Thanks to the developments of horizontal drilling and hydraulic fracturing, shale gas has become a major source of energy for the U.S. A surge in the production of unconventional gas has raised expectations so much that the U.S. will be changing the old paradigm among major gas suppliers like Russia and Qatar in the upcoming decade, and will likely become one of the major gas providers to the global gas market. Yet, the future of shale gas and tight oil is still considered to be far from certain and its future critically hinges on gas prices and environmental concerns.
Innovations in shale have coincided recently with a significant fall in oil prices, which has been as one of the major hurdles for the shale industry. Since June 2014, the price of oil has dropped roughly by half, reaching $50 per barrel. Loss of revenue has resulted in the reduction in the number of active oil rigs in the U.S. In 2014, as the number of shale plays began to shrink, some industry commentators, such as Forbes’s Bill Powers, started predicting that the shale revolution “like all bubbles, … will pop sooner than expected.” Indeed, recent reports have shown that the number of drilling rigs has plunged. Yet, the volume of crude oil has increased and, according to the Energy Information Administration, the production of crude oil recently has reached its highest level in the last forty years.
Given the lifespan of shale gas wells, some are more significant than others among the U.S. shale plays. The Utica of Ohio, the Bakken and Marcellus formations play crucial roles in contributing to U.S. shale oil and gas production. The Marcellus alone singlehandedly contributes to 20 percent of overall natural gas production in the U.S. and this shale play continues to grow.
To emphasize the importance of Marcellus shale gas field for the U.S. natural gas industry, Powers noted, “without the huge growth in production from the Marcellus over the past two years, overall U.S. shale gas production would have peaked in 2012.” Overall, the Bakers Institute’s study highlights that with the help of these big producers, the U.S. shale oil and gas industry have been able to adjust their production level to the new economic environment. It is also notable that the collapse of oil prices has put further strains on the shale industry.
Recently, Bloomberg reported that on Oct. 10, 2014 the number of active rigs equaled 1,609 while total oil production was 9 million barrels per day (mbd). By stark contrast, on March 4, 2015, the number of active rigs was only 802 while production increased to 9.4 mbd. This might look paradoxical; however, what these figures clearly indicate is that fewer rigs do not correspond to less oil. Despite a reduction in the number of rigs, total oil production in the U.S. is still rising, due to efficiency and sunk costs in newly found rewarding shale wells.
As the industry develops, less efficient rigs are taken offline and production is then focused on more lucrative wells, which means squeezing more oil from fewer shale wells. With regards to the sunk costs, producers keep pumping oil due to the high upfront costs in shale extraction. For these reasons, the production of shale oil has gone up and is projected to continue to do so, according to the U.S. energy forecast.
Shale gas and tight oil production in the U.S. is likely to remain the major source of energy for decades to come, even if as Forbes predicts, the boom ‘bubble soon pops.’ This is primarily because the extraction procedure can be replicated in many places throughout the world namely, in China, Argentina or even in Russia and Poland given their vast shale reserves, according to the U.S. energy information administration.
Despite the major obstacles facing the industry, the shale boom will continue to be successful providing that the life span of shale wells can be sustained. This can be achieved by a continuous increase in drilling and with more innovative technologies while potential dangers to the environment can be mitigated through constant monitoring while implementing high standards and regulations.
As long as shale production exceeds its break even price of $65 per barrel, and oil rigs continue to be drilled, the production of tight oil and shale gas is likely to remain a major source of hydrocarbons for the energy needs of the U.S. Further, the current rise in oil prices, which has hit as low as $30 at the beginning of this year and bounced back to $50 as of June 2016, gives hope to the U.S. shale industry, encouraging it to continue drilling more wells.
