What Would Happen To The Current Fracking Activity And Subsequent Booms Generated If Oil $/bbl Were To Drop?


What Would Happen To The Current Fracking Activity And Subsequent Booms Generated If Oil $/bbl Were To Drop?

From LOGA News 9 January 2013

This is a much more complicated question than it seems:

1) Most oil/gas wells are fracked, even if they’re not in shale basins. Shale gas and shale oil* can only be liberated with extensive fracking, but regular non-shale wells have been fracked to improve production rates for over fifty years now. An oil price decline will never eliminate fracking even if it makes shale oil wells uneconomical to drill. It will just reduce the amount of fracking.

*Shale oil here refers to tight oil plays like Bakken, not kerogen shale. I think this is the more popular usage now.

2) Most of the shale fracking over the last decade has been for gas wells. The price of natural gas fell dramatically in the US because of the recent production glut. In fact, between Nov 2011 and Nov 2012, the number of rigs drilling for gas in the US decreased by 50% because the economics stopped being favorable. (Those rigs switched to other types of fields, either conventional oil or oil shale plays like Bakken.) Fracking activity has recently been more strongly tied to the price of natural gas than the price of oil.

3) Each basin, operator, and individual well has a different economic value assigned to fracking. As oil prices drop, a few low-value projects will immediately become uneconomical. As prices drop further, more projects stop being worthwhile. There is a lot of diversity in the oil & gas business, so oil production has a very smooth supply curve — each dollar of price reduction will reduce long-term supply by a small amount. Colorado kerogen shale might be economical at $120-200/bbl. Oil shales seem to phase out around the $65-90/bbl range, oil sands cost about $45-80/bbl, deepwater stops being worth it around $35-60/bbl, and Saudi Arabia‘s Ghawar field will keep pumping until oil hits $15/bbl. That’s a vast oversimplification but perhaps it’s what the question asker is looking for.

Note that these prices are for new projects — cost to keep an existing field producing is much lower. Estimates vary wildly because actual prices per well vary wildly. Here’s some sources with break-even point estimates:

4) Most oil wells produce associated gas, so the economics of a particular well depend on both the price of natural gas and the price of oil. With gas prices as low as they are today, projects can experience a negative wellhead gas price — it literally costs more to get the unavoidable associated gas into a pipeline than it sells for. (It’s usually illegal to just flare it off these days. Exceptions are often made for remote areas like Alaska or North Dakota where the air pollution has less impact.) So gas production can sometimes be a net drain on an oil shale well, thereby increasing the required oil price for the project.

5) Gas is usually sold by production quota contracts, so many operators are locked in to producing a certain amount of gas no matter what the price is. These companies are forced to keep drilling to meet production quotas long after they stop making money by doing so. So fracking will continue for a while after it becomes uneconomical.

All that said, fracking activity will certainly decline with lower oil/gas prices. But there’s no price point where fracking stops happening