The Dangerous Economics of Shale Oil | Peak Prosperity.
For years, we’ve been warning here at PeakProsperity.com that the economics of the US ‘shale revolution’ were suspect. Namely, that they’ve only been made possible by the new era of ‘expensive’ oil (an average oil price of between $80-$100 per barrel). We’ve argued that many players in the shale industry simply wouldn’t be able to operate profitably at lower prices.
Well, with oil prices now suddenly sub-$60 per barrel, we’re about to find out.
Using the traditional corporate income statement, it is difficult to determine if shale drilling companies make money. There are a lot of moving parts, some deliberate obfuscation at some companies, and the massive decline rates make analysis difficult – since so much of reported profitability depends on assumptions made regarding depreciation and depletion.
So, can shale oil be profitable? If so, at what price? And under what conditions?
I try to deconstruct all this here.
Technology
A shale well consists of a vertical shaft that drives down into the earth to get to the right geological layer where the oil is located. Then the shaft bends 90 degrees, and extends horizontally 5000-10000 feet. It is in the horizontal section where the magic takes place. At intervals along the horizontal section, the “frac stages” happen, each of which fracture the surrounding rock to release the oil locked inside the rock.
