From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June 2014 prices have more than halved. Brent crude oil had dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.
The reasons for this change are twofold - weak demand in many countries due to insipid economic growth, coupled with surging US production. It has been this growth in US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, that has been one of the main drivers of lower oil prices.
Added to this is the fact that the oil cartel OPEC is determined not to cut production as a way to prop up prices.
There are different theories floating around regarding why the oil price has fallen since 2014, the main reason was the production of Shale oil mainly by USA, Canada and UK.
Science behind Shale -
Tight oil also referred as shale oil , is found in abundance in some places in the world. Tight oil is similar to oil produced from conventional reservoirs. It should not be confused with oil shale (Kerogen shale) which is naturally occurring oil.
Actually shale oil should be appropriately called as Tight oil. Tight oil because its found in rocks having low permeability. This permeability is important because for the reservoir oil to flow into the well bore ,the rocks should have interconnected pathways between pore spaces or natural fractures found in rocks.
Its the application of advance technologies which make these developments unconventional. The quality of Shale oil is deemed to be good as it requires little refinement.
Production
Shale oil is produced by way of hydraulic fracturing , which is used to generate fractures in the rocks to increase permeability ... so that oil can flow to the well bore.
After the preproduction stages are complete shale oil is produced by horizontal drilling. The purpose of horizontal drilling is to increase contact between reservoir and well bore.
Step1-Vertical hole is drilled until the well bore reaches above the targeted reservoir. Typically 1000-3000m
Step2 -Kick off and begin to drill at an increasing angle until the well bore runs horizontally into the targeted reservoir.
Step 3- Drill horizontally to desired length. Around 3-4 km. The purpose of horizontal drilling is to increase contact between reservoir and well bore.
Step 4 -Tight oil reservoirs require some kind of stimulation often referred as hydraulic fracturing or fracking.
High pressure fluids are pumped into the well bore to fracture the rock so that oil will flow freely to the well bore. Water is used as the base fluid with 3-12 additives. It is also ensured that the fracture is propagated in the right direction. These fracking may result in the formation of seismic waves in the earths crust.
Step 5- Once the fractures have been produced,sand or ceramic beads are pumped into these small openings to hold open the cracks.
Step6- Once pathways have been created conventional methods like pump jacks are used to produce the well. This oil is stored in storage tanks (called as batteries) and transported using trucks or pipelines.
Well production is robust during the initial stages and will decline over time.
In many cases , tight oil development is used to increase the overall recovery from the existing well. These Infill wells are located amongst existing conventional oil well.
In contrast Halo wells are located on the fringes of the existing field and rely on the utilization of new technology to expand boundaries of productive zone or “ sweet spot “ within the oil bearing formation.
Shale gas- It is a natural gas trapped in shale formations. Shale gas has become an important source of natural gas in the US.
Environmental impact-
Environ impact includes water contamination, Emission, Seismic activity , Noise and health hazards.
Water contamination- In order to frack, an enormous amount of water is mixed compounds including chemicals and radioactive to create frack fluid. Moreover, many chemicals used in fracking have been documented to have deleterious health effects at small levels of exposure.
This frack fluid is further contaminated by the heavy metals and radioactive elements that exist naturally in the shale. A significant portion of the frack fluid returns to the surface, where it can spill or be dumped into rivers and streams. Underground water supplies can also be contaminated by fracking, through migration of gas and frack fluid underground.
Air pollution-
Shale gas which is emitted during the production of oil is a major pollutant. This includes methane and small amounts of ethane.Looking at ethane and methane together, shale gas and oil extraction were found to be easily the dominant source giving leak rates of 0.18-2.8% even before the gas was distributed to users.
Ethane can remain in the air for around two months, making it a global pollutant. Ethane measured from the top of the Swiss Alps has been rising since the start of large scale US shale gas extraction in 2009, indicating an increase in the global methane leakage from natural gas.
Seismic Events-
Fracking may cause a seismic event to occur as sound waves are created in earth. These micro seismic events are would release energy similar to a gallon of milk falling from a kitchen counter. Although oil major claim that these are micro seismic activities. However 3 earthquakes are felt in areas of fracking one in US,Canada and the UK. Fracking may induce earthquakes however this is still not scientifically established.
Dynamics of conventional Oil and Shale oil-
In military
language, whereas conventional oil and gas companies are the equivalent of
traditional armies that need a comprehensive plan, a long time to be deployed
and plenty of men who move accordingly, shale/tight oil companies are more like
guerrilla groups, that need to move on a micro-scale, on multiple
micro-objectives by flexibly leveraging on time and opportunities, and know
almost perfectly the environment they are operating in.
The
conventional oil and gas sector is a long-term business that requires the
ability to manage huge projects over several years, sometimes decades. Once the
exploration phase has shown the commercial feasibility of a given discovery – a
process that requires, on the average, about two years – it may take on average
an additional 8-10 years (or more) to bring the newly discovered field on line,
e.g., to start producing oil and gas.
The break even prices for Shale oil in US is shown in the chart.
All of this
changes dramatically in the shale and tight oil business. In fact, it takes only
a few months from obtaining a drilling license to bringing a well online. A shale well initial production rate over the first weeks of
operation represents peak output that is bound to wane substantially during the
following months of a well’s life. This implies that the foreseeable short to
medium time price of oil is essential to any drilling strategy: In other words,
starting production when the market is down means selling the bulk of a well
total production for cheap without possibility of recovery because after one
year of activity that well would produce 50 percent
less.
Given the
industry’s current cost structure, per-well productivity profile, transportation
bottlenecks, and refining constraints, the higher-cost, marginal shale oil
barrel has had a break-even point of $85 per barrel. In some cases it may be $
40 per barrel or less.
Not everything is rosy for the sustained oil
boom-
First and
foremost, a sudden oil price fall in the short term will likely determine a
significant contraction of oil drilling, starting with the most expensive areas
of U.S. shale formations. In turn, this would lead to a drop in production.
In fact, the drilling of new shale wells can be interrupted
very rapidly, within a few months or even weeks, in a scenario in which a drop
in oil prices renders continued investment unprofitable or much less profitable.
This is because shale development occurs on a per-well basis and not on a field
basis, as in conventional oil activity, and critically depends on short-term oil
prices given that peak production is achieved during the first weeks of a well
activity and the bulk of production is obtained during the first and second year
of production. The opposite is true as well: shale activity can be resumed
outright if oil prices later would resume their upward climb
.
Falling oil prices are indeed beneficial for the economy which is importing oil for their consumption and vice versa. In the case of oil price increases, there will be a transfer of income from oil consumers to oil producers. On an international level, the transfer is from oil importing countries to oil exporters, and oil exporters tend to expand demand only gradually. Its estimated that $10 rise in price of crude would decline the world production of goods and services by 0.5%. that is world economy would be $225 billion lower.
Gainers and losers-
Russia: Russia is one of the world's largest oil producers, and its dramatic interest rate hike to 17% in support of its troubled rouble underscores how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes. Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia's economy would shrink by at least 0.7% in 2015 if oil prices do not recover. Despite this, Russia has confirmed it will not cut production to shore up oil prices.
Venezuela is one of the world's largest oil exporters, but thanks to economic mismanagement it was already finding it difficult to pay its way even before the oil price started falling. Inflation is running at about 60% and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices. The country already has some of the world's cheapest petrol prices - fuel subsidies cost Caracas about $12.5bn a year - but President Maduro has ruled out subsidy cuts and higher petrol prices.
Saudi Arabia the world's largest oil exporter and Opec's most influential member, could support global oil prices by cutting back its own production, but there is little sign it wants to do this.
There could be two reasons - to try to instil some discipline among fellow Opec oil producers, and perhaps to put the US's burgeoning shale oil and gas industry under pressure. Although Saudi Arabia needs oil prices to be around $85 in the longer term, it has deep pockets with a reserve fund of some $700bn - so can withstand lower prices for some time.
If a period of lower prices were to force some higher cost producers to shut down, then Riyadh might hope to pick up market share in the longer run.
However, there is also recent history behind Riyadh's unwillingness to cut production. In the 1980s the country did cut production significantly in a bid to boost prices, but it had little effect and it also badly affected the Saudi economy. Alongside Saudi Arabia, Gulf producers such as the United Arab Emirates and Kuwait have also amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary.
Other Opec members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre. They have combined foreign currency reserves of less than $200bn, and are already under pressure from increased US competition.
Nigeria, which is Africa's biggest oil producer, has seen growth in the rest of its economy but despite this it remains heavily oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of the country's exports.
The war in Syria and Iraq has also seen Isis, or Islamic State, capturing oil wells. It is estimated it is making about $3m a day through black market sales - and undercutting market prices by selling at a significant discount - around $30-60 a barrel.
With Europe's flagging economies characterised by low inflation and weak growth, any benefits of lower prices would be welcomed by governments.A 10% fall in oil prices should lead to a 0.1% increase in economic output, say some. In general consumers benefit through lower energy prices, but eventually low oil prices do erode the conditions that brought them about.
China, which is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices won't fully offset the far wider effects of a slowing economy.
Japan imports nearly all of the oil it uses. But lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe's growth strategy to combat deflation.
India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India's fuel subsidies could fall by $2.5bn every year - but only if oil prices stay low. Every increase of $1 per barrel in Indian crude basket prices pushes up the annual oil import bill by $1.2 billion. Indian economy especially during past two years of Narendra Modi tenure also had the “tail wind” benefit of the falling oil prices.
Future of
Shale oil
Shale oil will
have a future indeed for the prices above $70 a barrel. This technology will
improve driving down the cost of production but future still remains
unpredictable.I am working with Oil and Gas Industry downstream. The falling oil prices have resulted in many offshore rigs going offhire ,resulting in loss of job....
Indeed with the price of oil it would be a mixed bag of fortunes ....
WIN SOME..... LOSE SOME......
