The Oil Price Swoon Won’t Stop The Shale Boom

STILL PROFITABLE AT LOWER PRICES, FRACKING IS RIPE FOR TECHNOLOGY GAINS THAT WOULD HELP IT WEATHER FURTHER DECLINES.

The Wall Street Journal
By Mark P. Mills
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With oil prices sliding, energy investors are worried, while Saudi Arabia and Russia no doubt hope, that low prices will cap America’s boom in shale-oil production. Green-energy types sit by, happy to see turmoil in the fossil-fuel sector.

But price dips are common in oil and other markets subject to cyclical swings. True enough, sellers of any product prefer high prices to low; but the current slump sets the stage for what I call America’s shale boom 2.0.

Three factors make it unlikely that the decline in oil prices will bring the shale revolution to an end.

First, shale production is profitable at today’s lower prices. We know this because the boom began during the Great Recession years of 2008-09, when prices fell below $50 a barrel. The price U.S. shale producers got for their oil during the boom averaged around $85 to $90, even though the world price stayed well over $100.

That spread—the difference between the West Texas Intermediate (WTI) and world (Brent) price—was a direct consequence of too much domestic oil chasing too little capacity to move, store and use it. Yet in the past five years alone more than $500 billion of private investment went into hydrocarbon infrastructure. U.S. shale output was obviously profitable enough to spur the stunning growth in production and infrastructure when domestic prices were in the same range as world prices today.

Second, shale production is getting more efficient, which means that profits are possible at prices even lower than today. Smart drilling techniques—horizontal drilling, hydraulic fracturing and information technologies that accurately locate where to place rigs and enable precise steering of the drill through meandering horizontal hydrocarbon-rich shales—are far more productive than when the boom started.

According to the Energy Information Administration, the quantity of shale or natural gas produced per rig has increased by more than 300% over the past four years. This rise in productivity matches (in equivalent terms of capital cost per unit energy out) the improvements in solar power, but it took 15 years for solar’s gains. Solar is now experiencing a slow-down in efficiency improvements; there is no sign of a slow-down in shale technology.

The third factor is the profound economic leverage afforded by the enormous scale and diversity of America’s hydrocarbon infrastructure. Many oil-producing nations have only a few big oil fields and a handful of companies, sometimes just one. The U.S. has dozens of world-class fields, thousands of production companies, tens of thousands of related businesses, and millions of miles of pipe and rail.

Among the thousands of shale producers, you can guarantee there are pioneers just like those who started the shale revolution. As profit margins erode due to low or even lower future prices, the pioneers will try out the revolutionary new shale techniques that have yet to be deployed.

You might think that the latest drilling technologies are already in use, an easy sell when cash is gushing. Not so. Businesses rationally resist spending to disrupt existing machinery and operations simply to learn new tools and techniques. But they will chase profits through efficiency-boosting innovation in leaner times.

The pipeline of next-generation shale tech has been piling up with unfielded advances. These include automated drilling, micro drilling that allows for far faster deployment with a smaller rig footprint and new types of drills (some may use lasers soon), and big-data analytics to maximize yields by tapping into the surprising volume of data from complex shale operations. There is also nanotechnology to radically improve chemical formulations and safety, on-site water recycling and even water-free fracturing, and new classes of high-resolution subsurface imaging to radically improve exploration and production using real-time and microseismic imaging.

In a few years, as new technologies are adopted, journalists will be writing again about the “surprise” that U.S. production expanded by another three million barrels per day on top of that much growth over the past few years. The bounty will in due course spread to other nations where the geophysical shale resources easily match the thousands of billions of barrels in the U.S.

Oil prices will continue to experience cycles as technologies are deployed. And the world will stay awash in oil.

Mr. Mills, a physicist, is a Manhattan Institute senior fellow and co-author of “The Bottomless Well” (Basic, 2006).

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