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.
Also absent outside North America are independent oil companies with a guerrilla-like mindset, a crucial aspect of the U.S. boom. Until now, the development of shale resources has not proved to be Big Oil’s strength—since shale oil requires companies capable of operating on a micro scale, pursuing a number of micro-objectives and leveraging short-term opportunities. Only the United States (and partly Canada) possesses a plethora of such aggressive companies. It is no accident that they have been, and still are, the protagonists of the shale revolution.
Finally, we even don’t know with any reasonable approximation either the real size of the shale formations in the world, or the costs to develop them. The problem is that the geology of the United States is by far the best known, explored and assessed, whereas for most countries shale deposits are a matter of pure speculation.
A geopolitical paradox
Huge as it may be, U.S. crude-production potential is still insufficient to allow for the much-sought-after U.S. crude-oil independence—the only missing point in the overall equation of U.S. energy independence.
In fact, the country is already largely self-sufficient in terms of all other primary-energy sources (coal, nuclear, natural gas, NGLs, etc.), while it still imports about 8 million barrels per day of crude oil to make up for its daily consumption of more than 15 million barrels.
True, the amount of crude oil imported each day by the United States has plummeted steadily from its peak in 2007 (when it reached more than 10 million barrels), and it will probably be less than 50 percent of consumption by the end of 2013. However, even in the most favorable scenario I outlined above, 25 percent of U.S. crude-oil requirements will have to be imported in the future.
This implies that if the United States wants to target the highest degree of oil security, it should rely not only on an increase of its domestic crude-oil production, but also on energy-efficiency measures that could curtail crude-oil consumption.
A lower rate of U.S. crude-oil imports might have paradoxical consequences for U.S. energy security. In fact, in case of a drop in oil prices, the most endangered foreign sources would be countries traditionally considered to be “safe”—like Canada and Venezuela, whose crude is particularly expensive. Whatever the case, for these two countries, and for Mexico as well, the resurgence of U.S. oil production means the need to find new reliable markets for their crude.
In turn, if they succeed in shifting from the United States, this will make them less dependent on the U.S. oil market, while making America a bit more vulnerable in the future to an oil crisis.
In geopolitical terms, therefore, the paradox of growing U.S. oil security is that it risks negatively impacting traditionally safe Western Hemisphere exporters while providing expansion opportunities for other countries, such as China, seeking to step into large-producing countries.
At the same time, the decline of U.S. imports is already having an impact on the production of several African countries—such as Nigeria, Angola, Libya and Algeria—which will be forced to find new export markets too.
The Persian Gulf, the chief target of the “import-destruction” mantra of U.S. energy-independence advocates, could lose shares of the U.S. market as well, but that area has the flexibility to turn its exports to Asian markets to offset potential losses.
However, even for Persian Gulf countries—as much as for the whole of the Organization of Petroleum Exporting Countries (OPEC)—the consequences of U.S. oil boom could be relevant if combined with the general upward trend of global oil-production build-up that is advancing much faster than demand. And that could finally backfire against the United States as well.
World oil versus the U.S. oil boom?
By the end of this year, oil-production capacity (which includes crude oil, natural-gas liquids and biofuels) will probably surpass 97 million barrels per day, including a spare capacity (unused capacity) of more than 4 million barrels per day.
Conversely, oil demand is growing sluggishly, a consequence of the troubled global economic situation, the slowdown of China’s growth, the unsolved problems of the Eurozone, as well as the impact of energy-efficiency legislation across the world. For all these factors, it is unlikely that daily demand will exceed 90–91 million barrels in 2013. That will cause a widening gap between production capacity, actual production, and demand.
At the same time, the exploration and production spending spree of the oil and gas industry goes on, with investments that will continue to exceed $600 billion in 2013, or more than $2 trillion from 2010. High oil prices, the need of most companies and countries to replace their reserves, and the extensive application of new technologies to oil recovery, are the major factors driving this unprecedented investment cycle that is now in its fourth year, and it will have particularly strong consequences on new production in the next few years.
Not only the United States, but also the biggest oil producers such as Saudi Arabia and Russia, are continuing to increase their production capacity—defying the dire predictions of most pundits who deemed those countries destined to face an irreversible decline of their oil output.
In this framework of growing supply capacity and sluggish demand, the price of oil is not determined by the strict logic of supply and demand, but by the recurring fears of supply disruptions coming from the instability of several Arab and African countries.
Yet the problem remains.
Global oil-production capacity is growing much more rapidly than demand for oil, and in order to manage this imbalance OPEC is currently relying on two pillars: on the one hand, Saudi Arabia’s willingness not to inundate the market with its full production capacity—that is obliging the kingdom to preserve a spare capacity of more than 3 million barrels per day; on the other, Iran’s inability to export a sizable amount of its oil production potential—or more than 1 million barrels per day—due to international sanctions.
The coming years will show if OPEC possesses the ability to manage this imbalance, against African countries looking for new outlets for their oil, an Iraq struggling to become one of the world’s top producers, the great potential of the United States, Canada and other countries—and an oil demand still stagnating due to a global economic crisis which shows little prospect of improvement.
The U.S.-Saudi dance
Whatever OPEC, and Saudi Arabia in particular opt for, however, will impact also the U.S. oil boom.
Should Saudi Arabia decides for producing oil at full capacity in the short term, like the Kingdom did in 1986, the oil price will likely face an abrupt fall. In this case, U.S. shale-oil production also will be endangered, depending on the extent of the oil price decrease.
In fact, the full development of shale oil in the United States requires an oil price higher than $80 per barrel in the short term, and higher than $65 per barrel in the longer term (five years). Lower price levels would result in a dramatic drop in drilling intensity—and consequently in oil production.
By converse, if a political crisis should endanger the oil production of Saudi Arabia or another big oil producer in the short term, the oil price will skyrocket, no matter how much oil America could produce.
The last two scenarios suggest that, whatever the degree of energy independence the United States can achieve through the shale revolution, the country will always be dependent on what happens across the global oil market, and should align its foreign policy with this reality.
Leonardo Maugeri, Ph.D., is a Senior Associate at the Harvard Kennedy School, Belfer Center for Science and International Affairs, and a former top manager of the Italian oil & gas company Eni.
Image: Flickr/L.C. Nøttaasen. CC BY 2.0.