Shale oil sustainability

What is oil shale?  The term oil shale generally refers to any sedimentary rock that contains solid bituminous materials (called kerogen) that are released as petroleum-like liquids when the rock is heated in the chemical process of pyrolysis. With more pressure and over more geological time, kerogen would heat to its “oil window” or “gas window” (the temperature at which it would release crude oil or natural gas). Oil shale can be mined and processed to generate oil similar to oil pumped from conventional oil wells; however, extracting oil from oil shale is more complex than conventional oil recovery and currently is more expensive. The oil substances in oil shale are solid and cannot be pumped directly out of the ground. The oil shale must first be mined and then heated to a high temperature; the resultant liquid must then be separated and collected.

Over the last six years, United States has doubled its production of shale oil from five million to nine million barrels a day. The conventional wisdom holds that the Saudis “fear” the influx of shale oil onto the market and that they want to see the price go down in order to drive out some of that shale production.

So, what is the break even point for oil share? From source at Wikipedia, according to a survey conducted by the RAND Corporation, the cost of producing a barrel of oil at a surface retorting complex in the United States (comprising a mine, retorting plant, upgrading plant, supporting utilities, and spent shale reclamation), would range between $70–95. This estimate considers varying levels of kerogen quality and extraction efficiency. In order for the operation to be profitable, the price of crude oil would need to remain above these levels This means that with the current oil price, it is unlikely that the US oil shale producer would continue to be profitable and therefore more and more will be ceasing production. This is generally the game plan of Saudi Arabia, i.e. to force the US, Russia, and Brazil to cut their production before OPEC. But in reality, there are still belief there will be no shale production shut in no matter how low oil prices go. General belief is that the cash component (cost) will be, say, $15, $20, $25. Why so? It is because there are a high number of incomplete wells that could easily be turned into productive wells in the US. In short, there will only be shut in if price goes below $30.

To have a feel of how resilient U.S. shale production is in the face of lower prices, Continental Resources Corp: the creation of billionaire wildcatter Harold Hamm spent about $5.50 to produce each barrel of crude from its Bakken wells after they’re drilled; in the company’s Great Plains discovery known as the South Central Oklahoma Oil Play, or SCOOP, the cost was 99 cents.. Those figures reflect full-year 2013 costs published in the 10-K report Continental filed with the U.S. Securities and Exchange Commission and are the most recent available. [source: Bloomberg 4-Dec-2014].

To conclude, it is indeed a battle of market share between Saudi and other OPEC countries with the shale oil producers like US.  The price will eventually come to a equilibrium over the next year or so. There could be some reshuffle of market share and it all depends on who could sustain the low oil price the most. Long term economic impacts? I would say that low oil price should create more economic value than harm to the world economy as it lowering down production cost in most industries, removing price pressure in production, and has positive impacts in inflation. Impact to Malaysia – it is likely to see more harm that good over the short to medium term amid we are net oil exporter and with our reliant on oil profits (30% of nation’s income).

 

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