HH The Rise Of Shale Oil

  • Location
  • Drilling
  • Extraction
  • Storage

Many people think that drilling and extraction are one in the same. However, the actual process allows the oil company to drill the well without extracting the oil. This allows the oil company to store the oil in the ground relatively cheaply.

Conventional Wells vs. Unconventional Wells

The difference between conventional wells and unconventional wells (such as shale oil wells) is nicely documented in a 2017 paper by Hilde Bjørnland, Frode Martin Nordvik and Maximilian Rohrer.1 In particular, they emphasized that the extraction process for unconventional wells - which involves stimulating the wells with water, sand and chemicals - can be undertaken a number of times during the life of the well.

On the other hand, once conventional wells are tapped and extraction is started, production cannot generally be stopped. This irreversibility means that the supply from an unconventional well is actually more responsive to future oil prices than the conventional well.

Matching Production with Prices

Why are unconventional wells more responsive? Because some crude oil can be left in the ground - essentially free storage - even after the well is first tapped. This feature - along with a few others outlined in the paper - allows oil companies to be more selective about when they tap the well.

Moreover, unconventional wells typically involve horizontal drilling, which allows producers to access previously inaccessible stores of oil. Conventional drilling requires oil wells to be drilled from the top down, limiting the potential supply.

Not surprisingly, the figure shows that the reduction in oil production between 2014 and 2016 was almost entirely driven by changes in the rate of shale oil production, while conventional production remained relatively steady.

Impact of Low Oil Prices on Unconventional Drilling

What does this mean for unconventional oil when oil prices are low? The nature of the operation enables companies to reduce extraction rates when prices dip and future prices are expected to be low. Moreover, when prices are high, companies can return to unconventional wells that have been previously tapped and resume extraction, albeit at a higher cost.

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