Fall of oil price: Do shale oil and gas still have a future?
|octobre 7, 2015||Posté par Pierre Papon sous Articles||
After reaching a peak of $ 115 in June 2014, the price per barrel (Brent) dropped sharply since; after a sharp rise early in the year, it fell again this summer, fluctuating today around $ 50. The increase by 70% since 2010 of oil production in the United States (9.5 million barrels / day in June 2015 against 5.6 million in 2010), mainly due to the rapid exploitation of non-conventional oil (near 45% of oil in 2014) partly explains the decrease of the barrel price. The abundance of the offer while global economic growth slowed notably in China (world oil demand has increased by « only » 0.9% in 2014) contributed also to this fall. At the time, Saudi Arabia has refused to lower its production in order to play its traditional role as market regulator with, probably, the ulterior motive of trying to break the non-conventional oil production while decreasing oil revenues of Russia and Iran, countries with which it is in indirect conflict.
We just recall that hydraulic fracturing technique has allowed the rapid exploitation of gas from unconventional (shale) sources in the United States, the US gas production increased by almost 40% since 2005 and that of oil by 70%. Recall also that the gas or oil trapped in impermeable rock of low porosity; the « source rock”, is also the reservoir, including shales which are foliated rocks (see P. Papon « Shale Gas: Myths and Realities » Futuribles No. 399, p.81, March-April 2014, and Futuribles Vigie, No. 181, August 21, 2015, www.futuribles.com and Bauquis, P-R., Parlons gaz de schiste en trente questions, Paris, La documentation française, 2015). The label “non-conventional”, frequently used, has the advantage of being more general (it applies alsol to the coal gas but it excludes oil sands).
The gas production increase was very fast in the United States after 2008 (it rose from 570 Gm3 in 2008 to 730 Gm3 in 2014) mainly due to the breakthrough of the exploitation of unconventional gas (half of production) and caused a sharp fall in its price. It reached a low of $ 2 / MBtu in 2012, below the breakeven point which contributed to stop the operation of some gas wells; most rigs were then « converted » to the exploitation of non-conventional oil. The prices recovered to $ 4 / MBtu by the end of 2014 (but dropped to $ 3 by early 2015). For now, based on the latest operational data, it appears that oil price decline has had no significant impact on the exploitation of non-conventional hydrocarbons. Neither the production of oil nor of gas have declined over the past year. Oil production actually increased slightly until June 2015 (9.54 million barrels / day), but it started to decline in July (9.44 Mb / d) and the IEA « forecasts » that this decline will continue until October 2016 because of the economic conditions (see EIA, « Petroleum and liquids –other » www.eia.gov ), but the number of new well drillings (vertical and horizontal) decreased significantly (100 000 wells were drilled between 2005 and January 2015 in the US) and operating certain wells is off.
In fact, important technical advances in drilling since 2010 have kept the production growth: – the number of days required to drill a well has halved in five years – the spacing between vertical wells on the same site has also halved (150 m in 2014 against 300 m in 2010) – the length of horizontal wells fracturing the rock and acting as a drain to pump oil (or gas) may reach 2 km (instead of 1 km up in 2010) and their number increased. This technical progress, overcomes partly the serious handicap of non-conventional deposits: the low oil or gas recovery is rather low (5% instead of 50% for conventional oil) but it increases slowly. The profitability thresholds for conventional oil wells (excluding off-shore) and unconventional ones are, since 2014, equivalent ($ 60 per barrel on average, with a rate of return on investment of 10%, varying from one site to another), they are slightly lower for North Dakota shale oil ($ 56 per barrel). However, the poor economic climate has made bankrupt many small companies, some being redeemed by large companies which initially did not believe in the future of non-conventional hydrocarbons.
One should also note that the debate on the environmental impacts of hydraulic fracturing remain in the US because it raises local opposition in Europe as elsewhere. The State of New York has thus prohibited oil and gas shale exploitation, in December 2014, until further notice, and Ohio is also considering the same decision. A recent report by the EPA (Environment Protection Agency, Assessment of the potential impact of hydraulic fracturing for oil and gas resources on drinking water, Washington, 2015, www.epa.gov ) about potential contamination of drinking water (fracturing uses a very large volume of water with sand and, in average, ten chemical additives) reveals that 7000 drinking water resources are located less than one mile from a drilling site. If EPA finds that it has not been possible to demonstrate the serious impact of fracking on drinking water supplies (150 incidents, spills of drilling water, were recorded, 10% of them having contaminated surface water), it recommends monitoring to detect possible contamination of groundwater by discharges. More generally, regulations on drilling has been strengthened under the Clean Water and Clean Air Acts. In 27 states, drilling projects are subject to a prior statement, including indications about chemical additives to be used, the public must be informed before the operation. Finally, one has detected a highly significant increase in small earthquakes in some states of central and eastern United States, especially in Oklahoma (with a magnitude of 5.6 in 2011): the annual average rate increased from 20 earthquakes of magnitude greater than or equal to 3 over the period 1970-2000 to 100 over the period 2010-2013 (a similar phenomenon has been observed in Canada and the United Kingdom, cf. Witze, A., « Artificial quakes shake Oklahoma, « Nature, Vol. 520, p. 418, 23 April 2015, www.nature.com ). These earthquakes would not originate from rock fracturing (it does induce magnitude 1 microseisms) but large volumes of waste drilling water being dropped at great depth are causing stress in the rock, on geological faults.
The economic impact of non-conventional hydrocarbons in the US is somewhat debatable, many experts estimating that US oil and gas shale euphoria has contributed to the economic recovery, the US benefiting from cheap energy and US chemistry of an inexpensive raw material (gas). But is this situation sustainable? If the EIA (Energy Information Agency) is forecasting growth in unconventional oil production in the coming years in the United States with a cap by 2020-2030 before declining after 2035, while gas would pursue a more moderate growth between 2020 and 2040, other experts believe, however, that this non-conventional exploitation will be a transitory phenomenon. If oil prices remained low, it is likely that the production of non-conventional hydrocarbons will concentrate in areas of the Northeast and near the Gulf of Mexico (Texas, see map). Can we expect the development of gas and unconventional oil exploitation outside the USA? First recall that the « American model » of exploitation of non-conventional resources is probably not transposable to other continents: basement of law being different in the USA (private ownership of land and subsoil), favorable tax credits for businesses, existence of a network of highly dynamic service companies for the drilling and favorable geology over much of the territory.
Meanwhile, un-conventional hydrocarbon resources exploitation has started slowly, since 2014, in a small number of countries (oil in Argentina, the picture is the Vaca Muerta deposit, and gas in Mexico). In Quebec, where there are resources in the south of the Saint Laurent basin, the provincial government outlawed operations for environmental reasons. In Europe the situation remains unclear. Hydraulic fracturing has been banned by law in France in 2011 (assessment of exploitable resources was not really firm). In the UK, the government has allowed exploration drilling despite opposition, in Germany the exploitation of non-conventional hydrocarbons will be allowed but with strict conditions. Russia, China (where nearly 250 wells were drilled and gas exploitation would begin by late 2015), Australia and Argentina which have substantial resources will certainly not forego this possibility. In Algeria, finally, an exploration project by hydraulic fracturing in the In Salah region in southern Algeria sparked violent opposition demonstrations in February 2015.
It is difficult to augur the impact that the exploitation of unconventional hydrocarbons will have on the world hydrocarbon production. The US will soon become gas exporters (as LNG) which may hinder producers like Qatar or Algeria and Iran, but it is unlikely to export oil (they still contribute to 40% of their consumption). Oil prices remain a fluctuating parameter (estimates of oil prices evolution, the recent years have proved largely inaccurate), its level will depend on developments in world demand and the political context in regions such as the Middle East; Iran’s return to the international oil and gas market , following the Vienna nuclear agreement, will change the situation. Furthermore, the decline in oil prices considerably hampers all producing countries that need oil and gas royalties to balance their budgets (for most of them a price greater than $ 80 per barrel is needed).
The future of non-conventional hydrocarbons remains an open question: geology, technical progress, politics and the economy will weigh in decisions that will be taken to develop or curb their operation by 2030. It will be observed that if geologists long knew of the existence of shale gas deposits, they did not anticipate the rapid penetration of their operation after 2005, with the technique of hydraulic fracturing. One should not forget also that the development of shale gas production by keeping the price of gas at a low level , has induced a partial substitution of coal by gas in thermal electricity generating plants in the USA (who are now exporting coal to Europe…). This new situation raises the question of the place of gas in the energy transition, its combustion emits half as much CO2 as coal for equal calories which is an advantage, but it could also disrupt the rise of renewable energy, although it does not seem to have been the case until now.