The unconventional oil age looks promising
Shale is going global. Its arrival will shape the supply picture for years to come
Shale oil has transformed the American energy landscape. But can the phenomenon spread around the world? It's a crucial question for global oil markets. If the unconventional oil boom takes off outside North America it will disrupt international oil-trading patterns and ease supply tightness. If it doesn't, then Opec and other established exporters can rest easy. Shale oil, otherwise known as tight oil, will have been another little road bump on the group's journey to oil-market domination.
Optimists say the conditions are right for a truly global unconventional oil business. Sustained high crude prices and rising demand give drillers every incentive to unlock more supply. That's what worked in the US, where an unprecedented surge in production has shredded notions of the country's decline as an energy power.
In 2000, oil output from North Dakota, home to some of the most prospective parts of the Bakken, the 520,000 square km shale oil reservoir, was less than 100,000 barrels a day (b/d). Drillers like Continental Resources took a gamble, hoovered up acreage and began fracturing (fracking). By 2009, the Bakken's output doubled. Production is expected to hit 1 million b/d any month now, and it will keep rising.
In Texas, fracking of the Eagle Ford, Permian and other unconventional oil plays has lifted the state's production to more than 2.7 million b/d. If Texas were a member of Opec, it would be one of its top three producers.
The Energy Information Administration (EIA), a division of the Department of Energy, said in January that total US output reached 7.5 million b/d last year, an increase of 1m b/d in just 12 months. It expects production to rise again by the same amount next year and reach 9.3m b/d in 2015, the highest level since 1972. It will leave the US vying with Russia and Saudi Arabia to be the world's largest oil producer.
All this production growth is helping the recovery of the US economy, which is shipping in fewer barrels and shipping out fewer dollars. In 2005, oil imports accounted for more than 60% of consumption. Last year, they met a third. Next year, forecasts the EIA, imports will account for less than a quarter of the oil burnt in the US. The shrinking petroleum import bill is narrowing the US trade gap, which hit $34.3 billion in November, a yearly decline of 12.9% and the lowest deficit since 2009. No wonder. At global prices, the extra 1m b/d brought on line last year equated to $100bn or so that the country didn't pay to foreign suppliers.
This story could run for decades. The EIA's high resource case, one of its possible forecasts for the US' unconventional sector, sees tight oil supply accounting for around half of the country's production of about 10m b/d between 2020 and 2040. Throw in Canada's oil sands, which could pump 5.1m b/d by 2035, according to the country's National Energy Board, and North America won't offer much of a market for international exporters, if at all.
Across the world
The impact of this is already being felt outside the US. The extra barrels produced in the country last year accounted for all the world's demand growth, with some to spare. By last October, the most recent available data point, US imports of oil from Opec countries had fallen to just 3.4m b/d. In August 2008 the number was 6.4m b/d.
Politically, US unconventional oil has given the White House and its allies room to pursue sanctions on Iranian oil without triggering a damaging price spike. Even the crash in Libyan oil supply, or outages in South Sudan and Syria, have passed without a major rally in global markets. Saudi Arabia's willingness to step up output when necessary has also been a factor in this. But without the US' tight oil, these crises would have put enormous pressure on the kingdom's willingness to play a swing-producer role.
The sceptics, however, see snake oil in the shale, and say its rise will be short-lived and localised to North America. They also point to the steep decline rates of tight oil wells, which means ever greater numbers of them need to be drilled to keep production level. This is costly. The International Energy Agency (IEA) says the break-even price for light tight oil is $64 a barrel. Fine, while oil prices remain around $100/b, but not so good in a slump. Bernstein Research reckons the marginal cost of non-Opec production - chiefly unconventional North American supply - is now $104.50/b. Brent now trades only fractionally above that. It doesn't leave much wiggle room.
The other problem is more basic. The rest of the world is not America. The success of the Bakken and Eagle Ford is testament to a few small independent oil companies, run by men with a superhuman tolerance for risk, taking gambles with rocks the majors wouldn't touch with a drill stem. Until 2005, most people had only heard of the Bakken through phishing emails promising a Saudi-sized oil discovery in a forlorn corner of the American prairies. Some entrepreneurs believed it. Now they're extremely wealthy.
That kind of story isn't going to be repeated in Europe, where red tape is strangling progress and eco-warriors travel between proposed drilling sites to protest against them. It won't be repeated in China, Russia or South America, which all lack the fleet-of-foot services companies that have been responsible for the grunt work in the American unconventional oil sector. Those countries need people who know how to perform multi-stage fractures and drill 3 km horizontal wells.
With those constraints in mind, Opec, the shale sceptic-in-chief, recently forecast that tight oil output would peak in the OECD at 4.7m b/d in 2020 and decline sharply afterwards. Its reference case doesn't foresee any medium-term unconventional output outside North America. Opec' global market share has been shrinking with every extra barrel of tight oil fracked from the rock. Yet the group, not known for long-term strategic thinking, remains sanguine. It simply won't last, is its mantra, and it surely won't go global.
No one, least of all a conventional oil producer, should bet against the emergence of a global unconventional oil sector. As Petroleum Economist's survey this month makes clear, the phenomenon is spreading, slowly but surely. Its progress won't be as explosive as in the US, or follow the same path. For one thing, the majors, having missed the boat in the US, are in the vanguard of the international unconventional oil business; and some of the producer countries, bereft of infrastructure, will start from a lot further back. Spread, though, it will.
In January, BP forecast that tight oil's share of global supply would rise from almost nothing in 2005 to 7% in 2035. The US will still dominate, thinks BP, but Canada, Mexico, South America, Russia and China will all chip in, too.
A lot of unconventional oil now waits to be tapped. A study of 148 plays by IHS, a consultancy, found light tight oil reserves that could 'well exceed' 288bn barrels. If proven commercial, this would represent about a 12% increase in global conventional reserves. The IEA thinks there is even more: about 345bn barrels of light tight oil, and vast recoverable resources of kerogen oil (or oil shale) and oil sands.
The US is by no means the only major player in the tight oil reserves business, either. Russia, China, Argentina, North Africa, Australia, Venezuela and others all own vast tracts of oil-rich organic matter.
In Russia, some of the world's biggest oil companies are hunting for tight oil, willed on by the Kremlin and its ambitious target to keep oil output at present levels until 2035. The Bazhenov Shale, in West Siberia, is probably the world's biggest oil reservoir, with 1 trillion barrels in-place. It may dwarf the Bakken. So might Argentina's Vaca Muerta, where the majors have begun work.
Significant production from unconventional sources outside North America is probably a decade away, at least. Rosneft and ExxonMobil, for example, will only finish their pilot projects in the Bazhenov in 2015. But a hazy picture of future global unconventional oil supply growth is emerging. After the US will come Russia and Argentina. China and North Africa may follow. Much later, techniques to produce kerogen oil more cheaply and with less damage to the environment will surely emerge. And so on. Just 10 years ago, even many in the industry wondered where the next slug of oil production would come from. Now it has an answer.
Ticking along in the background are Canada's oil sands. Major development there is only really a couple of decades old. Yet it already feels like a mature unconventional region. Medium-term growth remains questionable, because Canada has not yet figured out how to export its bitumen to global markets. But that logistical problem will not last forever. As the rise of shale oil shows, the market will find a way to get the oil to the consumers who want to buy it.
What will the prospect of all this new oil do to prices? Probably not much. It remains costly to produce, so unless the methods of extraction get cheaper the price will have to stay roughly where it is. Consumers will have to get used to that.
High prices haven't just yielded more supply, they have also curbed excessive demand growth. The rate of consumption is rising at around 1m b/d now. Before the global financial crisis, it was at about 1.6m b/d.
The age of easy oil may be over, but an era of unconventional oil looks just as promising. Bounteous reserves of tight oil and oil sands will come on stream around the world in the coming years. This is an opportunity for oil companies, services firms and hopeful producers from Argentina to Madagascar, Russia and Australia. And it will be a boon for a global economy that needs more oil every year.