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Oil prices look set to fall as America exploits a shale cornucopia

My Times column:

Exciting as Britain’s latest shale gas estimate is
— 47 years’ supply or more — it pales beside what is happening in
the United States. There shale gas is old hat; the shale oil
revolution is proving a world changer, promising not just lower oil
prices worldwide, but geopolitical ripples as America weans itself
off oil imports and perhaps loses interest in the Middle East.

One of the pioneers of the shale gas revolution, Chris Wright,
of Liberty Resources, was in Britain last month. It was he and his
colleagues at Pinnacle Technologies who reinvented hydraulic
fracturing in the late 1990s in a way that unlocked the vast
petroleum resources in shale. Within seven years the Barnett shale,
in and around Forth Worth, Texas, was producing half as much gas as
the whole of Britain consumes. And the Barnett proved to be a baby
compared with other shales.

Like many shale entrepreneurs, Mr Wright is now spending a lot
of time in North Dakota drilling for oil. The success of America’s
shale gas revolution drove the gas price so low that in 2010 most
drilling rigs switched to looking for oil. With spectacular

A new report (The Shale Oil Boom: a US Phenomenon) by
Leonardo Maugeri, of Harvard University, sets out just how
astonishing this second shale revolution already is. After falling
for 30 years, US oil production rocketed upwards in the past three
years. In 1995 the Bakken field was reckoned by the US Geological
Survey to hold a trivial 151 million barrels of recoverable oil. In
2008 this was revised upwards to nearly 4 billion barrels; two
months ago that number was doubled. It is a safe bet that it will
be revised upwards again.

The big reason for the upwards revisions is technology rather
than discovery. Thanks to faster and cheaper drilling (which means
less-rich rocks can be profitable) and things such as “zipper
fracturing”, where two parallel wells are drilled and alternately
fractured to help to release oil for each other, the oil recovery
rate is rising from 2 per cent towards 10 per cent in places. Gas
is now nearer 30 per cent. Well productivity has doubled in five

Now the Bakken is being eclipsed by an even more productive
shale formation in southern Texas called the Eagle Ford. Texas,
which already produces conventional oil, has doubled its oil
production in just over two years and by the end of this year will
exceed Venezuela, Kuwait, Mexico and Iraq as an oil “nation”.

Then there’s the Permian Basin in west Texas, which looks as big
as the other fields, and the Monterey shale in California — the
source rock for all California’s ordinary oilfields — which, at 15
billion recoverable barrels, could be bigger than the Bakken and
Eagle Ford combined, according to a new report prepared for the
Energy Information Administration. The numbers are so large they
are almost ludicrous. Predictions that the oil supply in the US
would peak, loud a few years ago, are a distant memory.

On the ground shale oil wells look much the same as shale gas
ones. Both use pressurised water and sand with a smidgin of
kitchen-sink additives to crack the rock a mile underground. Even
in Texas, only 1 per cent of water consumption is used for
hydraulic fracturing. Aquifer pollution, radon pollution,
earthquakes you can sense and water disposal are all so far
non-problems. Of course, oil means carbon dioxide emissions, but at
least it might put the brake on biofuels, the most water-intensive,
energy- inefficient, land-grabbing, hunger- causing way of driving
cars yet devised.

Refineries in Texas are retooling to cope with this glut of
lighter crude oil; chemical plants are being built to use the flood
of cheap ethane (the raw material for many synthetic substances)
that comes with shale oil and gas.

Some still think this is a temporary bubble, and that the rapid
“decline rates” of shale oil wells — the production rate usually
halves after the first year — will cause production to tail off.
They said the same about shale gas too. But fast-falling costs
meant that shale gas drillers just kept on drilling new wells to
maintain production even as gas prices fell. Companies went bust by
the dozen, but consumers got the benefit.

Mr Maugeri calculates that at $85 a barrel most shale oil wells
repay their capital costs in a year. He estimates that even if oil
prices fall steadily to $65 in five years, shale oil production
will treble in the US because of increasing productivity per well
and the easing of transport bottlenecks. By 2017, he thinks,
America will be producing nearly 11 billion barrels a day
[correction 11 million], equal to its previous peak in 1970. It
would need much less in the way of imports. US oil imports peaked
at 60 per cent in 2005 and will be below 40 per cent this year.

Internationally the effect is very different for oil compared
with gas. Gas is costly to export by sea, requiring liquefaction.
This roughly doubles the cost of it, meaning that America’s cheap
shale gas boosts its economy at home, and gives it a competitive
advantage in attracting energy-intensive industries. (US gas prices
are a third or a quarter of what they are here.) Mexico, too, is
benefiting because of having a land border with America and

Oil is different. Although the two world oil benchmarks, West
Texas Intermediate and Brent Crude, are diverging in price at the
moment, this is unlikely to last. Oil is cheap to transport and has
a world price. So whereas America’s shale gas revolution hurts the
British economy, its shale oil revolution helps us.

There would be losers. America’s falling appetite for imports
may hit Nigeria and Angola harder than the Middle East because of
the types of oil they produce, while Canada and Venezuela, whose
tarry oil sands are high-cost, would also suffer if oil prices
fell. But every oil producer would eventually feel the effect of
this falling US demand, so there is no doubting the downward
pressure on world oil prices that this revolution is likely to

This week John Llewellyn, a former head of forecasting for the
OECD, wrote a report for Puma Energy predicting that oil prices
could halve to $50 a barrel by 2020. Of course, all sorts of things
could blow that prediction off course — political upheavals in
producer nations such as Iran, Brazil or Venezuela, faster growth
in China and India, an environmentalist backlash in America — but
there is little doubt that the inevitably ever-rising price of
fossil fuels as they run out is, for the third time in my life,
proving a myth.

By Matt Ridley | Tagged:  rational-optimist  the-times