By John Kemp
LONDON, June 27 The success of the shale
revolution will be slow to replicate outside the United States
because of limited access to drilling equipment and skilled
personnel, according to influential oil analyst Leonardo
Maugeri has produced a thoughtful assessment of the U.S. oil
industry. But he is too pessimistic about the potential for
shale production in the rest of the world and its role in
restraining medium-term and long-term oil prices.
"The drilling-intense nature of the shale business is a
factor that will make the expansion of the shale phenomenon in
other parts of the world improbable - at least in this decade,"
according to Maugeri, a former executive at oil company ENI and
now a scholar at Harvard University's Belfer Center for Science
and International Affairs.
"No other country can likely match even a fraction of the
U.S. drilling and fracking power," Maugeri explains in a report
published on Thursday. "No other country ... has the specialised
crews, tools and capabilities to perform intensive fracking
Citing Baker Hughes, Maugeri notes that more than
half of the world's drilling rigs are employed in the United
States. Ninety percent of them are equipped to drill horizontal
wells, and almost all oil and gas wells in the United States are
now fractured to stimulate production. In the rest of the world,
by contrast, fracturing is used on fewer than one well in 10.
This leads him to conclude that shale is likely to remain a
uniquely U.S. phenomenon for a while.
"Near-term discoveries of shale resources outside of North
America likely will prove short-lived, because shale's
increasing cumulative production involves drilling hundreds,
even thousands, of new wells per year," Maugeri claims.
RIG FLEET DYNAMICS
The report's main shortcoming is treating the global
drilling fleet as fixed. That may be true in the very short
term, but over a five-year or 10-year horizon the rig fleet will
respond to changes in industry practices and price incentives.
At present, the fleet is configured to target oil and gas
accumulations in conventional reservoirs. It is designed to
drill a small number of highly productive wells. The risk of
failure is great and costs are high, especially for wells
drilled offshore and other challenging environments, which is
why the industry spends so much money on seismic and other
surveys designed to "de-risk" the drilling process.
Shale transforms the process profoundly. Instead of
targeting discrete pools of oil and gas that have migrated and
accumulated in reservoirs, horizontal drilling and hydraulic
fracturing go straight to the source rock. Rather than hunting
for discrete pools and risking missing them, shale oil and gas
are distributed continuously throughout the source formation.
Developing shale is much less risky and capital-intensive
than a conventional field, but far more wells must be drilled
and far more rigs are needed. The productivity of individual
wells varies tremendously, even across quite short distances.
Big returns still come from finding the most productive "sweet
spots" in the formation.
Conventional is customised. Every well is different and
individually planned before drilling starts. In fracking, the
aim is to standardise as much as possible to minimise the time
and cost involved in drilling hundreds or even thousands of
wells across a formation. Leading exploration and oil service
firms talk about "factory fracking" as an assembly-line process.
Therefore, if shale is going to account for a large share of
global production in the coming decades, the global rig fleet
will have to change. The industry will need a much larger fleet
of smaller and cheaper rigs for drilling on land.
The crucial questions are how high oil and gas prices need
to be encourage the expansion and how quickly it can be
TOOLPUSHERS AND ENGINEERS
Maugeri is correct that the rig fleet cannot be expanded
overnight. But five years is a long time (five years ago the
world was still worrying about peaking oil and gas supplies).
Ten years is an eternity. Over the 5 to 10 year horizon, the rig
fleet is almost infinitely flexible.
Oilfield service firms may be cautious about expansion,
given the risk of a cyclical downturn in oil prices and drilling
demand, but new rivals from China and other countries with
substantial shale gas resources could quickly scale up the
"China has shown ... an incredible capacity to develop in a
few years whatever it needs to ensure the development of
strategic sectors," Maugeri admits. "If China really discovers
major shale gas formations on its territory, it once again could
surprise the world through the production of an adequate fleet
of drilling rigs."
Shale deposits need not be in China. Giant Chinese oil and
gas companies have become major investors and developers of
resources abroad, and China has a fast-growing engineering and
oilfield services sector of its own. It is already one of the
world's largest exporters of rigs, oilfield supplies and
Experienced crews to conduct and interpret seismic surveys,
plan field development, and drill and fracture wells are in
shorter supply than rigs. Senior toolpushers, drillers and
derrickmen with 15 to 25 years of experience in the field and
able to lead operations, as well as petroleum geologists and
engineers, have been in particularly short supply after many
were laid off during the long period of low prices in the 1990s.
But the oil and gas boom is already five to 10 years old,
and within another five to 10 years the workforce bottleneck
should ease. China is graduating hundreds of thousands of
engineers every year and should be able to scale up its
production effort without too much difficulty, at least for the
simpler shale formations.
A QUESTION OF PRICE
It all comes down to price. There is some threshold price
for oil and gas that will provide both the incentive and the
cash flow to expand the rig fleet and the total volume of
drilling and fracturing.
The exact threshold remains uncertain but is probably below
$100 per barrel. At current prices exploration and production
companies plan to invest a record $678 billion this year on
exploration and production.
Maugeri estimates the breakeven for shale oil is $85 per
barrel, but this does not take into account revenues from
associated methane and natural gas liquids production, which
reduce costs, and it could be as low as $40 in sweet spots.
Breakeven rates outside the United States would probably be
higher but would fall over time as drillers and pressure pumpers
As long as oil prices remain above the threshold, the global
drilling fleet and drilling activity will grow.
There are "above ground" obstacles to the expansion of shale
production overseas, including mineral ownership, unstable
political and legal frameworks, and objections from
environmentalists. Maugeri's report suggests they cannot or will
not be overcome. But once again it is a question of defining the
"So long as technology and better understanding of shale
formations do not further revolutionise the shale sector,"
Maugeri writes, "the overall increase of U.S. shale oil
production critically will depend on the continuation of a
highly intensive drilling activity and on a relatively high oil
price". Maugeri believes this intensity will be "impossible for
other countries to achieve".
But the lesson of the shale boom is that technology is not
static. It is wrong to assume the global drilling fleet and
techniques are fixed. Both are almost infinitely variable, given
prices high enough for long enough.
If oil remains above $100 per barrel, there is no doubt the
shale revolution will spread beyond America's shores, it is only
a matter of how fast.
In the past decade, analysts have repeatedly underestimated
the oil and gas industry's capacity for rapid innovation. It
would be a pity to make the same mistake again.
"The Shale Oil Boom: A U.S. Phenomenon" by Leonardo Maugeri
is available from the internet at: