Part 1 of 2
Peter Zeihan, author of “The Absent Superpower”, writes that we are into the third and maybe starting the fourth shale oil technological revolution, transforming the oil and gas production industries. Those rocking donkeys that you see in the plains that used to pump most of the oil in this country are as obsolete today as farming with horses. The transformation of technology in shale oil and gas production caught the Saudis and OPEC with their eyes closed and is giving them competition that they never imagined possible.
The U.S. shale oil industry has a cost of production second only to the Saudis and next year according to Daniel Yergin.
“The U.S. is likely to hit its highest level of oil production in its entire history,” Yergin said.
Liquid oil that can be pumped by conventional drilling is in fields that are often found on massive rock formations that hold petroleum. Zeihan writes,
“That of all the petroleum of which we are currently aware, only one-fifth has ever been able to use permeable rock or natural faults to migrate beyond where it has formed and less than half of that flows into this perfect package that have hopes of being tapped,” Zeihan writes.
Eighty to 90 percent of the oil is believed to be trapped within the shale rock. In order to release this trapped oil, drillers have to drill horizontally through the formation.
Here is the short version explanation of fracking: “The magic of the fracking process is hydraulics. Placed under pressure, gases compress. Liquids, however, never compress. With enough pump power, the rock itself will crack apart, spiderwebbing a fine mesh of cracks out from the well shaft and forcing the sand-laced water into the parts of the mesh that are closest to the pipe. Operators then place a temporary plug the next few dozen feet of pipe, and so on until they reach the lateral’s heel. The pumps are then turned off. Pressure within the well pushes the frack cracks and so left behind, keeping those cracks wedged open. Each of those sand-propped cracks now accesses a multitude of those tiny, isolated pockets of petroleum – and that now – untrapped petroleum can flow back to the horizontal shaft, laterally to the vertical shaft, and up and out into the field’s surface gathering system.”
Every shale oil field is different and there are portions of fields that have differences as well, so it requires an amazing amount of technology and experience to develop shale oil. The U.S. companies are still learning with new advances in constant discovery so that almost every day in the industry is an education. Everything that happens occurs as the result of some incentive and the Saudi’s gas war was the incentive for the second shale oil revolution.
The war started in 2014 with the Saudis believing correctly that they were the low cost oil producer, and told the world that despite low prices it would maintain production until others expressed a willingness to reduce production with them. They and other conventional oil producers expected U.S. oil production to decline with prices. Surprise. Surprise. In 2015 and since, it has gone up.
Yergin observed, “It first became evident in the U.S. given the collapse in revenues, along with heavy debt burdens, that led to multiple bankruptcies and the expectations that prices would be ‘lower for longer’. Shale producers had no choice but to slash costs if they wanted to survive. In the process, they became more efficient, focused and innovative. A new well that might have cost $14 million in 2014 now costs $7 million. The gain in efficiency is so great that a dollar invested in U. S. shale today will produce about 2.5 times as much oil as a dollar invested in 2014, according to IHS Markit. In 2014, many thought a drop in price to $70 a barrel from $100 would shut down U.S. production. It didn’t. Today, new shale oil wells can be profitable at $40 to $50 a barrel and some companies claim even lower. This recalibration will push up supply more than had been anticipated, at least in the next few years.”
The U.S. shale oil industry quickly adapted to the lower prices with reduced costs and this year it was the Saudis and OPEC that blinked lowering their production and actually adhering to the promised cuts. Zeihan says that the U.S. shale industry survived by acquiring new efficiencies – contract creativity, crunching margins, geographic consolidation, selective delays and technological adaptation. As Yergin noted, they cut the cost of production in half. They did this by recycling water, in some cases recapturing it and using it again and again. They believe that the technology is there to reduce water use 80 percent. Much of the rest was expertise gained by doing and seeing.
Rigs now walk from site to site and instead of one well, as many as 20 are drilled from the same platform. Where a rig would send one well down vertically that turned horizontal for 600 feet in 2004, by 2011 the well was drilling 6000 feet horizontally. By 2014 they were drilling multiple wells with 43 miles of pipe with 23 miles of reservoir contact. By mid-2016 a fracking well was one vertical pipe down with 29 miles of pipe per platform with 28 miles in contact with the reservoir. Horizontal pipes are now drilled as far as 20,000 feet. They also found that more sand and more pressure opened up more rock increasing production. The discoveries defining shale oil production have shown no sign of slowing down.
(To be Continued. . .)
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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