Jan 29 2013
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US shale oil boom: A game changer?
JEDDAH - Reports about the US shale oil boom being a game changer have proliferated after the November 2012's prediction by the Paris-based International Energy Agency (IEA) that the United States will overtake Saudi Arabia and Russia to become the world's biggest oil producer by 2020 and energy self-sufficient by 2030. While such rosy predictions play well to the IEA's audience, which is largely American, they don't stand up to scrutiny.
Still, it is clear that US shale resources might play a significant role in non-OPEC supply prospects. The paper will argue that US shale oil production would hardly make a dent in the global oil supplies as it would largely offset the decline in US conventional oil production. It will also argue that the US would never be able to overtake Saudi Arabia or Russia in oil production and would continue to be dependent on oil imports for the foreseeable future, Mamdouh G. Salameh, World Bank - Oil Market Consultancy Service, said in a working paper early this month.
The paper concluded that the shale oil boom in the United States would not be easy to replicate in the rest of the world. As to shale oil's current production and supply prospects, total US production from known "main" plays is projected to increase from about 1 million barrels a day (mbd) in 2012 to 2 mbd in 2020 possibly reaching 3 mbd from 2025 onwards.
However, the increase in US shale oil production of 1 mbd between 2012 and 2020 would hardly offset the normal annual depletion rate of 3 percent-5 percent in US conventional oil production, estimated at 1.2 mbd-2.0 mbd during the same period. 3 So the global oil market would hardly benefit from the US shale production.
Outside the US, there is shale oil potential in 85 basins around the world. Some projections show that tight oil production will increase from less than 2 percent of global oil capacity in 2012 to more than 4 percent in 2020. With regard to the economics of shale oil development in the US, the drilling and completion costs for a horizontal shale well currently ranges from $4 to $6 million.
Drilling and completion costs required to develop a shale oil play will typically amount to $50,000-$75,000 per flowing barrel. This relatively high cost arises from the steep first year decline rate of 70 percent - 90 percent for the wells.
Nevertheless, a break-even oil price of $72-$80/barrel suggests that most shale oil plays are profitable at current oil price levels. There are large uncertainties about the size of US shale oil resources with estimates ranging between 800 billion barrels to 1.5 trillion barrels and spread all over the United States.
Although no serious attempts have been made yet to analyze its size, it seems that even if the in-place volumes are large, reserves will not be as high due to very low recovery factors, presently in the range of 1 percent to 10 percent with few exceptions. It is one thing having huge resources of shale oil in-place and quite another turning them into a sizeable production capacity.
According to the US Energy Information Administration's (EIA's) 2012 Energy Outlook, the unproved technically recoverable shale and tight oil resources in the US were estimated in 2010 at 33 billion barrels (bb), with recoverable shale gas resources about 480 trillion cubic feet (tcf). For the latter, it is worth mentioning that this level is almost half that reported (827 tcf) a year earlier. It is a further indication of the large uncertainties still associated with recoverable resource estimates.
US oil production is projected to increase from 6.41 mbd in 2012 to a projected 7.50 mbd in 2019. The growth results largely from a significant increase in onshore crude oil production, particularly from shale and other tight formations.
After about 2020, production begins declining gradually to 6.1 mbd by 2035 through to 2040 as producers develop sweet spots first and then move to less productive or less profitable drilling areas.
Oil imports are projected to decline from 65 percent of consumption in 2012 to 60 percent by 2019 before they resume their rise reaching 68 percent by 2035. This means that there is neither a chance for the United States ever to become self-sufficient in oil nor to overtake either Saudi Arabia or Russia in oil production. The fall of imports since 2009 reflected two things: a decline in domestic demand in the wake of the 2008-09 global financial crisis and increasing shale oil production.
The IEA said it saw US oil production rising to 10 mbd by 2015 and 11.1 mbd in 2020 before slipping to 9.2 mbd by 2035. Saudi Arabian oil output would be 10.9 mbd by 2015, the IEA said, 10.6 mbd in 2020 but would rise to 12.3 mbd by 2035.
Russian oil output, which over the past decade has been steadily above Saudi Arabia, is projected to stay flat at over 10 mbd until 2020, when it will start to decline to reach just above 9 mbd by 2035.
Allowing for the slow shale oil production and the steep depletion in US conventional oil production ranging from 3 percent-5 percent per annum, the projected US oil production by 2020 would amount to no more than 7.40 mbd, far less than the IEA projection of 11.10 mbd and far below the projected production of Saudi Arabia and Russia at 10.60 mbd and 10 mbd respectively.
Moreover, that level of shale oil production is probably sustainable for a couple of years because of the early peak and steep first year decline in shale production rates from new wells estimated between 70 percent and 90 percent.
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