[Crossposted from my blog on All American Politico.]

It’s the economics, Stupid!

Shale gas well 2

Shale gas well

Today, one cannot turn on the TV or read a newspaper without being bombarded with comments about our shale resources[1].  On the one hand, there is unending hype about how shale oil and gas will lead to North American (not US) energy independence in the future.  [I discussed this topic in general in my earlier post, Drilling for Data.]  On the other hand, there are ongoing claims about potential ecological disasters resulting from fracturing (“fracking”) the shales.  This column will concentrate on the economics of developing these resources and their effect on the global energy market.

Costs for a shale oil well:  The cost to develop a shale oil well can be four times greater[2] than that for a “conventional well,” for several reasons:

  • Drilling: The wells are horizontal, and to be economical must pass through hundreds of feet of the shale bed, which may only be a few feet wide.  This requires much more complex drilling and real-time monitoring of the process.
  • Casing: Running the steel casing in a horizontal well is trickier and more expensive.
  • Fracking:  The fracking process itself is complex and expensive

Shale oil production: The production from a shale oil well is limited by several factors:

  • Previous production:  Many of the currently popular shale regions (Bakken, Marcellus, etc.) have been drilled previously using conventional methods, leaving less for current production.
  • Fracking is usually a last resort:  In a conventional well, fracking is considered quaternary recovery, following natural flow, pumping and injection.  Here it is the primary method, and thus these wells produce 10-20% of the total oil in place vs. 30+% for conventional wells.
  • Shorter life: A typical well has a 20-30 year productive lifetime, while, for the reason above, shale oil wells have much shorter lives.

The combination of higher costs, shorter lives and lower total yields, make shale oil viable only in the case of high petroleum prices.  If, by some miracle, oil prices should drop, producible (i.e., economically viable) shale oil reserves would vanish.  Even at today’s prices, major oil companies are reevaluating the situation:

Royal Dutch Shell profits dropped 60pc to $2.4bn (£1.6bn) in the second quarter after drilling of its shale oil assets in North America showed they were worth $2.1bn less than it had thought.

What about shale gas?:   Shale gas is even less promising than shale oil in the short term, but offers potential long-term benefits. The costs of drilling a gas well are comparable to those for oil, but:

  • Lifetime: Gas is more volatile than oil, and so comes rushing out when the rock is fractured.  In a typical well, gas production can drop  82% in the first year!
  • Transportation: Gas is easy to transport domestically via pipelines, but international shipments require expensive liquefaction facilities.  When the shale gas boom started, supplies far exceeded local demand, and the US price crashed, leading the Chairman of ExxonMobil to state last June: “We are all losing our shirts today ” on natural gas.  Gas drilling in the US continues to plummet.
  • Longer term:  If the US can reconfigure both its electrical generation and transportation sectors to use natural gas instead of other hydrocarbons, we can tap the abundant domestic supply and reduce both pollution and exports, but that is a BIG IF!

 


[1] Even my All American Politico colleague Mark Finelli has chimed in.

[2] https://www.dmr.nd.gov/ndgs/newsletter/NL0308/pdfs/Horizontal.pdf .  This paper is a good, impartial introduction to horizontal drilling in general.


Photo from Jeremy Buckingham licensed under Creative Commons

cobernicus

cobernicus

I am a physicist by training, currently VP of an Engineering Co. in CT. I am active in the Association of Yale Alumni and local politics. I serve on the Cheshire, CT Planning & Zoning Commission and was previously its Chair.

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