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Will Shale Oil Fuel Manufacturing Boom in the US?

Will Shale Oil Fuel Manufacturing Boom in the US?

Will Shale Oil Fuel Manufacturing Boom in the US?

Matt Badiali is a long-time commentator and analyst on the oil and gas, and mining sectors – he was a speaker at this year’s inaugural Sprott Vancouver Natural Resource Symposium. Matt has recently reported on the opportunities in American shale oil and gas. His recent piece, below shed some light on just how big shale oil and gas could turn out being for the US – and why it’s just getting started.

Hello again from San Antonio’s Henry B. Gonzalez Convention Center. I’m here attending the fifth annual DUG Eagle Ford conference, held by Hart Energy Publishing. This is the largest of Hart Energy’s events. This year there are 4,800 attendees at this conference (which is a whole lot).

Some interesting comments from the early presentations…

One of the big questions about shale is ‘at what oil price is it no longer economic?’ I heard two estimates today that can shed some light on that. One source said that even if the price of oil falls to $65 per barrel, drilling in the Eagle Ford will be robust.

Another said that at $45 per barrel, everything shuts down. So that gives us a $20 per barrel window where we go from game on to all stop.

The state of Texas now produces as much oil as Iraq. Roughly 3 million barrels of oil per day. Most of that comes from two sources, the Eagle Ford shale in Southeast Texas and the Permian Basin in West Texas.

Operators in the Eagle Ford shale are responsible for two major technical and economic innovations. First is pad drilling. This technique allows several wells to be drilled at different depths and directions from the same well pad. It results in dramatic cost savings, which makes the wells much more economic.

The second is enhanced completions. This is a combination of much longer horizontal legs and massive amounts of sand injected into the well during fracking. To put that into perspective, a four-well pad will consume two 100-car trainloads of frack sand.

To put that into an economic framework for you, by using those two techniques, Sanchez Energy will cut its well costs by $1 million (over 10%). It will increase its returns by 10% from 50% to 60%.

Finally, service giant Baker Hughes’ VP Tammi Morytko dropped a bomb on the crowd. She said that 60% of all frack stages, or about $40 billion in well costs, are wasted. They are ineffective. Luckily, that is improving. The industry’s goal, she said, was to improve the 6% oil recovery we get today to 15%. In other words, we only get about 6% of the oil out of shale. And it’s made an enormous impact on the U.S. supply. Her goal of 15% is 2.5x that much oil. That would be amazing, and I believe it’s possible.

Chris Guith the senior Vice President of Policy for the Institute for 21st Century Energy (U.S. Chamber of Commerce) laid it out for us. Our technically recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand.

The in-place resource — that is the volume we know exists but can’t quite figure out how to extract — works out to 586 years of natural gas, 536 years of oil, and 9,844 years of coal. In other words, there is an enormous amount of supply out there. In fact, the U.S. has the world’s largest fossil fuel resource. It’s up to the engineers to figure out how to get it out economically.

Chris also pointed out how large a benefit the shale revolution is for the U.S. economy. Since 2007, all non-farm jobs fell 2.6%. Oil industry jobs rose 38.6%. In 2012, there were 2.1 million jobs in the sector. By 2025, there will be over 4 million jobs. It’s a great time to teach your kids about rocks or pipes…it’s a growth industry.

Another benefit will be a manufacturing renaissance. In the U.S., thanks to cheap natural gas prices, it costs just $300 per ton to make ethylene. In Europe and Asia it costs over $900 per ton. And you can export ethylene (as opposed to crude oil).

Chris said that there will be about $120 billion invested in the petrochemical industry to take advantage of the cheap prices. It will go into making vinyl, polypropylene and other plastics.

Those products will go on ships to the rest of the world…all thanks to the shale revolution.

All in all, I learned a ton today. The impacts of this trend are working their way out into the economy. We will see a major change in the U.S. economy… Instead of service and technology leading the way, we’re likely to see a resurgence of manufacturing… something completely unthinkable in 2005 or 2006.

Fascinating stuff. Now we just have to figure out how to profit from this information.

Courtesy: Matt Badiali via Sprott Group

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