Meeting Breitling Energys Chris Faulkner for a 45-minute masterclass on the US shale oil revolution leaves you in no doubt about where he stands on the current state of the global oil sector.
The executive, dubbed the Frack Master by the US media for his constant championing of the shale oil industry, does not do grey areas.
He has opinions on everything from the US overtaking Saudi Arabia to become the global swing producer (inevitable), to the end of Opec (inevitable) and the prospects of the Middle East fostering its own shale industry (not inevitable).
However, while this larger-than-life figure leaves no uncertainty where his allegiances lie, his involvement and knowledge of the US shale sector is expansive and the sheer scale of what is happening across the Atlantic is sending shockwaves through the Middle East.
US oil production has grown at a phenomenal rate since 2011 solely because of shale oil. Horizontal drilling and hydraulic fracturing (fracking) has grown by 65 per cent since 2010 and crude imports have dropped by 3.1 million barrels a day (b/d) since 2005. Total oil production stands at about 9.5 million b/d.
The oil is not cheap and the average cost of production from a well fracked in the US is about $55 a barrel. It was $100 oil that enabled the sector to grow at a rapid rate and allowed the small wildcat companies at the frontier of the sector to take risks that would not have been possible with lower prices.
[Shale oil] is not cheap and we admit that, says Faulkner. Based on our current production rate of about 9.5 million b/d, it takes 6,000 new wells to be drilled each year to keep that number flat. It costs $35bn to do this. All of that money goes into the ground to keep production flat.
The US is still producing oil at the same rate as last year, despite rig counts falling by 50 per cent from the 2014 total of 1,950. Faulkner says the lower oil prices have caused many shale producers to reign in costs and to look for creative ways to reduce production costs.
Faulkner believes that while $100 oil propelled the US shale industry a great distance in a very short amount of time, it also made a lot of people in the industry fat and lazy. Lower oil prices have provided the turning point the sector needed for sustainable growth.
The early days of US shale production in 2008/09 are almost unrecognisable from the industry today. Back then, it was gas that was being fracked, and it was taking companies, such as Breitling Energy, 90 days to drill a horizontal well. Those same wells now take just 20 days and are producing large volumes of oil.
However, since June 2014, the sector has not had the geopolitical situation in the Middle East acting as a tailwind on prices. The collapse in oil prices forced US shale producers to do more with less to survive. What used to take three rigs now takes two, what used to take 30 days now takes 15.
Today, the industry relies on reducing cost overheads, and drilling wells is the most expensive element, with most costing in the region of $4m. So reducing drilling times is essential to the sustainability of the sector.
We dont think $100 oil is coming back anytime soon, and so we needed to figure out how to operate at $50-$60 oil, says Faulkner. Achieving this has a lot to with the fact that we are independent and we are willing to do trial and error and take risks. Other countries are just starting to embrace fracking, but we have already taken it to Fracking 2.0.
The shale boom of recent years has pluralised the global oil market and even led Saudi Arabia to increase production to drive down the crude price in an attempt make a large dent in US production.
In 2011-14, non-Opec production surged with the majority of that new production coming from the US, says Faulkner. In late 2014, Opec started to lose price control and Saudi Arabia went for market share not price. US shale oil is expensive oil and [Riyadh] thought that a few months of low prices would curb production and that would see 1.5 million b/d leaving the market, but this hasnt happened.
Opec is showing us right now that they do not know how to handle any serious competition
Opec is showing us right now that they do not know how to handle any serious competition. The US has given them a whammy that they dont know how to deal with. The day a cartel stops aligning its own interests and turns into a free-for-all, is the day it is ceases to be a cartel. And that is Opec at the moment.
The end of Opec
Faulkner firmly believes that the end is approaching for Opec and that the US could easily slot into the role of being the global swing producer.
He claims that 85 per cent of the wells drilled in 2015 have yet to be turned on and the fields themselves are being used as forward looking contango oil storage. It would take about 14 days to turn on the 4,000 wells, which combined would add 2 million b/d of production.
This concept could be rolled out on a larger scale and a potential 4 million b/d could be kept within the respective fields.
The unbridled success of unconventional hydrocarbons output has prompted producers across the Middle East to start looking at the possibility of developing their own shale assets, particularly in the gas sector.
There are several obstacles in the way of the Middle East emulating the US success, however. Principally, shale wells lose 70 per cent of their production after 12 months and require large volumes of fresh water, as well as extensive infrastructure. Whether these challenges can be overcome is debatable.
Shale wells are expensive and there is a constant treadmill of drilling so this is what they are facing, Faulkner says. It is the opposite of conventional and that is why the Middle East producers dont get it. They are not used to drilling thousands of wells each year just to maintain production. The incremental costs [in the region] are marginal and from day one they consider themselves unlucky if it is costing them $20 [a barrel].
Unless you can out engineer the decline curve somehow and continue drilling non-stop, coupled with the more conventional challenges, then you just cant see anyone being able to emulate the US success.
Faulkner cites the $7bn Saudi Aramco has proposed to spend on unconventional hydrocarbons as woefully inadequate and believes that to imitate the US would require an initial investment upwards of $100bn.
The US has proven that it can build a sustainable shale oil sector that can make a tremendous impact on the global oil industry. The technology is improving and yields are getting higher from each well every year, so it is only a matter of time before even greater breakthroughs are achieved.
The golden key for shale oil producers is how you reduce the decline curve of a well and [achieve] a decline that is similar to a conventional well, he says. This is the Holy Grail [for shale oil] and no one has figured it out yet. [The US] has decades left of oil and we are only in phase one of this. This is only the beginning for this industry.
Shale oil revolution not evolution
The US success in producing shale oil has taken the rest of the major oil producers by surprise and is causing widespread panic among many of the established old guard.
Shale oil was not even deemed to be possible a decade ago and has only been developed since about 2011. The process is not to be confused with oil shale, where hydrocarbons can be extracted from sedimentary rock by heating it to extremely high temperatures in furnaces.
Shale oil is extracted using hydraulic fracturing (fracking) the process that was first used to produce gas. Horizontal wells are drilled and then a mixture of water and chemicals are used to fracture the rock and extract the hydrocarbons.
The process is not easy or cheap with 6,000 wells being drilled in the US alone at about $4m a well. The wells then produce an average of about 1,000 barrels a day for the first 12 months then tail off and produce about 200 b/d for the next 10-15 years.
Since June 2014, there has been speculation that lower oil prices would sound the death knell for the industry and would lead to a huge drop off in production of about 1.5 million b/d.
This has not happened and the US shale sector is still causing a major oversupply in North America, which is rippling across the globe.
A consequence of lower oil prices is that the sector is now focused on reducing costs at the drilling stage and ensuring that research and development is focused firmly in extending the lifecycles of the wells. There are now several innovations being developed aimed at lowering drilling costs. They are:
This is a process where shale oil producers drill several wells from one rig to save costs. As many as 15 wells can be drilled, but three to four wells a pad is the norm.
A further innovation has been to start production at the first phase of each well rather than sequentially. This means you can start producing at several wells and then increase each one in phases.
Shale oil production requires huge volumes of water and while sourcing water is not an issue in the US, it is still a cost overhead. Several producers are now using water that is recycled from the well after being used for fracking.
It is now possible to refrack wells after 10 years and achieving 75 per cent of the initial production rate. Due to the industry being in its infancy this process will become more popular as the sector matures.