Shale Revolution Not So Simple

More oil at home won't necessarily improve the U.S. position abroad.

The United States is enjoying an oil boom whose real extent is still largely underestimated. In just few years, the country may become the world’s top oil producer, mainly due to the unlocking of its huge shale-oil resources.

Whereas a shale revolution (both for oil and natural gas) is unlikely in the rest of world, due the some unique factors that characterizes the U.S. oil and gas patch, global oil-production capacity is also growing much faster than demand.

The interconnections between these two phenomena might have deep, paradoxical and almost unnoticed consequences for the world oil market and the U.S. energy security.

Big boom theory

On the basis of my analysis of more than four thousand oil wells in the United States, I estimated that even with a steady decline of crude-oil prices (from $85 per barrel in 2013 to $65 per barrel in 2017), the United States could be producing 5 million barrels per day of shale and tight oil by 2017. With the present output of 1.5 million barrels per day, that would more than triple the current production.

More than 90 percent of such production will come from just three large shale/tight-oil formations: Bakken-Three Forks (North Dakota), Eagle Ford (Texas) and Permian Basin (Texas). Along with the increasing production of natural-gas liquids (NGLs), and a relatively flat production of conventional oil and biofuels—both considered as part of the overall oil production in most statistical sources—the United States could become the top oil producer in the world by 2017, with an overall oil production of about 16 million barrels per day, and a sheer crude-oil production of about 11 million barrels per day.

Reinforcing this prospect is the resilience of U.S. conventional-oil production too. In fact, thanks to the extensive application of advanced technology to mature and once declining U.S. conventional oilfields, U.S. conventional-oil production is also doing better than generally expected. So far, among the fourteen main oil-producing states/areas of the United States, ten have already witnessed a reverse of their declining oil production.

Yet the driving force behind the U.S. oil boom, that is its huge shale-oil potential, depends crucially on the U.S. oil industry’s ability to bring on line an astonishing number of wells each year.

In fact, the extremely low porosity of shale-reservoir rocks limits the recoverability of oil from one single well. On average each loses 50 percent of its output after twelve months of activity. To offset this dramatic decline of the production and get an higher production, an oil company must thus drill an ever-increasing number of wells.

For example, in December 2012 it was necessary to bring ninety new wells on stream each month to maintain the production rate at Bakken-Three Forks (so far, the largest shale-oil play in the United States)—770,000 barrels per day. But as production grows in North Dakota, the number of wells also must grow exponentially.

The large and scarcely populated territories of North Dakota and Texas are capable of sustaining such ever-increasing drilling intensity for many years to come, to over one hundred thousand active shale-oil wells—as against around ten thousand to date.

Nevertheless, the sheer number of productive wells required in shale production is unprecedented and, from an environmental perspective, will probably represent a major obstacle to the expansion of shale activity even in the United States. Apart from Texas, North Dakota and a bunch of additional states with vast territory, scarce populations and a long history of drilling intensity, the rest of the country likely will not embrace the “drill or die” logic.

Shale boom won’t be global

Whereas drilling intensity won’t prevent the United States from becoming the largest oil producer globally in just few years, it will likely prove a daunting obstacle for the rest of the world—for several reasons.

First, the United States holds more than 60 percent of the world’s drilling rigs, and 95 percent of these are capable of performing horizontal drilling—which, together with hydraulic fracturing (fracking), is crucial to unlock shale production. No other country or area in the world has even a fraction of such “drilling power,” which takes several years to build up. For example, all across Europe (excluding Russia) there are no more than 130 drilling rigs (as against 180 in North Dakota alone), and only one-third of them are capable of doing horizontal drilling.

Moreover, no other country has ever experienced even a fraction of the drilling intensity that has characterized the U.S. oil and gas history.

Consider: in 2012 the United States completed 45,468 oil and gas wells (and brought 28,354 of them on line). Excluding Canada, the rest of the world completed only 3,921 wells, and brought only a fraction of them on line. To my knowledge, Saudi Arabia brings on line no more than two hundred wells per year.

Other factors will contribute to prevent the development of shale resources in the rest of the world.

One is the absence of private mineral rights in most countries. In the United States, landowners also own the resources under the ground—and have a very strong incentive to lease those rights; in the rest of the world, such resources usually belong to the state, so that landowners usually get nothing from drilling on their lands but the damage brought about by such activity.