Frack­ing fu­els half of U.S. out­put

The Pak Banker - - MARKETS/SPORTS -

It re­cently hit a new mile­stone in the U.S. Frack­ing now ac­counts for more than half of all U.S. oil out­put, ac­cord­ing to the En­ergy In­for­ma­tion Ad­min­is­tra­tion. It's a stun­ning feat con­sid­er­ing frack­ing made up less than 2% of Amer­i­can oil pro­duc­tion in 2000. Hy­draulic frac­tur­ing tech­nol­ogy, more com­monly known as "frack­ing," paved the way for drilling into Amer­ica's enor­mous shale de­posits. It has fu­eled a dra­matic boom in U.S. oil pro­duc­tion.

Back in 2000, there were just 23,000 frack­ing wells pump­ing about 102,000 bar­rels of oil a day. Now there are 300,000 frack­ing wells, churn­ing out 4.3 mil­lion bar­rels per day.

Frack­ing "has al­lowed the United States to in­crease its oil pro­duc­tion faster than at any time in its his­tory," the EIA said in re­cent re­port.

U.S. out­put has nearly dou­bled over the past decade and Amer­ica only trails Saudi Ara­bia and Rus­sia glob­ally.

That surge in Amer­i­can crude is one of the main rea­sons why there is a global glut in oil that­keeps get­ting worse. The ex­cess sup­ply caused oil prices to peak in mid-2014 and crash as much as 75% since then.

"Prices are where they are be­cause shale has been so phe­nom­e­nally suc­cess­ful. It's changed the whole pric­ing par­a­digm," said Ta­mar Ess­ner, di­rec­tor of Nas­daq's en­ergy team. Frack­ing in­volves shoot­ing a mix­ture of mostly wa­ter and sand un­der high pres­sure against a rock for­ma­tion un­til it frac­tures. The sand fills the frac­ture, forc­ing crude oil out of the rock for­ma­tion.

Frack­ing has been crit­i­cized for its po­ten­tial en­vi­ron­men­tal con­se­quences, in­clud­ing wa­ter con­tam­i­na­tion and earth­quakes. These con­cerns were summed up in a 2010 HBO doc­u­men­tary called "Gasland" that fo­cused on com­mu­ni­ties im­pacted by nat­u­ral gas frack­ing.

Shale oil is not a new dis­cov­ery. It's ac­tu­ally been around for 60 years. What's new is that the tech­nol­ogy has vastly im­proved in re­cent years.

In­no­va­tion has made pre­vi­ously-ex­pen­sive frack­ing much more ef­fi­cient. High oil prices be­fore and af­ter the Great Re­ces­sion lured tons of in­vest­ment dol­lars into this space, fuel­ing a tech­no­log­i­cal rev­o­lu­tion. In­vestors were also mo­ti­vated by ex­tremely low in­ter­est rates to bor­row cheap and in­vest in this tech­nol­ogy. The frack­ing rev­o­lu­tion first hit the nat­u­ral gas space, fuel­ing a wave of pro­duc­tion in giant shale fields such as the Bar­nett and Marcellus spread across Texas, New York, Penn­syl­va­nia and Ohio. But a sup­ply glut quickly formed in nat­u­ral gas, caus­ing prices to crater.

Frack­ing then spread to shale oil fields, led by the Ea­gle Ford and Per­mian Basin of Texas and the Bakken for­ma­tion of North Dakota. This turned out to be a game changer be­cause it brought about a ton of new sup­ply that was cheaper to drill than deep­wa­ter projects or even the Cana­dian oil sands.

"The in­cre­men­tal amount of new sup­ply was re­ally un­der­es­ti­mated. I don't think any OPEC mem­ber took shale se­ri­ously un­til maybe two years ago," said Ess­ner.

The other game-chang­ing char­ac­ter­is­tic of frack­ing shale oil is how fast the en­tire process is. While deep­wa­ter pro­duc­tion in places like the Gulf of Mex­ico re­quire tons of lead time, shale wells can be drilled and start pump­ing oil rel­a­tively quickly.

The "fast-cy­cle" na­ture of shale is one of the rea­sons many be­lieve the days of $100 oil are gone for now.

Lately, shale drillers have di­aled down pump­ing and U.S. oil out­put has de­clined a tad in re­cent months be­cause oil prices fell as low as $25 a bar­rel.

How­ever, ev­ery­one ex­pects some of these oil fields to be eas­ily switched back on the minute oil prices hit lev­els where they can make money. For some shale oil fields that price can be as low as $40 a bar­rel.

"It puts a ceil­ing on how far and how fast prices can go up," Ess­ner said.

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