MONDAY’S STUDY: Shale Oil Peaking
Oil from a Critical Raw Material Perspective
Simon Michaux, 22 December 2019 (Geological Survey of Finland)
Today approximately 90% of the supply chain of all industrially manufactured products depend on the availability of oil derived products, or oil derived services. As the source material for various types of fuels, oil is a basic prerequisite for the transportation of large quantities of goods over long distances. Oil, alongside information technology, container ships, trucks and aircraft form the backbone of globalization and our current industrial ecosystem.
Approximately 70% of our daily oil supply comes from oil fields discovered prior to 1970. Most of global oil supply still comes from 10 to 20 huge oil fields. In 2006, 10 oil fields accounted for 29.9% of the global proved reserves. Since 2006, comparatively very small oil fields have been discovered. 74% of the current global oil reserves is geographically concentrated in what is termed the Strategic Ellipse, which is the Middle East and Central Asia. Peak oil discovery was in 1962, since then rates of resource discovery has been declining persistently. New discoveries are limited: the exploration success rate in 2017 was a record low of 5%, and the average discovery size was 24mbbls. A projected range for average decline rate on post-peak production is 5-7%, equivalent to around 3-4.5mb/d of lost production every year.
Currently the market is oversupplied. When the market returns to demand taking up all global supply, effective spare capacity could only shrink by just 1% of global supply/demand of 96mb/d, leaving the market very susceptible to disruptions. Oil demand is still growing by ~1mbd every year, and no central scenarios that have been recently assessed see oil demand peaking before 2040.
Of existing world liquids production, 81% is already in decline (excluding possible future redevelopments). By 2040, this means the world could need to replace over 4 times the current crude oil output of Saudi Arabia (>40mb/d), just to keep output consistently flat.
In January 2005, Saudi Arabia increased its number of operating rig count by 144%, to increase oil production by only 6.5%. This suggests that the market swing producer (as Saudi Arabia was seen) was not able increase production enough to meet increasing demand.
Global conventional crude oil plateaued in January 2005. This would prove to be a decisive turning point for the industrial ecosystem. Since then, unconventional oil sources like tight oil (fracked oil shale) and oil sands have made up the demand shortfall, where U.S. shale (tight oil, fracking with horizontal drilling) contributed 71.4% of new global oil supply since 2005. Global conventional oil production broke out of its plateau in late 2013 and has been able to expand in capacity, where deep off shore plays become more important.
Since 2008, the Shale revolution (tight oil or fracked oil) has increased global oil supply which stabilized increased demand. This was achieved with the application of precision horizontal drilling applied to the existing hydraulic fracking industry. US tight oil produced in August 2019 was 7.73 million barrels per day, approximately 8.37% of global supply. The U.S. tight oil sector accounted for 98% of global oil production growth in 2018. Future global demand growth is now dependent on the U.S. tight oil sector.
Fracked well average production increased between 2010 and 2018 by 28%, but also water injection (and therefore chemical and proppant use) increased by 118%. This is an average across the whole U.S. Tight Oil Sector. Hydraulic fracked wells (used in Tight Oil) go through four basic stages in their life cycle. The three biggest tight oil producer basins of Permian, Eagle Ford and Bakken are all still growing but are in the mature stage of their life cycles. Mature is the third of four stages, where the fourth is decline.
The productivity (per rig as measured by EIA) of the U.S. Tight Oil sector in 2018 is less effective than in 2016. This suggests that the U.S. Tight Oil sector is approaching its peak production reasonably soon. Due to well depletion in fracking, 5 399 new wells are needed to be drilled to keep the U.S. tight oil production consistent in 2019. Each year a similar number of new wells are required.
The environmental impacts of fracking tight oil and oil sands is being largely ignored. Most of these are related to water way pollution and destruction of forestation habitat.
Most oil producers in the U.S. tight oil fracked sector have a negative cash flow and struggle to raise capital to develop upstream infrastructure. This is unfortunate as to maintain production levels, continual new drilling is required (which requires capital). As such Q1 2019 performance of fracking oil producers was far below projections, suggesting further difficulties in this sector.
If the BRIC economies (Brazil, Russia, India and China) was to become as developed as the German economy in context of oil consumption, the BRIC economy 2018 oil consumption would have to expand by 254%. If the whole World was to become as developed as the 2018 German economy in context of oil consumption in 2018, the global oil consumption of 99.84 million barrels per day would have to expand by 117% and an extra 116.68 million barrels per day of oil would need to be brought to market.
Starting in January 2005, all commodity prices that the World Bank track to monitor the industrial ecosystem (base metals, precious metals, oil, gas and coal) blew out in an unprecedented bubble. The second worst economic correction in history, The Global Financial Crisis (GFC) in 2008, was not enough to resolve the underlying fundamental issues. After the GFC, the volatility in commodity price continued. This report makes the case that the GFC was created as the entire industrial ecosystem was put under unprecedented stress, where the weakest link broke. That weakest link was in the financial markets. The strain that created this unprecedented stress, was triggered by the global oil production plateauing. This made the oil market in elastic in form. This is postulated to have happened because the Saudi Arabian oil production was unable to increase production in January 2005, in spite a significant increase of operating rig count. If further analysis supports this hypothesis, then the GFC was created by a chain reaction that had its origins in the oil market.
Due to our dependence on oil, it may be the primary, or master raw resource. Oil has a more significant CRM profile (immanent shortage in context of a vital resource) than almost any other raw material supplying industry. It is recommended that oil, gas, coal and uranium are all added to the European CRM list.