Shale : The Future Of US Oil

July 15th, 2016 by

oil-rallyTechnical advances in horizontal drilling have transformed shale oil into the most cost-effective and fastest sector in the US petroleum industry. Fracking operations in the American West are now considered the global swing producer, instead of Saudi Arabia.

As efficiency has risen and costs have fallen, shale now supplies 2/3 of the natural gas and 1/3 of all oil production in the US. The industry is now turning its attention to addressing environmental concerns over fracking.

Evolution In Action

The global oil glut began in 2014, as OPEC increased production to destroy its foreign competition. These actions was chiefly aimed at the huge oil boom in American shale oil operations, which had made the US nearly self-sufficient.

As oil prices fell under $100 a barrel, then under $70, then under $50,  the easy loans that fracking companies used to fund operations dried up. Every drop in the price of crude reduced the value of the oil reserves they had on the books, and made it harder to roll over their debt.

(photo: NY –, CC BY-SA 3.0)

Those oil companies that had over-expanded or had ignored efficiency measures began to go under. Debt rating agency Fitch recently reported that almost 1/3 of oil drillers that used junk bond financing have defaulted on a total of $29 billion in debt, and anticipates that to balloon to $40 billion by the end of the year. This follows $13.6 billion in defaults last year. Eric Rosenthal, Fitch’s senior director of U.S. leveraged finance, noted that the recent oil rally to $50 a barrel was not enough to save many of the oil operations that are on the ropes. “It’s a matter of when rather than whether they’ll default,” he said. Bloomberg reports that at least 130 oil drilling and drilling services companies have gone under since January 2015, leaving behind $44 billion in debt that will never be paid off.

Those drillers who are left standing have proven to be the ones who could cut costs and raise efficiency enough to survive the worst oil bust in 30 years.

Cost-Cutting King

WalMart has nothing on today’s shale industry when it comes to cutting costs. The average shale company has cut costs by 40% since OPEC began its price war in November 2014. In comparison, the average vertical drilling outfit has only been able to cut costs by 10% – 12%.

oil marketA recent study found that the average break-even price in the Eagle Ford shale fields was $48 per barrel. The average break-even price for Permian Basin wells was $39 per barrel. Before the global oil glut destroyed prices, many drillers needed $65 a barrel or more just to break even.

Now, shale drillers are the low-cost leaders. At $60 a barrel oil, 60% of profitable operations are shale, 20% are deepwater offshore, and 20% are traditional land wells.

We Don’t Need A Bigger Boat

Unfortunately for deepwater offshore oil and natural gas operations, shale exploration and production has several things in its favor. Obviously, onshore horizontal drilling infrastructure costs a small fraction of offshore oil development. The average deepwater offshore oil well costs $70 million to drill. In comparison, the total cost for drilling a shale oil well averages $8 million.

oil_rigsAny explosions or spills in the shale patch affect a much smaller area, and are quicker and easier to clean up than offshore blowouts (see also: Deepwater Horizon). Evacuation of an offshore rig due to accidents or weather conditions requires hiring helicopters or boats to evacuate the crews. A hurricane or tropical storm threatening offshore oil operations can result in a sudden shortage of evacuation vehicles, causing a jump in prices. Evacuation of an onshore rig is as easy as everyone piling into the crew van and driving away.

The actual drilling is also faster and cheaper. A horizontal fracking well can be drilled in as little as two weeks, though it can take up to 30 days in some cases. Offshore wells can take up to a year to complete, costing $800,000 to $1.5 million a day or more.

Dark Lining To The Silver Cloud

The major hurdle that shale oil operations now face is the effect of fracking on the environment. After the wells are drilled, a slurry of 90% water, 9.5% sand, and 0.5% chemicals are pumped in under high pressure to hydraulically fracture the nearby shale formations to free the trapped oil or natural gas. The sand remains in the new cracks to allow the gas and/or oil to flow into the well bore, while the chemicals help the oil flow more freely. Steel pipe is used to line the vertical part of the well to prevent seepage into groundwater or aquifers.

crude oilIt takes up to 8 million gallons of water to frack a shale oil well. Even though the chemicals comprise one-half of one percent of the mixture, it still adds up to 40,000 gallons of non-biodegradable chemicals. Among the hundreds of different chemicals used in fracking are lead, radium, uranium, methanol, mercury, hydrochloric acid, ethylene glycol and formaldehyde. Considering that 50% to 70% of fracking fluid is never recovered, these chemicals can use the same crevices that held the oil to slowly seep into groundwater. The fluid that is recovered is sometimes stored in open wastewater ponds, allowing the chemicals to evaporate into the air.

Now consider the fact that an individual shale well can be fracked up to 18 times!

Tackling New Challenges

Concerns over the risk of leaving the chemicals in the ground has spawned an entire industry focused on mitigating these risks and cleaning up the hazardous waste that results from shale drilling operations. In the meantime, the hunt for nontoxic additives has gone into high gear, in part due to new EPA regulations

Research by several companies, including industry leaders Halliburton and Schlumberger,  is focusing on using biodegradable or food grade additives to avoid inadvertent contamination of groundwater. Advances by Schlumberger also include a new fracking method that uses 40% less sand and 60% less water, while improving production by 20%.

Here Comes The Sun (And The Wind)

sunrise-313501_1280The challenge of reducing the environmental impact of fracking is only part of a larger challenge to the future of the shale oil industry. Renewable energy production in the United States is expected to grow from 14% to 44% by the year 2040, mostly at the expense of the coal industry. Natural gas’s portion of electricity production will fall from 33% to 31% in the US over the same time period, but the rest of the world will transition away from gas much faster.

While shale may continue to be most responsive and cheapest source of oil and natural gas in the US, that is a pie that will get ever-smaller over time. The industry has tackled the cost problem, but to survive it will have to solve the pollution problem to avoid being the big frog in a little pond.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product

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