The lessons from US fracking
US fracking companies have cut costs much further than expected to stay in the increasingly competitive petroleum market. Rhiannon Garth Jones looks at the consequences and lessons of its success.
By the end of November 2015, crude oil prices had fallen by 30% from June that year to around US$72 per barrel. Concerns were widely raised about the fiscal breakeven, the oil price at which budgets would be balanced, for most OPEC countries and whether OPEC would reduce production in a bid to bump up prices – Libya, Iran, Algeria, Nigeria, Venezuela, Saudi Arabia and Iraq all had a fiscal breakeven of US$101 or higher.
OPEC didn’t curb its production. No country wanted to reduce its market share, especially in the face of high levels of US shale production. At the time, there were 1,115 American drilling rigs, the peak of the US shale boom. Prices have since continued to fall – dropping below US$30 at one point in 2016 – and US production has suffered since April 2015. But a revival is on the cards – Baker Hughes, the oilfield services group, registered 464 US rigs at the time of press, up from 384 in May.
The US shale industry reacted quickly to falling prices by cutting jobs and closing rigs. The shale industry is much more flexible than most of its competitors, with its wells taking only a few weeks to drill and complete. By July, Wood Mackenzie reported that US shale drillers had cut costs by 40% to remain competitive. Averil MacDonald, Emeritus Professor at the University of Reading, UK, noted additional reasons for the cost reductions, saying, ‘better seismic imaging has allowed targeting of sweet spots rather than the previous trial and error of drilling to find spots with good flow rates. It's also possible to drill more wells (laterals) per pad, which is far less costly. The key effect is that overall productivity per rig has improved, making the business far more viable.’
That flexibility and improved technology in the US shale industry is bad news for other producers. Ed Crooks, US Industry And Energy Editor at the Financial Times, commented that ‘Any rival producers that need higher prices to be financially viable should be worrying about being eaten alive’. Scott Sheffield, Chief Executive of Pioneer Natural Resources, one of the most active shale drillers, has publicly stated that he expects a long-term oil price of about US$60 per barrel. It will fluctuate around that level, he believes, and could occasionally reach US$40 or US$80. But any producer that needs oil to be consistently above US$60 will be in trouble.
Your bad news is my good news
MacDonald says the reported reduction is ‘very significant and has gone far further than the Saudis were expecting. This makes a great difference to the balance of the markets.’ However, there are reasons for the UK to be confident, she says. ‘The UK can learn lessons from the US industry, including seismic imaging and good targeting of sweet spots. It's important to note that the UK shale layer is thicker than in America, which is promising. More shale reserves accessible in each pad means more laterals can be put in.’
And MacDonald thinks it’s an opportunity worth taking. ‘A viable shale gas industry has the potential to be of huge importance to the UK. As North Sea gas reserves decline, shale gas can ensure that the UK doesn't have to rely on imports. We already import around 50% of our gas, at a cost of £18 million per
day. A UK shale gas industry would not only provide jobs, it would also keep that £18 million per day in the UK economy, contributing to tax receipts and supporting services. It also potentially allows investment in the infrastructure we require for renewable electricity generation to achieve our carbon reduction obligations.’
There have certainly been signs recently that fracking might go ahead in the UK, despite vocal public opposition. In May, councillors in Yorkshire approved the UK’s first fracking project in five years, at the Kirby Misperton site. In August, new Prime Minister Theresa May announced she is considering paying up to £10,000 directly to households affected by fracking in their neighbourhoods, in a bid to make sure local people feel personally invested.
Tom Crotty, Director at petrochemicals company Ineos, has said the company hopes to lodge up to 30 planning applications to drill test wells in the next six months and could begin extracting gas in early 2018. Crotty said that he was confident that recent rule changes to allow ministers to intervene if local councils delay granting permission would finally lead to Ineos drilling test wells.
Ineos is not alone in making plans for the UK – Cuadrilla is hoping to extract gas in 2017 in the northwest, subject to planning approval, and iGas plans to test its first gas sites in northern England by 2018.
At the UK Onshore Oil & Gas: Planning and Environment Summit, in July, Professor Paul Younger noted that many of the concerns surrounding fracking in the UK were based on problems in the USA that would not be possible in the UK, which has much stronger environmental regulations, both in terms of the chemicals used and permitted seismic impact.
In his recent interview (Materials World, June 2016), Professor Younger highlighted the UK’s likely ongoing dependence on natural gas, as we try to ensure enough supply to meet demand, while reducing carbon emissions. In the long term, that will mean phasing out fossil fuels but, in the short term, he believes that being dependent on gas is better than coal, because the carbon emissions are much lower. Additionally, indigenously produced gas has a lower carbon footprint than imported.
While the success of the US shale industry continues to cause concern for other major oil-producing countries, it could be a cause for optimism in the UK.