The press has been abuzz recently with yet another energy surprise.
America is producing so much oil from shale that the nation is,
ostensibly, running out of places to store it all. The total quantity of petroleum stuffed into huge steel tanks right
now is at levels not seen for 80 years. Cushing, Oklahoma, for example,
is filling up — the now infamous interconnect point for the Keystone
pipeline is also the location of one of the nation’s big tank farms.
According to Energy Information Administration data, Cushing is 72% full now compared to a 48% level at this time last year.
Who, just a decade ago, would have thought the United States would be
seeing “peak storage” instead of “peak oil” so eagerly predicted by the
anti-oil lobby? And who would have thought that the oil price collapse may be setting
up conditions for yet another flood of American oil into world markets?
The technology used in the shale fields means that the crude glut is
actually even bigger than being widely reported, with deep long-term
implications for global oil prices. First though, it bears noting that the easiest and most obvious fix
to the run-up in oil supplies that domestic markets can’t use would be
to promptly repeal the antiquated American law that makes it illegal for
U.S. firms to sell their oil to other countries. Oil prices are set, as
most people who follow this subject know, in the world market. Yet
American oil producers can’t sell into that market. This situation not
only flies in the face of the free-market and free-trade ethos of the
United States, it fails the sanity test.
As CEO Harold Hamm recently said—
Mr. Hamm’s company, Continental, is one of the great new shale oil
producers, and thus one of those creating the glut—the president could
with a wave of the magic executive-order-wand, waive or suspend the
export prohibition. Or the Congress could send to the president for
signature a veto-proof bill repealing the out-of-date statute. Either
action would re-stimulate the job-creating and tax-generating shale
business activities in over a dozen states. (For more on this issue, see
my earlier The Case For Exports.)
But in the meantime in the real world, even though there are clearly
global customers for American crude, oil will keep piling up in above
ground storage tanks. And, more importantly, even more oil will pile up underground. How this latter happens, and what it means requires a micro-tutorial in shale.
The shale oil business is different. Production emerges from two
distinct construction stages. First a shale site is mapped out and long
horizontal wells are drilled within the shale seam (some as long as
10,000 feet). But unlike conventional wells, oil flow doesn’t begin with
the drilling. In a second separate step using different equipment, the
well is “completed” or “stimulated,” or in the vernacular, “fracked.”
Consider an analogy that is more accurate than most realize: the money
and time spent in stage one, to find, map and drill the well, is
equivalent to building a manufacturing plant. The completion stage is
the equivalent of connecting the factory to the power grid, turning
everything on and going into production.
Once the time and money have been spent building the production
capability, there is very little cost to just waiting to turn it on
later – putting the completion spending on hold when prices are too low
to justify operations (or customers just not available), and simply
leaving stored in situ all the oil that is ready to flow.
Today, the United States has some 3,000
wells drilled and ready to flow. Nearly all of them will remain idle
until needed. The amount of oil stored in those 3,000 wells ready to
flow is at least three times greater than all the oil stored in
steel tanks around the country. And it only takes a few months to turn
on well production. All those wells, when they roll, will add nearly three million barrels per day to U.S. production.
Add to this then, all the ‘extra’ oil parked in the steel tanks
around the country that, when released, can add nearly another one
million barrels per day. That combination, four million barrels per day,
equals an amount equal to the total growth in U.S. oil production seen
over the past half dozen years.
Since global oil prices swing on marginal changes in expected supply
or demand of just one or two million barrels per day, America’s
four-million-barrel-per-day of supply stored up is the unspoken wild
card in the coming months. In part because there is so much, and in part
because it can come on line so fast.
If, as some have claimed, the Saudis have been trying to drive U.S.
shale producers out of business, hoping that a subsequent supply
shortfall will push prices back up, they are in for a surprise. The
hundreds of small shale oil producers in America are likely to follow
precisely the pattern we have already seen for small shale gas
producers. When prices tick back up, new production comes on-line
practically overnight to capture the opportunity. When prices sag too
much, the producers quickly revert to storing the bounty underground.
All this has two salutary implications.
First, it means that much if not most of the control over the
throttle for oil prices has in fact moved from a single monopoly, OPEC,
to hundreds of entrepreneurial American firms. The geopolitical
implications of this have yet to fully diffuse. Second, it means that, absent ugly black swan events like massive
wars, American shale entrepreneurs have ended the brief realm of the
$100 barrel.
Meanwhile, the vast shale resources extant in the United States,
together with emerging technologies, mean that even at lower prices
there are still plenty of profits to be made in fueling the world’s
insatiable appetite for hydrocarbons. But for oil-producing nations that
are economic monocultures and kleptocracies, oil must be priced in the
stratosphere to generate enough money to prop up flawed or failing
economies. For them, the new price regime is not pretty. <>
http://www.forbes.com/sites/markpmills/2015/02/25/budget-wars-threaten-basic-science-and-future-innovation/
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