How anarchy works for shale oil

It’s a bit obscene – for years we have watched the meteoric rise of shale oil and now, as prices have gone down dramatically the party seems to be over. Doom and gloom at big shalecorp?

Not so fast.

The wild story reminds me of the DotCom bubble around 2000. I was working for a French IT startup then – that’s where I got my programming skills. This sure makes me a bit geeky but …

What has this all got to do with shale oil? More than meets the eye.

When the DotCom bubble popped, the internet startups went down the drain. Well, most of them. It was like the proverbial asteroid that had killed the Dinos in order to cleanse the world and make space for the most dangerous predator of all times – humans.

Now – just 15 years after the bubble popping wreaked havoc in the startup scene, look at web based businesses. Not only they are thriving, but they also pose a serious threat to the brick and mortar way of doing business.

OK, we got it. Shale oil extraction costs are going down and USD 40 seems to be what USD 70 used to be just months ago. Wait a minute – this is a pull from the optimization bottle – no more. Sure those pesky shale drillers must hit a bottom as this cost-cutting can’t go on forever and finally they will buckle and wither away. At least this is what many other oil-producing countries must be thinking – judging by their actions.

Not so fast. Because this paradigm change is much more serious.

Shale developers like EOG claim that they can be profitable at lower than 30 and potentially even lower than 20. How can that be? Most OPEC producers start having lethal trouble at those oil price levels.

Here comes the anarchy bit and that’s a bit hard to understand.

Look at an Amazon warehouse. If you are looking for the system how things are deposed and how they are picked you might get a little mad – as there is none. New wares are just put on whatever available shelf space there is and scanned for its location and when pickers search for anything, they get directions from a screen. Computers figure out where is what, who picks it, in what order and where this item eventually goes.

Without superior data management and number crunching, this all would not be possible. A warehouse like those Amazon battlefields could not have existed 15 years ago. Computers were not good enough to deal with the inherent chaos in such a system and human operators would have been so inept handling it – so that this would have resulted in utter mayhem in less than 2 hours.

Today, however – this stuff works so well, it has turned decades worth of warehouse logistics on its head and blew it to smithereens.

Services like Uber run on exactly the same principle. It takes the analysis process out of the equation as this is being done by the computers and it reduces humans to mere robotic agents that will perform whatever task they are assigned to. Just imagine autonomous vehicles that need no driver anymore together with this. It might just ring in the end of car ownership and a lot of other stuff we have become so accustomed to.

Big data is going to happen to shale as well and it actually already does. When shale started to catch my interest in early 2006, no one really understood the behavior of shale wells or shale reservoirs or whatever else. It was simply punching holes in the ground, drive in some horizontal holes and frac this thing to see what happens. It was no more than butchery compared to the needle pins that puncture many shale sweet spots today.

Ah yes, the term sweet spot hit me a little after 2006 when even I started to understand that those shale reservoirs are not homogeneous. What reservoir is homogeneous anyhow? Conventional O&G reservoirs have never been this way so why should shale be?

A sweet spot is a little part of a reserve where for some reason the commercial balance between exploration cost and flow rate swings wildly towards the positive. In simple words, this means less money spent for every MM Btu (or barrel) of product lifted.

But the data crunching goes far deeper. Shale companies are learning their trade at an astonishing clip – far quicker than the cumbersome oil world can adapt so analysts are scrambling to revise their predictions almost on a weekly rate. What was said yesterday likely is the crap of tomorrow. See – analysts are used to a pretty static world in big oil. Changes were annual – sometimes decadal and there are traces of that in the system today. The question is – what parts of the drilling planet are affected by the nanosecond drilling entrepreneurs and what not.

Let’s drill this a bit further – compared to today’s surgical methods in drilling, their drilling cousins from just 10 years ago look like butchers trying to remove your tonsils with a machete. Drill-bits have more options than straight down. Drilling goes almost fully robotic making new rigs more cost effective than even dreamed about 5 years ago, the internal structure of sweet spots is better understood and re-fracing becomes a business by itself complete with re-fracing scientists and engineers that will vastly increase flow on your re-stimulated well.

But even more, low prices make location a factor again. Producing shale gas close to the market basin costs less than producing conventional gas somewhere in Siberia from where it needs to be transported for thousands of kilometers through wild lands and even wilder transit countries before the end consumer can cook a meal. This means that even if your shale is a sliver more expensive to extract (and this rationale is tumbling down the drain so fast, it got our heads spinning), your conventional gas might still be more expensive.

In time (and we are not talking decades here) enough shale in the US will be so cheap to produce that the transportation penalty of getting it there will not be worth it anymore. That kills the biggest energy consumer as a market for most oil producers as even if they can get it out of the ground cheaper, they won’t be able to bridge the transport gap.

Those shale producers are living under constant duress, so they stay slim and aggressive, no way to relent. This comes coupled with serving a local market that they know better than the back of their hands.

And the journey is far from being over. Reserves are less important by the day – abilities to thrive in a mad world with shifting conditions is getting you into business again.

New oil is precision strikes at reservoirs close to the home turf. Data and the ability to mine it for the nuggets is more important than blind booking of reserves in the future.

But you know that – don’t you?

2 replies
  1. Colin McAndrew
    Colin McAndrew says:

    I agree except that logistics of drilling wells are much more complex than Amazon and Uber. Also, there is no Moore’s Law for drilling shale wells: plateau on cost reduction soon as seen only Permian holding up, never mind the end of free money. Similarly we will never see a hydrogen economy as we never saw lead being turned to gold.
    I will be worried about shale oil when I see rigs headed from US to Argentina: USA has unique advantages.

    • Rudolf Huber
      Rudolf Huber says:

      Colin, sure they are more complex. But the underlying rationale is the same and let’s be frank, more complexity just means more variables the gizmos can feast on. I also agree that the end of free money is going to put a stake into the heart of some initiatives, but all over I have more faith in the manufacturing skills of shale drillers than in the skills of monster O&G companies in deep-sea settings. Rigs will move to Argentina and to China and maybe it’s there where the next chapter is being written. But I have a hard time they will beat the roughneck, unbridled entrepreneurialism of North America.
      Call me naive but I fundamentally believe in humans going after the pot of gold once they smell the opportunity. Thanks for taking the time to comment by the way – I truly appreciate.

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