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How Fracking Changed the U.S Energy Sector and How It Could Change Europe's (Part 1 of 4)

This is the first of a series of four articles that will try to shed some light upon the hydraulic fracturing technique and its economic, environmental and geopolitical consequences, especially for the US and Europe. This first article will focus on the technical aspects of fracking and on the Texas oil boom in the Permian Basin.

For the last century and a half, the largest share of oil, gas and hydrocarbons we extracted from the underground came from conventional (or “normal”) deposits. As oil and gas are generated through the decomposition of marine microorganisms, they mix with the so called “source rock”, the sediment of the sea bottom transformed into rocks by the heat and the pressure of the Earth’s inner layers. If this source rock formation is porous, oil and gas, which are lighter and less dense than the surrounding rocks, start to come up towards the surface. If during this movement, called “migration”, they found a non porous rock, such as clay (also known as seal rock or cap rock), the flow comes to a stop and a deposit is formed. This kind of deposit is the easiest and the most profitable to exploit.

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However, oil and gas may remain trapped in a non-porous rock, a so-called shale, and  wells drilled into this formation would extract very little oil. Although the solution to this problem dates back to the 1860’s, the Halliburton’s experiment of 1949 is considered the first commercial application of hydraulic fracturing. [1]

Fracking is the high-pressure injection of fracking fluid (primarily water, but also sand and ceramic particles to keep the fractures open) that fractures the shale rocks and allows oil and gas to flow into the well. This technique has been in use for decades in conventional deposits to extend the lifespan of the wells, enabling oil companies to extract resources from previously deemed empty deposits. But this was not sufficient to extract profitably from shale deposits since the injection in a vertical well does not free enough oil or gas. 

Moreover, oil was very cheap on the market and the fracturing technology was too expensive. But by the end of the 1990’s and the early 2000’s, rising oil and gas prices and new developments in the technique made fracking profitable. The major breakthrough has been the horizontal drilling: in order to extract oil from  shales, the well is first drilled on a vertical direction to reach the deposit and then it continues horizontally, so that the largest possible volume of rock is fractured by the fracking fluids.

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Thus in the United States a large number of shale deposits, which were previously un-commercial to drill, became profitable, causing the US production of crude oil to jump from 5 to more than 10 million barrels a day, making the US the third oil producer in the world and an oil exporter (more than 2.3 million barrels a day of crude oil only) for the first time in over 40 years. [2] According to the International Energy Association, in the next five years the US should become a net energy exporter. [3]

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The production of natural gas surged too, and the US is the leading country, together with Qatar, in the development of LNG infrastructures that will allow the export of large quantities of gas across the oceans, to feed the growing gas needs of Eastern Asia and an ever more import-dependent Europe.

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For American consumers this so-called shale-boom translated in very low prices (compared to those of Europe) of gasoline, natural gas, wholesale energy and created thousands of new jobs, which surely helped the recovery of the American economy after the 2007-08 crisis.

The Permian Basin

Until just six or seven years ago, the southwestern part of Texas was an endless and arid plain, punctuated with just a handful of sleepy cities, cattle ranches and a few oil wells. That idyllic rural image now belongs to the memory of the locals. The area around the small cities of Odessa and Midland is now swarming with industrial machinery, oil rigs, trucks and oil worker from all over the nation. Every hotel is now always fully booked and rooms that once went for 100$ are now rented for 800$, sometimes 1000$ a night. “Man camps” or encampments of dormitories, burst throughout the county and house thousands of workers.

What is possibly going on? 

The answer is quite simple: oil, the “black gold”, lots of it.

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The Permian Basin is a large sedimentary basin situated in the western United States, spanning across Texas and  New Mexico for some 400 km in length and 500 km in width. Drillings first started in the 1920s and reached the peak in 1973 at about 2 million barrels/day), while declining since then to a minimum of less than 1million barrels/day. 

Since the development of the fracking technique, this swath of Texas plain went through a renaissance that is nothing short of miraculous: between 2011 and the first months of 2018, oil production increased 4x, setting new records every month in the last two years  (3,277 million barrels/day as of June 30th) and scoring a 38% increase in the last year. By 2020 it is expected to reach 5.3 million barrels a day, possibly becoming the biggest oil field in the world (currently, the Ghawar Field in Saudi Arabia produces 5.8M barrels/day). [4]

On a yearly base oil extraction increased 38% in 2018.


- Jeffrey Ball - Fortune
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Since 1920, more than 30 billion barrels of oil have been extracted from the Permian Basin; still, according to most estimates, there are at least 70 billions barrels of recoverable oil (oil that can commercially be extracted under current price and technology restraints) and arguably up to 160 billions. 

While other American shale plays suffered the sharp decline of oil and gas prices of 2015-17, which forced hundreds of businesses out of the market, Permian wells are profitable with prices as low as 30$ per barrel. Every major oil company is rushing to western Texas to take a share of this bonanza: at a global level, 22% of all drilling rigs in operation is located in the Basin.

Although the Permian Basin helped push the US oil production beyond 10 million barrels day for the first time for over forty years, the texan oil abundance has not yet helped keeping oil prices particularly low, and for a simple reason: all that oil cannot be easily sold on markets because there is not enough pipeline capacity to transfer the oil to the Gulf Coast refineries and from there to global markets. This bottleneck is keeping WTI Midland (the price of the Permian oil) up to 19$ dollars lower than Brent (global oil price) and 9$ lower than WTI Cushing (general American oil). 

From this follows that oil production increase may slow down in a sizeable manner, perhaps as much as 300.000 barrels/day less than forecasted, leading to prices between 5 and 10% higher than would have been otherwise.

Several new pipelines are being built but they will not be completed for at least another year and in any case they will note solve the problem because production is predicted to double again in the next two years. Meanwhile, oil is haul by hundreds of trucks every day which, although lead to local drivers earning more than 10.000$ a month, are causing externalities such as traffic, pollution and road accidents, forcing locals to accept this toil in exchange for work and money.

Thanks to the Permian Basin oil and other fracking basins across the country, in 2016 the US exported oil for the first time in more than forty years, after the 1975 export ban was lifted by Congress in the autumn of 2015 [5]. As of April 26th, the US is already the second world exporter of crude and oil products and according to Citigroup is on course to become the top exporter by 2019.  [6]

Thanks to the hydraulic fracturing technique, the US is adding hundreds of thousands of well paid and high quality jobs, is keeping domestic oil and gasoline prices at a reasonable level and is becoming independent from the instability of the Middle-East and the whims of OPEC.

Is there any chance that this could happen to the Old Continent?


Continue


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    Leonardo Aldeghi

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