How Shale Oil Grows So Fast – In this section and the next few articles, we will talk about The Petrodollar and the Geopolitics of Oil which is part of Tesla’s Revolution as the leader of the electric car company today. To understand more, we recommend reading the following article – and the series;
How Shale Oil Grows So Fast
The main source of unconventional oil in recent years has been shale oil resource plays in the United States. The large ramp-up to a production level of 4.5 million barrels per day in 2015 came as a complete surprise. In themselves shale oil and gas were not unknown resources; in 1821 a shallow shale gas well was brought into production. Geologists have understood since the nineteenth century that many such plays existed, as shales formed the initial starting point of oil and gas formation. And even politicians were aware of the potential with president Richard Nixon in a 1973 presidential address calling for a program to develop commercial extraction of shale oil in the US. Yet its rapid development surprised even insiders.
Shales are the so-called ‘source rocks’ in which oil was formed from organic matter that was deposited during periods of warming 50 to 150 million years ago. A large part of the oil formed in these rocks migrated through porous cracks and microholes into ‘reservoir rocks’ of conventional oil fields, which formed a more concentrated pool enclosed by a cap rock that trapped the oil in place. In the underground layers where such cap rocks were not in place, the oil continued to migrate slowly to the surface, where bacteria either ate it over millions of years, or it became mixed with sand, forming what we now today call the tar sands of Canada.
What geologists also knew was that shale oil was difficult to extract because of the low porosity of these rocks. Many vertical wells would have to be drilled with little payoff, were it not for two key innovations made in the last 15 years: the perfection of horizontal drilling, and the utilization of hydraulic fracturing via explosives and chemicals to open the rocks underground for oil to flow. These innovations made it possible to extract a lot of oil from shale in a short time, at a cost of about $70 per barrel around the year 2010.
Shale deposits are situated deeper underground than conventional oil fields, and in formations that were more horizontally stretched out and not as thick. The start of shale oil and gas exploitation at scale in 2005/06 became possible because of new techniques like hydraulic fracturing or ‘fracking’, which entails pumping a dense liquid down an oil or gas well at pressure to crack open the rock. Hydraulic fracturing had already been utilized for over half a century; in its first application in 1948, a mixture of leftover Second World War napalm mixed with sand was pumped down the well to pressure the rocks open to allow gas and oil to escape.
Testing hydraulic fracturing in the 1980s in shales was first done by a US company called Mitchell Energy. The company was after shale gas and first drilled many uneconomic wells in the Barnett Shale, but it managed to rapidly reduce the cost of fracturing as it drilled over 589 wells between 1982 and 2000.
Only a few years later, large-scale exploitation started after prices jumped to over $50 around 2005. This increase in oil prices made it feasible to translate the shale gas drilling experience with horizontal wells directly to shale oil.
Only since 2003 have horizontal wells been successfully and at large scale applied in the Barnett shale.
Today, three US regions provide over 85% of shale oil production. These are estimated to contain 33 billion barrels of oil in resource totals. Another 15 plays have been found to possess significantly large amounts; however, oil companies have not been successful in ramping up their production due to their different geological formations.
In a situation of relatively low oil prices of around $40 per barrel, the majority of shale oil-producing wells return a loss. As a consequence, the drilling of new wells has virtually come to a halt in 2016, and oil production dropped by nearly one million barrels per day. Shale oil will thus only continue to provide significant quantities if oil prices rebalance to levels above $60. Some producers are able to operate at lower prices due to cost cutting, but this is only the case for the best ‘sweet spots.’
For most companies, the majority of debt needs to be paid off in 2017 and 2018. If oil prices stay low, millions of oil workers will be laid off, and the US economy could face a severe economic hit.