The future growth of shale will heavily be dependent on the price of oil. However, it’s certain that shale technology is here to stay.
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