Shale Oil: Blessing or Catastrophe?

The stock market has been volatile lately.  That does not bother me much, I expect some volatility.  Nonetheless I have a fear.

The American shale oil adventure troubles me.  If it turns out to be non-economic or unable to access the materials, then the US economy will be severely dislocated.  They still use 19 million barrels of oil a day.  If they had to go back to acquiring that from politically unstable, even hostile, sources, I doubt they could carry it off.

The old, “Then What?” question.

While North American energy security at affordable prices is a clear bonus, I have the concern that this is not the method that provides it.  There are too many people with an agenda that claim that it is the answer.

Shale oil and to some extent Alberta Heavy Oil look like and behave like an available source of energy for a very long time, it is troubling because it seems not to make any money.  There is also the question of whether the reserves that are there are actually recoverable, and then there is the specter of the EPA and their ideologues.

Leaving aside the EPA which is not fact based enough to be capable of analysis, we have, “Can they get the resources out?” and if so, “Can they make money doing so?”

I came upon this article which reinforced some of my concerns.  Shale Oil: Miracle or Pipe Dream

It raises some interesting points:

  1. Of the 271 billion to 503 billion potential reserves in the Bakken Field, the U.S. Geological Survey estimates 7.4 billion can be extracted.
  2. Shale and oil sands cost in the $70 per barrel range to extract.  Saudi oil is about 35% of that.
  3. The cost to drill a well in the Bakken field is about $12,000,000.
  4. The production decline after success is dramatic.  65% to 70% in year one and continually falling thereafter but at a slower rate.  The data from wells drilled in 2009 and 2010 are that production is around 10% of original flow after four years.
  5. Expansion and even sustaining flow requires new wells.
  6. While not clear yet why, some operators are selling their leases.
  7. Most of the capital is borrowed or arises from share issues.  Until growth can be sustained from earnings, you might wonder what will happen if interest rates rise.
  8. There may be valid environmental concerns

I own no oil securities but a failure here cannot be good for any sector of the economy.  I have not reached the paranoid stage yet, but I am vigilant.

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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

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2 Responses to Shale Oil: Blessing or Catastrophe?

  1. Brian says:

    Don’t worry, the people who spent trillions on “shovel ready jobs” are now in charge of saving us from Ebola. So the resulting decline in the number of North American oil consumers should guarantee that oil prices remain low, regardless of any variation in supply.

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