Oil: The Next Revolution
Comment of the Day

June 27 2012

Commentary by Eoin Treacy

Oil: The Next Revolution

Thanks to a subscriber for this informative report by Leonardo Maugeri from the Beifer Center for Science and International Affairs at Harvard Kennedy School. Here is a section:
The U.S. shale/tight oil could be a paradigm-shifter for the oil world, because it could alter its features by allowing not only for the development of the world's still virgin shale/tight oil formations, but also for recovering more oil from conventional, established oilfields – whose average recovery rate is currently no higher than 35 percent.

The natural endowment of the initial American shale play, Bakken/Three Forks (a tight oil formation) in North Dakota and Montana, could become a big Persian Gulf producing country within the United States. But the country has more than twenty big shale oil formations, especially the Eagle Ford Shale, where the recent boom is revealing a hydrocarbon endowment comparable to that of the Bakken Shale. Most of U.S. shale and tight oil are profitable at a price of oil (WTI) ranging from $50 to $65 per barrel, thus making them sufficiently resilient to a significant downturn of oil prices.

The combined additional, unrestricted liquid production from the aggregate shale/tight oil formations examined in this paper could reach 6.6 mbd by 2020, in addition to another 1 mbd of new conventional production. However, there remain obstacles that could significantly reduce the U.S. shale output: among them, the inadequate U.S. oil transportation system, the country's refining structure, the amount of associated natural gas produced with shale oil, and environmental doubts about hydraulic fracturing, one of the key technologies for extracting oil from shale. After considering risk factors and the depletion of currently producing oilfields, the U.S. could see its production capacity increase by 3.5 mbd. Thus, the U.S. could produce 11.6 mbd of crude oil and NGLs by 2020, making the country the second largest oil producer in the world after Saudi Arabia. Adding biofuels to this figure, the overall U.S. liquid capacity could exceed 13 mbd, representing about 65 percent of its current consumption.

Eoin Treacy's view Our contention for more than a year has been that the USA could become energy independent within the next 10 to 15 years. However this is dependent on not only increasing the rate of domestic oil production, but also migrating as much as possible to domestically produced natural gas. It is only by substituting oil demand with an alternative domestically produced energy source that the USA can ever hope to become independent of foreign imports. There are a considerable number of political and investment hurdles that will need to be overcome to achieve this goal.

WTI crude oil has returned to test the psychological $80 area which marked important lows in 2011 and represented the upper side of the previous trading range until mid-2010. A sustained move below that level would be required to check potential for at least a bounce.

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