Sustainable North American oil boom would have complicated impact on OPEC

The steady increase in US oil output of recent years, especially as a result of shale oil exploitation, has not gone unnoticed by OPEC. But is it sustainable?

That was a question posed rhetorically by OPEC Secretary General Abdulla ElBadri in late October on the sidelines of a Gulf Intelligence energy forum in Muscat, Oman. Expanding on the issue, he said it remained to be seen whether US and Canadian crude production could be maintained at current levels, let alone increased, implying that it was too early for OPEC to start worrying seriously about any potential impact to the market call on the organization’s crude.

ElBadri’s comments are at least a little reminiscent of the position previously taken by Russian gas giant Gazprom on US shale gas, when its top officials repeatedly played down the potential for increasing North American gas supplies to have a knock-on effect on European dependence on Russian gas. Yet, with competing international gas suppliers such as Qatar diverting LNG cargoes from North America to Europe, that clearly has happened.

Nonetheless, ElBadri is far from the only noted energy expert currently dismissive of prospects for unconventional North American oil supplies to have a long-term impact on global markets.

At a previous Gulf Intelligence forum in Dubai in September, for instance, veteran analyst Fereidun Fesheraki, chairman of FACTS Global Insight, made light of the potential for rising Canadian heavy crude production capacity to have a lasting impact on the global oil market, characterizing it as expensive and “subsidized”.

Expensive by the standards of conventional onshore oil extraction, a Canadian official attending the Dubai forum agreed, but “subsidized” was a misconception, he told Platts. The official noted that neither the Canadian federal government nor individual provinces currently subsidize commercial oil and gas operations, including oil sands and other heavy crude production. They merely impose taxes at higher or lower rates on intrinsically profitable extractive ventures .

Industry insiders with specialist insight into the US shale gas and oil booms have convincing technical arguments with which to rebut the views of shale skeptics. One such is Schlumberger’s John Daniels, an expert in shale drilling and well stimulation. In a recent presentation in Abu Dhabi to the Emirates Society of Geosciences, he explained not only why such skepticism exists, but also why it is probably misplaced.

Asked whether US shale oil production was sustainable, Daniels’ answer was an unequivocal yes. “We’re at a cusp. It’s only going to go up,” he said.

The same held for North American shale gas production, despite vocal opposition from certain environmental groups, Daniels added, confidently predicting that the US would “soon” become an LNG exporter.

“I think it will happen because of the size of the resource in place and the (local) familiarity with it,” he said. “There’s still a lot of room for improvement here, and producers are going to be forced to become more effective with their exploration and production dollars.”

With regard to shale oil plays such as North Dakota’s giant Bakken field, producers had yet to commence serious efforts to reduce their environmental footprints by maximizing operational efficiency while reducing consumption of sensitive resources such as water. Once they did so, pressure from the environmental lobby would ease, Daniels predicted.

In the past, he explained, US oil and gas producers had taken a scatter-gun trial-and-error approach to choosing drilling sites on shale formations and applying well stimulation techniques such as hydraulic fracturing (fracking). With a high incidence of errors–drilling in the wrong place or designing a suboptimal stimulation program–well costs could be several times higher than for conventional production, with similar results for other key variables such as water consumption.

With a few exceptions, initial output improvements achieved by switching to horizontal from simpler, less costly vertical drilling, fell off quickly, leading to widespread skepticism about the sustainability of production levels in most shale operations.

The situation has generated a compelling need for better understanding of reservoir geology and how it affects fracking, which technology-based oil and gas services companies such as Schlumberger are now providing. Drilling the a reservoir’s sweet spots — locations maximizing the combination of reservoir quality and well-completion quality, or the presence or absence of formation water — is key.

Schlumberger currently has a model that can reliably predict from well log data where to drill the first five wells, Daniels said. The approach has already produced a 33% efficiency gain at Texas’ Eagle Ford shale.

Other technology advances related to well design and stimulation, all aimed at maximizing reservoir contact, may be especially helpful to Middle East states that are seeking to exploit shale gas and other unconventional gas resources. In Egypt, consumption of water at one such project has been cut by 30%, and by as much as 50% for the use of proppant used to keep reservoir fractures through fracking, Daniels reported.

“There is a huge amount of source rock down there that can be exploited,” he said with respect to potential Middle East and North Africa region shale gas resources.

Regarding heavy crude production, which is becoming an increasingly important part of Middle East oil output, there is more good news from the technology front.

In Dubai in October, Daniel Christian, a senior executive of utlilities pipe and services company Victaulic, demonstrated how a weldless modular pipe system widely used at Canadian oil sands operations could also have advantages for transporting mixtures of oil, water and sand pumped from mature fields in the region. One big advantage is that line sections held together by a groove system can be rapidly disconnected for cleaning and reconnected afterward, allowing passive separation of sand from fluids during transportation.

The bottom line for OPEC producers, therefore, is that the currently rising tide of North American unconventional crude may not start to ebb any time soon, but that technology adopted by US and Canadian onshore producers can also help keep MENA and other OPEC producers competitive. At the same time, exploitation of MENA shale gas resources could help some OPEC members, including Saudi Arabia, displace some of their increasing domestic oil consumption with gas.

Platts