Oil/gas developers are finding new ways to micro-manage the means by which they approach shale formations and the yield curve of U.S. production has not peaked. In fact, the rate of production increase could be compared to Moore’s law in microprocessors that the “transistors in an integrated circuit doubles every two years.”
The trajectory in technological fracking technology advancement between 2014 and 2016 was an awakening to the petroleum industry. According to Peter Zeihan, by mid-2016 each well had the production potential three times what which was considered the norm in 2014 for a 50 percent increase in costs. To scale this will increase U.S. baseline output by 50 percent. They project that by 2019 a price structure near $25 barrel is possible. The U.S., not the Saudis or any other conventional type of oil production, will win this gas war. The Saudis, OPEC and Russia have to be stunned at the turn of events.
U.S. conventional oil and gas producers cannot compete with shale oil production either. The radio commercials that I hear touting investment in oil drilling and forecasting “higher oil prices” may be miles off. The investment had better be in shale and the outlook for oil prices given shale oil technology is frankly flat. Sell rallies. This is great for consumers.
Zeihan estimated that the shale oil revolution saved the average American family $1,100 in cheaper gasoline and $750 year in cheaper electricity. He says that compared to the Bush tax cut of $315 annually. I don’t know if President Trump will make America great again, but the shale oil revolution has made a major contribution toward that result. Shale oil and gas production is at this point by and large an American technology and industry. It takes not only shale but the right kind of shale oil formations and the U.S. has the most and best shale. It takes more than shale to develop a successful shale oil industry. It also takes lots of capital, infrastructure such as pipelines, technological expertise and a skilled workforce, which America is best positioned to work with. Wherever else there are shale oil formations around the world they are lacking some of the other components needed to harvest and market it.
Desert countries such as Algeria and Libya lack water along with nearly every other component of a shale oil industry. Russia has large shale oil formations but they will need Exxon or others to develop it, so as long as there are sanctions on Russia their shale oil industry will stay dormant. China has shale but it is poor quality and is not a productive type. Persian Gulf producers have no reason to develop shale oil with the only conventional oil in the world that is cheaper to produce than shale oil.
Zeihan also noted that Arabian oil is produced at night and that shale oil is a 24 hour/day operation. It is 120 degrees during the day there which significantly complicates shale oil production increasing costs. The best shale oil in France lies under Paris. The green movement in Europe will not let them frack under cities. He says that the best prospects for shale oil production outside of the U.S. are Canada, Mexico, Australia and Argentina.
A WSJ headline says that “Shell, Exxon and others that were late to the U.S. boom, grab at new opportunities. . .with big jumps on Argentine Shale.” The article says that Argentina has more available shale gas than the U.S. The cost structure in Argentina is different though. Shell says that steel pipe casting costs 40 percent more there than in Texas. Exxon says that it costs 2-3 times as much to drill a well in Argentina than in the U.S. Argentina does have some pre-existing transportation infrastructure, local expertise and reasonable regulation but lacks money as they are broke. U.S. companies will have to develop it but Argentines make bad partners. Anytime that anything works there they confiscate it through taxation.
Canada is producing shale gas but is a residual supplier to the U.S. now that the U.S. industry is producing so prolifically. Some extensions of U.S. shale formations reach into Mexico but Donald Trump is more interested in building a wall and messing with NAFTA. Investing in Mexico carries new risk until defined.
So the U.S. shale oil industry is most of the present existing global shale oil industry and for the world industry to develop it will be primarily the U.S. industry with the proprietary production knowledge and technology to be able to do it. If you don’t understand the U.S. shale oil industry you can’t know much about the world petroleum production or the oil market for that matter.
After reading this, I hope that you can appreciate how the change occurring to U.S. oil production in real time is of a scale to be compared to U.S. Agriculture changing horse power from animals to machines. The Saudis/OPEC/Russia are curtailing production but also have to compensate with the increasing U.S. shale oil production if there is to be a significant supply tightening of the market. If prices moved to $60 barrel as some have predicted (not me), U.S. shale oil producers will be making solid profits to exploit their ever improving production prowess to finance a new higher level of production. I think that the Saudis and Russia will get tired of holding back production so that U.S. shale oil producers can take market share from them. The other half of the equation is demand – cheap oil helps economies grow.
P.S. For ethanol to compete with shale oil corn has to stay cheap.
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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