The Coming Shale Revolution
What if I told you that the United States is set to surpass all the current oil producing nations to take the #1 spot? United States, the country which has always relied on oil imports and which made its currency the de facto global currency by signing a deal with Saudi Arabia to accept only US dollars for its oil exports? Thanks to a new way of drilling for oil, this will be a reality in the next 1-2 years. This is not a long-term trend, it’s already happening as we speak.
It’s called fracking or hydraulic fracturing. And it’s set to vastly improve our ability to get the black gold flowing out the ground. So what exactly is fracking and how does it work?
The traditional method of drilling for oil was to bore a hole in the ground and capture the oil that came gushing out. With fracking, not only do the companies drill a vertical well, they also drill horizontally at the bottom of the well! Once drilled, the well is encased in piping, sealed and charges are dropped to “fracture” the surrounding rock and get the oil flowing. The well receives a flow of oil from a greater area of the rock due to this technique, and this also reduces the count of wells that need to be drilled to extract oil from a region.
And if this weren’t enough, the technology now exists to move the drill rig to work on the next well, thus saving time and money. Earlier, rigs had to be disassembled and re-assembled at the new drill site. The cost incurred on this is estimated to be around $1 mn. With the new moving rigs, this cost is completely avoided. As a bonus, the new rigs require about 40% fewer workers.
So, to sum up, horizontal drilling increases output, and moving drilling rigs reduce cost, providing both topline and bottomline benefits to oil companies. And this is all happening in America, chiefly in the Bakken formation in the state of North Dakota.
The state of North Dakota has a budget surplus of over a billion dollars, and a rate of unemployment of 3.5%, well below the national average. The production has already exceeded the capacity of the current pipeline infrastructure; there is a shortage of oil workers, shortage of housing and other amenities for the workers. The oil boom is already leading to the rising prosperity of the region.
With recoverable reserves of 24 billion barrels (yes, you read that right) according to the estimate of an industry veteran heading one of the largest oil companies in that region, the country is well poised to meet about 3.5 years of domestic demand just from the oil flowing from the Bakken formation. And this is only one of several shale formations (albeit the largest) from which oil can be extracted. Also, the total proven oil reserves in the US now exceed that of Saudi Arabia, the current leader.
An oil boom in a geopolitically stable region such as the US might potentially disrupt the balance of power between the OPEC and their customers. The situation is well worth watching.
Until then, fill ‘er up and keep driving.