Will U.S. take steps to keep the ‘Shale Revolution’ going?

At least one observer wonders whether it’s time to start protecting up the burgeoning U.S. oil industry. Chip Register, managing director of Sapient Global Markets, writes in Forbes:

“One possibility would be for the government to level the playing field with OPEC and others by introducing tariffs on cheap foreign oil imports, with the goal of driving separation between the North American energy economy and the chaos of the international markets. While this may seem extreme, it may be necessary to protect this young yet highly strategic industry from going extinct.”

The global price of oil is off about 25 percent since June, and it’s already having an impact on U.S. drilling operations. As Real Clear Energy’s Nick Cunningham noted in a post Wednesday, there are now 1,590 active oil rigs in the country, the lowest level in six weeks.

Drilling in shale-oil formations, largely using hydraulic fracturing, helped the U.S. reach 8.95 million barrels of oil per day this month, the highest level in 29 years. But as a story in Bloomberg points out, that growth trajectory is difficult to maintain:

“Oil production from shale drilling, which bores horizontally through hard rock, declines more than 80 percent in four years, more than three times faster than conventional, vertical wells, according to the IEA [International Energy Agency].”

Shale-oil production is relatively expensive compared with imported oil, so it won’t take much of a drop in global prices to make some domestic operations unprofitable. The Bloomberg story quotes Philip Verleger (an economic adviser to President Ford and director of energy policy for President Carter), who says that if oil falls to $70 a barrel, production in the Bakken shale formation could plummet 28 percent to 800,000 barrels a day; in July the production level was 1.1 million barrels a day.

The notion Register raised isn’t new: In early October, Ed Hirs, a lecturer in energy economics at the University of Houston, touted a paper he’d written suggesting that the U.S. government intervene to restrict oil imports and protect U.S. producers.

“We need to act in our own best interest,” Hirs said at an energy symposium, according to Forbes. America’s oil growth is so strong “that we can de-link from the global market.”

Exec: North American rail network could be headed for gridlock

Calgary-based Canadian Pacific Railway Ltd., has dropped merger talks with CSX Corp. of Jacksonville, Fla., and remarks this week by the always-blunt Canadian Pacific CEO E. Hunter Harrison are very telling about the future of oil traveling by rail.

The volume of oil, including that produced in the Bakken shale formation in North Dakota and southern Canada, is soaring, and yet many communities are concerned about the increased rail traffic to carry the oil to refineries. In 2013 a derailment and resulting inferno in Quebec killed 47 people, and since then the issue has been on the minds of activists, local politicians and the U.S. government, which is considering stronger tank-car hulls and other safety improvements.

Harrison said mergers are needed to prevent gridlock in the North American rail system.

“There’s a desire to put more tonnage on the rail,” Harrison said during a conference call Tuesday, according to Toronto’s Globe and Mail. At the same time, governments are saying that we want to slow you down because of [hazardous materials] and crude. There’s no more infrastructure [being built]. No one wants the railroad to run through their backyard, or their city.”

E&E Publishing’s Blake Sobczak has much more from Harrison on that subject. Here are quotes from Harrison in a story Wednesday on E&E’s Energy Wire page (subscription required):

“We even have issues on our network now where there’s city councils and groups of citizens banded together who say, ‘We don’t want you to run trains at night.’ … In my view, at least, we are quickly approaching a time where none of this works.”

In New York state, a coalition of environmental groups led by Earthjustice filed a petition with the state urging a ban on allowing older DOT-111 tank cars going through the Port of Albany. Charlene Benton, president of the Ezra Prentice Homes Tenants Association, said in an Earthjustice statement that many families live “within a few feet of these bomb trains. Our families deserve to live free of the daily fear that one of these trains will blow up in our backyard. The time to act is now, before it is too late.”

How would lifting oil-export ban affect gas prices? GAO weighs in

The U.S. Government Accountability Office released a new report saying that lifting the nation’s nearly 40-year-old ban on oil exports would reduce gas prices for Americans.

The ban was put in place after the oil shortages of the 1970s. But critics of the ban say the ramped-up production in the U.S. of light sweet crude could lead to a glut, keeping prices artificially low.

As The Wall Street Journal notes, “export advocates note that most of the country’s gasoline prices are derived from global markets and sending out U.S. crude would ultimately lower prices at home.”

The nonpartisan GAO stated that repealing the ban on exports would “likely increase domestic crude oil prices but decrease consumer fuel prices.”

The public might not be convinced. A Reuters-Ipsos poll earlier this month found that Americans are split about 50-50 on whether to repeal the ban. The chief concern is that prices would rise, not fall, if drillers were allowed to export crude to higher-priced foreign markets.

U.S. refiners, which purchase domestic oil at a cheaper cost, have opposed lifting the ban.

The GAO added that lifting the export ban “could pose risks to groundwater quality, increase greenhouse gas emissions and increase the risk of spills from transportation.”

Bloomberg has cool graphic showing shale-oil break-even points

With the global plunge in oil prices comes concern that many U.S. companies that drill in tight-oil shale formations might be hurt, since it’s more expensive to extract that oil and their profit margins are smaller.

But Bloomberg has a helpful chart showing that “most regions continue to be profitable below $80, including the Bakken and Eagle Ford formations, two of the most important sources. Much of the Eagle Ford play would still be profitable with $50 oil.”

Analyst doubts low oil prices will hamper U.S. production

Whenever a petroleum analyst writes a sentence that begins: “I can still recall when prices collapsed in 1986 …” you know he’s seen just about everything in the global oil market. Michael Lynch has some sage words for those who are predicting slashed U.S. production (and accompanying job losses) owing to the rapidly falling price of crude oil.

Writing in Forbes, Lynch opines (emphasis added):

“Various arguments are being made now about how expensive oil has become to produce and the manner in which this will support prices, but this is much more valid in the long-term. … It is hard to imagine that a multi-billion dollar deepwater platform would be abandoned because of a six-month price drop.

“Other factors will prevent a decline in production from lower oil prices. Companies with contracts renting rigs won’t just cancel them, laying off employees is a near-last resort, and leases must often be drilled in a certain period to hold them. Abandoning wells also has a cost, and oil price drops that are thought to be brief won’t cause many companies to do that.”

Innovation in oil & gas — it ain’t over yet

To read the newspapers these days, you’d think that all the innovation in energy is involved in bringing down the cost of solar panels or building even bigger blades for windmills. But innovation still continues apace in oil and gas, both in pulling them out of the ground and in finding new ways to use them.

“We haven’t been giving the big oil companies enough credit,” said Dominic Basulto in The Washington Post. “ Sure, we may see their print ads or watch as they tout their accomplishments on TV, but deep down, many of us believe that the brightest minds have moved on to something new in energy innovation. But that’s not true.”

That’s important because if we’re going to use our abundant natural gas supplies to wean ourselves off of foreign oil, we’re going to have to be sure the current superabundance of natural gas isn’t just a flash in the pan. Moreover, we’re going to need innovation in making the transition to methane-based liquid alcohol fuels easier as well.

As most people have heard by now, even our best technologies can’t extract more than about 10-20% out of an oil or gas reservoir from the earth. Simply doubling that rate would give us access to huge, new quantities of domestic fuels.

There’s also a concern that fracking wells will have a much shorter lifespan than traditional gas and oil wells. Then there’s all that natural gas being flared off in the Bakken. Ending that conspicuous form of waste will require some new technology.

All these problems are being tackled through innovation, however, and that’s what Basulto is talking about.

Although everybody knows about fracking — the technology of forcing sand and water into the rock to break it up — few realize that the real novelty that makes up the current upturn in production possible is horizontal drilling, which allows access to entire geological strata without making the territory look like a pincushion.

“Today, drilling rigs are so good that they can punch holes in the earth that are two miles deep, turn the drill bit 90 degrees, drill another two miles horizontally, and arrive within a few inches of the target,” said Robert Bryce, author of “Smaller, Faster, Lighter, Denser, Cheaper,” a book about innovation in the energy industry. But horizontal drilling hasn’t stood still. ExxonMobil has developed an “extended reach” technology that can push outward several miles further deep in the earth. “Extended reach reduces our environmental footprint and in offshore applications will limit our presence in the marine environment,” says the company’s website. It may have been developments like this that prompted President Obama to give a green light to exploration off the Atlantic Coast from Delaware to Florida last month.

The same innovations are occurring with natural gas fracking. Innovators have made an improvement called “sleeve technology” that surrounds the drill bit and allows highly accurate placement of stimulation treatments. The result is that wells can be drilled twice as fast as a few years ago, at a lower cost. With increased precision in both drilling and fracturing, wells are being made more productive as well. Erika Johnsen on Hot Air said, “Data from the Energy Information Administration’s Drilling and Production Report shows that a Marcellus Shale well completed by a rig in April 2014 can be expected to yield over 6 million cubic feet of natural gas per day (Mcf/d) more than a well completed by that rig in that formation in 2007.” That’s a huge improvement in the space of seven short years.

All this is good news for the effort of substituting natural gas-based ethanol or methanol for foreign oil in our cars. After all, one of the fundamental considerations is that there will be enough natural gas around to keep the price reasonable. With so many competing proposals for employing natural gas — electrical generation, the industrial revival, LNG exports, etc. — it’s crucial that we keep expanding production.

So it’s encouraging to hear the news from Clean Energy Fuels, T. Boone Pickens’ baby, which has been building a “CNG Highway” across the country to service long-haul tractor-trailers. CEF has just completed the first leg of this nationwide network, connecting Los Angeles and Houston.

But much of the nation still lies outside the reach of natural gas pipelines and CEF is figuring out a way to serve them, as well. Last month the company opened a filling station in Pembroke, New Hampshire that will be served by a “virtual pipeline” of high-tech tractor-trailers making round-the-clock deliveries. This will allow the station to pump 10 million gasoline-gallon-equivalents (GGE), twice the volume of CEF’s largest existing station. More important, it will open up large areas of the country that have not had access to CNG. This natural gas-based substitute will sell for 30% less than gasoline.

Technology never stands still. Sometimes it forces us to give up things that have become familiar or even seemingly permanent. But as Robert Bryce said, the new technology is usually “faster, smaller, lighter, denser and cheaper.” And in the case of methane-based liquid fuels, it will mean freeing ourselves from foreign oil as well.