Commodity supercycle in rude health despite shale oil  

Posted by Big Gav in , ,

Ambrose Evans Pritchard has his own farewell to The Oil Drum at The Daily Telegraph, remaining skeptical that we've got an endless supply of oil just waiting to flow out of the ground - Commodity supercycle in rude health despite shale.

The Oil Drum is closing down after eight years, giving up the long struggle to alert us all to "peak oil" and the dangers of an energy crunch. Readers have been drifting away. The theme has gone out of fashion, eclipsed by shale and fracking in the US. ...

But though fracking is a Godsend, let us not lose our heads. The US Energy Department expects shale oil to add 3.1m bpd to America's oil output by 2020, a remarkable feat but far less than the 5.4m estimates of a much-cited study by Leonardo Maugeri at Harvard.

The depletion rate on rigs at the Bakken field in North Dakota - the biggest US shale field - is precipitous. Output falls 30pc within two years, and a third is leaking into the air. Shale bears say average declines are nearer 70pc in the first year, and dismiss the whole craze as a bubble.

That is going too far. The technology is improving every week. The decline rate may flatten over time. Yet claims of a 100-year bonanza in the US are wishful thinking. "The upper limit of supply is likely closer to 23 years using present day rates of consumption," said the Eos report.

Kevin Norrish from Barclays said US drillers have already tapped the "best plays" for shale, with newer Utica ventures in the north east of the US and Canada coming up short. The biggest productivity leaps may already have happened. "We expect a steep slowdown in the rate of tight oil production growth from the middle of this decade onward," he said.

Barclays is defiantly holding to a Brent crude forecast of $184 in 2020, betting that spare capacity in global output will prove thinner than supposed, and that oil shocks will come back to haunt us.

We should think of shale as one-generation play for the US, enough to ensure American superpower primacy into the middle of the century. Whether the rest of the world can follow suit in any meaningful time-frame is an open question. Boston Consulting Group said there were 110,000 shale wells in the US and Canada by the end of last year, and just 200 in all other countries combined. Argentina, Poland and Ukraine may try to get going after 2015 but they have almost no service infrastructure, and all score badly on "ease of doing business". Australia may do better from 2017 onwards.

China has the world's biggest reserves on paper. It is itching to start but much of its shale is in the north-west desert where there is no water, and frackers have yet to find a viable extraction process without water. Not one of the 19 drilling awards issued by the Communist authorities in January went to companies with oil and gas experience. They were mostly power utilities or coal miners.

Even if China seizes the prize, it will first have to build a vast network of pipelines. That will take a great deal of energy, long before shale supply reaches the market. ...

We all love a fresh narrative but consensus has swung too fast from the 2008 oil panic to the energy complacency of 2013, and done so on slender evidence. As matters stand, peak cheap oil remains an incontrovertible fact. To Oil Drum, a fond farewell.


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