Shale oil: A giant with feet of clay?

The unconventional oil industry, which has made it possible to meet the increase in demand over the past decade, is deeply weakened by the current pandemic. The lack of investment will ultimately lead to a decrease in extractions - at least temporary - which risks aggravating the crisis once the pandemic has passed. Stimulus plans should take this into account.

Since the passage of the world peak of conventional oil extraction in 2008, it is unconventional oils that have taken over to meet a structurally growing global demand. Foremost among these is mother rock oil in the United States, known as "shale" oil. The manufacturers exploiting this very expensive oil to extract have been strongly affected by the Covid pandemic and serious uncertainties hover over the future of this sector, in the short and medium terms.

An already complex situation before the pandemic

Oil extraction from bedrock is expensive. This is because the rock has to be fractured and kept open - which consumes a lot of energy, water and sand - and wells run out particularly quickly. When a conventional oil well sees its production decline by 4% to 6% per year, a “shale” oil well sees its production drop by 70% in the first year. This requires continuous drilling to replace operating wells. However, what is expensive in oil extraction is not to operate a well but to put it into service (drilling and, where applicable, fracturing).

As paradoxical as it may seem, due to its high extraction costs, the bedrock oil industry has never been profitable overall since its emergence ten years ago, in the aftermath of the oil shock. of 2008. If it was able not only to hold up but to grow strongly during this decade, it is thanks to growing debt and the issuance of shares. However, investors eventually lost patience and demanded profitability. Thus, at the end of 2018 when a barrel of WTI was still around $ 50-60, the shale industry was already starting to reduce its investments and drilling.

The pandemic has accelerated the trend

The collapse in the price of a barrel due to the pandemic (now painfully back to around $ 40) has put a sharp stop to investments. From 885 oil well drilling rigs operating in the United States in December 2018, that number rose to 670 in early 2020 to less than 200 since June. While American oil extractions have decreased, they are still maintained at a relatively high level. Extractions in the Permian Basin (the world's leading oil extraction site), for example, have only decreased by around 500,000 barrels / day since the start of the year to stabilize around 4.4 million barrels. / day.

Maintaining extractions is made possible by the fact that “shale” oil wells are drilled in series, before being progressively fractured and then exploited as needed. The United States thus has a reserve of drilled but not fractured wells that allow the industry to continue to extract without investing in new drilling. However, this situation is not sustainable: the reserve of drilled but not fractured wells is running out, especially as some have never been fractured for reasons of economic viability given the production potential at their location. Fracking and commissioning account for about two-thirds of the total cost of commissioning a well. Thus, even if the well has already been drilled, the decision to fracture it is not automatic and it can be called into question by taking into account the price of a barrel and the actual production of wells located nearby.

Still, drilling will not resume at the current oil price. But when the price of a barrel starts to rise again, assuming that investments start to flow again into the unconventional oil industry, it will take at least several months or even a year before this fully translates into a stabilization or even an increase in prices. extractions (time to sign contracts, to put new wells into production and to exceed those at the end of their life). In addition, this massive return on investment is possible but by no means certain or obvious if we take into account the uncertainty that hangs over the profitability of this industry, the colossal sums lost so far by those who have invested in it and the that the most profitable sites have already been exploited.

A time bomb

The future of oil bedrock extraction is therefore uncertain. Even if it is not excluded that it may still start to rise again for a few years, this will not happen smoothly without the price of a barrel rising significantly and in a relatively sustainable way. And the longer the barrel stays at its current level, the more complex this restart will be. This is why some analysts estimate that US oil extractions could drop to 6 Mb / day by mid-2021, or a halving since their peak in November 2019.

In view of the heavy dependence of our economies on oil, it is essential to take into account the time bomb represented by the foreseeable decline in the extraction of "shale" oil, as conventional oil is in decline and global demand will recover. on the rise from the past pandemic. This is already the case in China. Both for the climate and to limit the worsening by a predictable oil shock of the economic crisis induced by the Covid, States must consider oil sobriety as one of the central axes of the recovery plans put in place.

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