Shale, shale, the oil’s all here! …. or maybe not!

[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:

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

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:


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

[2] .  This paper is a good, impartial introduction to horizontal drilling in general.

Photo from Jeremy Buckingham licensed under Creative Commons

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