How The Shale Revolution Turned The World Upside Down

  • Date: 22/04/17
  • Robert Rapier, Forbes

The shale revolution has sent shockwaves not only across the country but around the world. Ultimately OPEC responded to the threat with a price war to win back market share that was being lost. To date, it looks like that strategy has failed, but this is a game with many innings still to be played.

Overemphasizing the shift in the energy markets since 2005 is hard. Had you predicted the shift that was to come, you would have been widely deemed a lunatic. But let me take you back there for a moment and remind you of where we stood, and what played out over the next decade.

U.S. oil production had seemingly peaked in 1970 at 9.6 million barrels per day (BPD), and by 2005 had declined for 35 years. Production in 2005 stood at 5.2 million BPD, and crude oil imports had reached 10.1 million BPD — just under 50% of total U.S. petroleum consumption. The U.S. economy was in a precarious situation, highly dependent on oil imports from countries like Venezuela and Saudi Arabia; countries whose interests weren’t always aligned with our own.

Concerns about oil supplies weren’t limited to the U.S. In 2005 energy investment banker Matt Simmons published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Simmons helped set off a fierce debate about whether Saudi Arabia — and the world as a whole — had reached a global peak in oil production. This thesis gained traction over the next three years, as oil prices surged past $100/bbl and helped push the world into recession. The U.S. desperately needed a miracle to reverse decades of growing energy dependence. Actually one was in the works, unbeknownst to most Americans.

The situation in natural gas was much the same. U.S. gas production had peaked in 1973 at 21.7 trillion cubic feet (Tcf). By 1986 production had fallen to 16 Tcf, but in 2005 had recovered a bit to 18.1 Tcf. Not only did he sound the alarm on oil, but Matt Simmons had also predicted in 2003 that with “certainty,” by 2005 the US would embark on a long-term natural gas crisis for which the only solution was “to pray.”

Simmons wasn’t the only one to think that a natural gas crisis was imminent. In fact, it was widely believed that this would be the case, and companies began to plan and build liquefied natural gas (LNG) import facilities to cope with the expected shortfall. Natural gas prices began to spike ever higher during 2005, and the Henry Hub Gulf Coast Natural Gas Spot Price crossed $15 per million British thermal units (MMBtu) by year-end.

Insiders like Matt Simmons and T. Boone Pickens initially appeared to be correct in forecasting an energy crisis for the U.S. But these insiders were seemingly unaware that oil and gas producers were refining a technique that would turn the world energy markets upside down.

Hydraulic fracturing, or “fracking” had been around since the late 1940s and had been used extensively to promote higher production rates from conventional oil and gas wells. Fracking involves pumping water, chemicals and a proppant (like sand) down an oil or gas well under high pressure to break open channels (fractures) in the reservoir rock trapping the deposit. Oil and gas do not travel easily through certain reservoir types, which is why they need to be fractured. The proppant is designed to hold those channels open, allowing the oil or natural gas to flow to the well bore.

But legendary oilman George Mitchell was one of the key players behind the innovation that made such a dramatic change in the trajectory of the U.S. oil and gas markets. Mitchell combined fracking with horizontal drilling — another standard technique used in the oil and gas industry. Like fracking, horizontal drilling had been around a while and had been widely applied in the oil and gas industry since the 1980s.

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