June 18, 2014 8:04 am

Beware the hype over the shale boom

The shale boom is set to go global. That is what the International Energy Agency has said, but is this promise of a burst of international, unconventional oil production in the next five years overhyped?

Techniques such as hydraulic fracturing, or fracking, have unlocked previously inaccessible US reserves and transformed the country’s energy sector. Indeed, it is on track to become the world’s largest oil producer by 2020.

Now the oil watchdog backed by wealthy nations is looking to countries from Russia and Argentina, to Mexico and Canada. These nations are ploughing ahead with policy initiatives to initiate recovery from their shale oilfields and replicate the US success story. The US will barely make up 15 per cent of the world’s tight oil resources, according to the IEA.

But the upbeat tone surrounding non-US unconventional oil potential in the IEA’s annual medium-term oil market report is a far cry from last year’s report.

“Little is known at this point about the size and quality of the global tight oil resource, and . . . it seems unlikely that shale plays or other tight oil formations will be developed outside of the US before the end of the [five-year] forecast period,” the IEA said in 2013.

The scepticism was warranted. Although the potential exists, the conditions need to be right.

Jan Stuart, head of oil markets research at Credit Suisse, said even if some progress is made between now and 2019 with the improving political climate in some countries, achieving the same kind of scale as the US will be questionable. “It might be possible, but I don’t think it’s going to have a massive impact on oil market supply and demand balances,” he said.

Why?

The cost to extract “tight oil” reserves, held in shales and other challenging rocks, is significantly higher in other countries than in the US. This suggests they will need a higher price of oil to be commercially viable, even amid a glut of US shale oil.

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Additionally, the conditions that fostered the success of the US do not exist in the same way elsewhere.

The presence of tens of thousands of independent companies keen to experiment with drilling techniques, strong capital markets to finance the industry and take on risk, and landowner rights over the oil and gas under the ground are some of the factors that could mean this could be a “made in America” phenomenon only.

“A structural shift is needed,” said Philip Verleger, a former US Treasury official and now an energy analyst. “This is a business that is undertaken by small firms . . . The large firms like Total and Shell like large projects. They cannot manage many smaller labour intensive jobs.”

Environmental opposition, water shortages and the lack of skilled staff and necessary equipment to recover reserves are other hindrances.

But even if shale (or “tight”) oil supply outside the US meets IEA expectations of 650,000 barrels a day by 2019 (including 390,000 b/d from Canada, 100,000 b/d from Russia and 90,000 b/d from Argentina) this would still be just a fraction of the 5m b/d the US is expected to produce over the same period.

The Commodities Note is an online commentary on the industry from the Financial Times

anjli.raval@ft.com

@anjliraval

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