Shale Enhances U.S. Bid to be World’s Biggest Oil Producer

By Angus Gillespie

The U.S. has been conducting tests and research for decades on the effects of fracking on shale, which was necessary due to shale’s high porosity and low permeability. Initial testing began as far back as the mid 1970s. Mitchell Energy, now a division of Devon Energy, was first to successfully use the fracking technique in the Barnett Shale in Texas. This method of extraction made the process quite economical and feasible to continue. George Mitchell, the founder of Mitchell Energy, has often been referred to as the “father of fracking” because of his central role in its being used in shale. Complaints of uranium exposure and lack of water infrastructure have often emerged as concerns by environmental groups opposed to fracking methodologies. There have also been allegations of instances where releasing wastewater from fracking has gone into fresh water supplies used for human consumption.

It’s widely anticipated that fracking could open the door for the U.S. to overtake Saudi Arabia as the world’s number one oil producer. Platts, a New York-based analytical company that provides data and other sources of information for the energy and petrochemicals sectors including benchmark price assessments has been closely monitoring the developments.

“Another clear theme this year remains the dramatic upheaval, and for most, growth, that the American shale-led boom continues to thrust on energy players,” said analysts Robert Perkins and Henry Edwardes-Evans in Platts’s annual report on the world’s top 250 energy companies.

Becoming the world’s largest oil producer is certainly good news for the U.S. overall, however, lower gasoline prices also means the American economy now faces some of the same price drive struggles as other oil-producing countries, such as Saudi Arabia or Mexico.

While the controversy of the practise of fracking remains, there is little doubt that the process of extracting oil and gas from shale rock is transforming the entire American energy industry. It’s expected that over the next five years, the U.S. will be producing almost 10 million barrels per day. With this type of colossal output, coupled with a monumental desire on behalf of the U.S. to be energy self sufficient, those against the fracking process are likely going to find it extremely difficult to slow the momentum. This type of extraction saw U.S. oil output jumping by more than 1 million barrels per day, marking the largest increase in the country’s history.

“The U.S. oil supply estimate excludes biofuels, which, when added to the total, are widely believed to place the U.S. as the world’s biggest liquids producer above Saudi Arabia
and Russia,” stated the report by Perkins and Edwardes-Evans.

As it stands, 103 American companies can be found on a list of the top 250 energy firms in the world, based on assets, revenue, profit and ROI capital. ExxonMobil remains at the very top of the list where it’s been for the past decade without interruption. In fact, ExxonMobil entered the shale gas market just four years ago when it acquired XTO Energy.

Supply Up, Demand Down

On a global scale there is more oil than demand, and because of that the price has dropped significantly in many regions over the past year. Adding to the conundrum is that the cost of producing oil through traditional methods is rising much more rapidly than its selling price, which leaves companies scrambling to find new, more efficient (cost effective) ways to extract the commodity. The U.S. benchmark – West Texas Intermediate Crude – is down almost 20% since the middle of 2014 with a noticeable cutback in drilling having already been imposed.

Just recently the EIA cut its crude price forecasts due to rising production and falling world wide consumption. In North America, demand is down because Americans and Canadians are driving less, opting either for more fuel-efficient vehicles or opting to navigate themselves from point to point on municipal and regional public transit services.

Now that the U.S. has found a way to extract its oil at a more cost-effective rate, there is a noticeable spike in supply, but a decrease in imports, which means there could soon be a price war starting with the Organization of Petroleum Exporting Countries (OPEC). There is already no shortage of experts who believe OPEC’s ability to control petroleum pricing worldwide has already lost tremendous ground, which it may never get back.

OPEC Price War

As evidence we are in the early stages of what could be a prolonged price war, the world’s current largest exporter – Saudi Arabia – has reduced prices rather than give up a percentage of the global market share. OPEC also may prevent further declines because members need high prices to support social spending. It’s estimated OPEC and its partner countries account for about 42% of the entire world’s oil supply – but that percentage is about to take a bigger hit if the U.S. continues on the path it’s now on.

Globally, second-quarter consumption grew the least since 2011, according to the IEA. The adviser to industrialized countries cut its demand forecasts last month by 0.2% for this year and 0.1% for 2015.

The slowdown is “nothing short of remarkable,” the IEA said in a recent report. It attributed the decline to reduced economic growth in China and also Western Europe.

American output is rising as companies are producing additional wells out of each rig, which in turn is providing more oil. In Texas, there are now twice as many rigs out in the fields but five times as many wells.

Meanwhile, the U.S. has approved four facilities to liquefy gas for exports. America prohibits most crude exports, however, finished products such as gasoline trade freely. Producers are lobbying to loosen the rules for crude too. The last time the U.S. had a domestic oil boom was in the 1980s, following the Arab embargo. It ended when new supplies overwhelmed the market.

Despite a soft international market, American oil exports are expected to set a record by the end of 2014 as producers find ways around a four-decade restriction on crude leaving the country. Canada accounted for 93% of the shipments, Italy, Singapore and Switzerland also took U.S. oil. U.S. shipments to Canada will increase further when maintenance there ends, even as Enbridge finishes the reversal of Line 9B that will carry 300,000 barrels per day to eastern Canada from the province of Ontario.

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