The Benefit of Shale


Shale formation

When considering the market implications of abundant shale resources, we distinguish between a technically recoverable resource and an economically recoverable resource. Technically recoverable resources represent the volumes of oil and natural gas that could be produced with current technology, regardless of oil and natural gas prices and production costs. Economically recoverable resources are resources that can be profitably produced under current market conditions. The economic recoverability of oil and gas resources depends on three factors: the costs of drilling and completing wells, the amount of oil or natural gas produced from an average well over its lifetime, and the prices received for oil and gas production. Recent experience with shale gas in the United States and other countries suggests that economic recoverability can be significantly influenced by above-the-ground factors as well as by geology. Key positive above-the-ground advantages in the United States and Canada that may not apply in other locations include private ownership of subsurface rights that provide a strong incentive for development; availability of many independent operators and supporting contractors with critical expertise and suitable drilling rigs and, preexisting gathering and pipeline infrastructure; and the availability of water resources for use in hydraulic fracturing.

Because they have proven to be quickly producible in large volumes at a relatively low cost, tight oil and shale gas resources have revolutionized U.S. oil and natural gas production, providing 29 percent of total U.S. crude oil production and 40 percent of total U.S. natural gas production in 2012. However, given the variation across the world’s shale formations in both geology and above-the-ground conditions, the extent to which global technically recoverable shale resources will prove to be economically recoverable is not yet clear. The market effect of shale resources outside the United States will depend on their own production costs, volumes, and wellhead prices. For example, a potential shale well that costs twice as much and produces half the output of a typical U.S. well would be unlikely to back out current supply sources of oil or natural gas. In many cases, even significantly smaller differences in costs, well productivity, or both can make the difference between a resource that is a market game changer and one that is economically irrelevant at current market prices.