The past decade has seen an explosion of drilling into the United States’ shale oil reserves. Many people feel as though the shale boom will make life easier for everyone involved with an added bonus of cheap oil. Although we have transitioned from importing the majority of our oil from countries in the Middle East and Venezuela, domestic oil costs much more to produce on US soil.
In the Bakken formation in North Dakota, oil is coming out of the ground at the feverish rate of one million barrels per day. The initial flow rate from shale rock formation is usually very high, however the rate of production declines quickly and steadies off. In the first year of drilling alone, shale well production will drop about 60-70%. According to the International Energy Agency, it would take 2,500 new wells per year just to keep Bakken oil production at current levels. Iraq would only need 60 to do the same.
The price of oil has remained around $100 per barrel in recent years, which makes shale oil production profitable. Shale oil takes an estimated $60-80 per barrel to break even on cost for domestic production, depending on the area being drilled, the extent of drilling and the ability to get it to market. In Iraq, each barrel costs about $20 to extract. If the price of oil dropped to $80, drilling companies would have little incentive to continue drilling new wells and funding exploration ventures.
If technological advances, new techniques and speed of drilling continue improving, this will drive down the costs of producing from shale. This will in turn put downward pressure on the price of oil. Horizontal drilling has transformed the industry from drilling straight down into a formation to drilling a curved well that can follow a shale formation and access it throughout. The technique called multi-stage fracturing also boosts oil output. Traditionally, wells would be drilled, the rock would be fractured, and production would be static from that point. Multi-stage fracking fractures the rock at several different points along the well bore.
Independent oil producers in the U.S. spend approximately $1.50 for every dollar they earn in revenues. They also carry a sizable amount of debt. With oil prices at sustained, elevated levels, investors are content with current levels of debt. If the price of oil fell and investors saw their potential for profit falling in lockstep, they would likely chose to invest elsewhere. Having high debt and slim profits makes for a poor investment. A sustained drop in oil price would cause companies to slow or even halt drilling, which would result in a decline in production.
With all the headwinds confronting oil companies, the shale oil boom does not seem like it will be ending any time soon. U.S. oil production is projected to rise to 9.2 million barrels per day in 2015 from 7.4 million in 2014. Recent shale exploration has revealed that the Permian Basin in western Texas contains approximately 30 billion barrels of oil. To put it in perspective, the nearby Eagle Ford formation is estimated at 7-10 million barrels, and the Bakken formation at 4.3 billion barrels. With many companies rushing to greener pastures to produce in the Permian and other domestic hot-spots, the conversation on shale oil is far from over.