The tight oil being developed in North America is certainly not the lowest-cost oil in the world. But of the opportunities available to major oil companies, relatively low cost is just one of many advantages it offers over other sources of production.
“The shale revolution has changed the competitive landscape, because every investment decision we make, we have to ask ourselves: would we rather drill one more well in the Eagle Ford?” said Marianne Kah, Chief Economist for ConocoPhillips at the USAEE/IAEE Conference in Anchorage, Alaska this week.
The Eagle Ford is one of the three major unconventional oil plays that have been strong drivers of crude production growth in the US, along with Texas’ Permian Basin and North Dakota’s Bakken Shale. And with multiple layers of potentially hydrocarbon-bearing geological formations, in some respects, exploitation of these plays remains at an early stage. “We don’t even know how much is there because we’re just looking at the first level of the pay zone,” Kah said.
Estimates for breakeven costs of tight oil are by no means low, tending to cluster in the $75-85 per barrel range, but its costs are lower than those of many other opportunities available to oil companies. “Obviously it’s not as low-cost as Saudi Arabia, but we can’t invest in Saudi Arabia,” Kah said. “For the things we look at, like oil sands and deepwater, it has a fairly low breakeven price.”
And when examined using a broader range of metrics, Lower 48 unconventional oil has characteristics that are very attractive to a company like ConocoPhillips.
Tight oil plays like the Eagle Ford have a quick payback period. “These projects can be developed in a couple of years, and you get a lot of production in the first two years, so that really gives you very good economics, even though production drops off steeply and has a long tail after that,” Kah said.
US onshore oil has access to a well-developed service industry and infrastructure, and it is low-risk, both in terms of actually striking oil, and in being confident that regulatory conditions will allow the company to produce and market it. “There’s really very little exploration risk, and of course the US has a strong rule of law,” she said.
While a lack of infrastructure connecting some newer plays to markets has been a stumbling block for some operators, companies have been making massive investments in pipelines and rail to resolve the issue. “The Eagle Ford is close to markets, and we’re finding that even the Bakken, with rail capacity being built out, is actually able to bring crude to markets on all three coasts of the US, and it’s pretty high-quality crude.”
To read more about transportation and marketing of Bakken crude, read Phillips 66: ‘Everything’s Better with Bakken’.
And tight oil offers the option for a company to scale up or scale back activity in a way that technically challenging, long-lead projects with large up-front costs, like greenfield LNG projects of deepwater developments, do not. In the event a producer wanted to channel available resources into another project, tight oil is flexible, Kah said. “Particularly if you have a lot of mega-projects in your portfolio…you can decide about drilling a well or not.”
Production from unconventional wells tends to drop off sharply after an initial period of robust output. Some see this as an indication that the production boom the US is experiencing from its unconventional plays will prove unsustainable.
But Kah expects ongoing gains in well productivity to keep drilling costs at manageable levels.
“This is such a dramatic trend, if you look at a forecast of shale crude production, along with natural gas liquids,” said Kah. “Even non-shale crude oil is increasing in North America, from the deepwater Gulf of Mexico as well as the Canadian oil sands, so it looks pretty probable that by 2020, North America is going to have to become a net exporter of crude. And that is a real sea change for us.”
