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Matt Ridley: The Second Shale Revolution

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Matt Ridley, The Times

Exciting as Britain’s latest shale gas estimate is — 47 years’ supply or more — it pales beside what is happening in the United States. There shale gas is old hat; the shale oil revolution is proving a world changer, promising not just lower oil prices worldwide, but geopolitical ripples as America weans itself off oil imports and perhaps loses interest in the Middle East.

 

One of the pioneers of the shale gas revolution, Chris Wright, of Liberty Resources, was in Britain last month. It was he and his colleagues at Pinnacle Technologies who reinvented hydraulic fracturing in the late 1990s in a way that unlocked the vast petroleum resources in shale. Within seven years the Barnett shale, in and around Forth Worth, Texas, was producing half as much gas as the whole of Britain consumes. And the Barnett proved to be a baby compared with other shales.

Like many shale entrepreneurs, Mr Wright is now spending a lot of time in North Dakota drilling for oil. The success of America’s shale gas revolution drove the gas price so low that in 2010 most drilling rigs switched to looking for oil. With spectacular results.

A new report (The Shale Oil Boom: a US Phenomenon) by Leonardo Maugeri, of Harvard University, sets out just how astonishing this second shale revolution already is. After falling for 30 years, US oil production rocketed upwards in the past three years. In 1995 the Bakken field was reckoned by the US Geological Survey to hold a trivial 151 million barrels of recoverable oil. In 2008 this was revised upwards to nearly 4 billion barrels; two months ago that number was doubled. It is a safe bet that it will be revised upwards again.

The big reason for the upwards revisions is technology rather than discovery. Thanks to faster and cheaper drilling (which means less-rich rocks can be profitable) and things such as “zipper fracturing”, where two parallel wells are drilled and alternately fractured to help to release oil for each other, the oil recovery rate is rising from 2 per cent towards 10 per cent in places. Gas is now nearer 30 per cent. Well productivity has doubled in five years.

Now the Bakken is being eclipsed by an even more productive shale formation in southern Texas called the Eagle Ford. Texas, which already produces conventional oil, has doubled its oil production in just over two years and by the end of this year will exceed Venezuela, Kuwait, Mexico and Iraq as an oil “nation”.

Then there’s the Permian Basin in west Texas, which looks as big as the other fields, and the Monterey shale in California — the source rock for all California’s ordinary oilfields — which, at 15 billion recoverable barrels, could be bigger than the Bakken and Eagle Ford combined, according to a new report prepared for the Energy Information Administration. The numbers are so large they are almost ludicrous. Predictions that the oil supply in the US would peak, loud a few years ago, are a distant memory. […]

Some still think this is a temporary bubble, and that the rapid “decline rates” of shale oil wells — the production rate usually halves after the first year — will cause production to tail off. They said the same about shale gas too. But fast-falling costs meant that shale gas drillers just kept on drilling new wells to maintain production even as gas prices fell. Companies went bust by the dozen, but consumers got the benefit.

Mr Maugeri calculates that at $85 a barrel most shale oil wells repay their capital costs in a year. He estimates that even if oil prices fall steadily to $65 in five years, shale oil production will treble in the US because of increasing productivity per well and the easing of transport bottlenecks. By 2017, he thinks, America will be producing nearly 11 billion barrels a day, equal to its previous peak in 1970. It would need much less in the way of imports. US oil imports peaked at 60 per cent in 2005 and will be below 40 per cent this year.

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