The Shale Revolution Isn’t Ending. The Shale Challenges Aren’t Either.
By Richard Murphy, Product Manager
Although oil prices have risen back to the $48 to $50 per barrel range, they remain far below the levels that kicked off large-scale shale oil production in the United States just a few years ago. Still, the latest data make it clear that shale is completely remaking the oil industry, even without crude prices approaching or surpassing $100.
The Energy Information Administration’s latest numbers put July shale oil production at 5.47 million Bbls of oil per day, and August is expected to be higher than that, at 6.03 million BOPD. This level of production is astonishing when considering that, from 1999 through 2011, total U.S. oil production rates were between roughly 5 million and 5.8 million BOPD. In other words, shale oil production in the United States, on its own, is at a level greater than the nation’s entire production as recently as 2011.
What this indicates is that shale oil is here to stay and is not a temporary experiment, even with oil in the $40 to $50 range. Notably, many shale oil wells being drilled now are profitable at prices less than $40 per Bbl, helped considerably by improvements in drilling technology. Further technological advances are likely to bring costs down further.
The tremendous growth of shale, coupled with the recent changes to federal law allowing exports of domestic crude, have made the U.S. a major oil exporter. Exports hit 1 million BOPD in February and could climb to 2 million BOPD in the next year or two. If so, the U.S. would be on par with Kuwait and Nigeria as an oil exporter.
Additionally, these developments potentially make the U.S. a major swing producer, a role held by Saudi Arabia for the last few decades. In fact, we’ve already seen what can happen in this regard: Due to the embargo a few Middle Eastern nations are enforcing against Qatar, the U.S. recently filled this position for the United Arab Emirates, which purchased a tanker with 2 million Bbls of Texas condensate.
More than likely, oil prices will have to drop to $35 per Bbl, or lower, and then stay there before shale wells would see major abandonment. Of course, if that type of price drop were to happen, the entire industry, and not only shale oil, would be in trouble.
Rapid Industry Change
The extraordinary increase in shale production has caught many companies off guard because it’s happened so quickly – the industry is significantly different than it was as recently as 2010. Often, systems built for the pre-shale days are struggling to keep up with changes brought about by the new shale output. Why? The reason is that shale oil has a unique set of needs, including:
– Thousands of truck and rail logistics movements can be required for even a moderately sized company. Managing these movements can be exceedingly difficult due to the fact that shale oil often is produced in areas that lack pipeline and storage infrastructure.
– Shale oil requires significant blending, which has to be properly managed because it differs greatly from the pipeline and refinery specifications for which the refining business was optimized prior to 2010.
– Forecasting can be enormously difficult owing to the hundreds or even thousands of wells a company might have in production, as well as because of the non-linear production curves that shale wells tend to have.
– Exporting new crude oil, especially light, sweet oil, such as what’s found in the Eagle Ford, can have a huge positive impact on producers and marketers. However, it also means that systems must be able to handle new markets, delivery locations, currencies and vessel-borne transportation, along with all of the complications that concurrently arise.
Ultimately, companies that focus on having the processes and systems in place to cope with all of the changes from shale production will be well-positioned to take full advantage of the shale revolution. At the same time, those that have systems and processes stuck in the 1990s, the early 2000s, or even 2010, will be left behind.