NEW YORK – OPEC and lower global oil prices delivered a one-two punch to the drillers in North Dakota and Texas who brought the U.S. one of the biggest booms in the history of the global oil industry.
Now they are fighting back.
Companies are leaning on new techniques and technology to get more oil out of every well they drill, and furiously cutting costs in an effort to keep U.S. oil competitive with much lower-cost oil flowing out of the Middle East, Russia and elsewhere.
“Everybody gets a little more imaginative, because they need to,” says Hans-Christian Freitag, vice president of technology for the drilling services company Baker Hughes.
Spurred by rising global oil prices U.S. drillers learned to tap crude trapped in shale starting in the middle of last decade and brought about a surprising boom that made the U.S. the biggest oil and gas producer in the world. The increase alone in daily U.S. production since 2008 – nearly 4.5 million barrels per day – is more than any OPEC country produces other than Saudi Arabia.
But as oil flowed out and revenue poured in, costs weren’t the main concern. Drilling in shale, also known as “tight rock,” is expensive because the rock must be fractured with high-pressure water and chemicals to get oil to flow. It became more expensive as the drilling frenzy pushed up costs for labor, material, equipment and services. In a dash to get to oil quickly, drillers didn’t always take the time to use the best technology to analyze each well.
When oil collapsed from $100 to below $50, once-profitable projects turned into money losers. OPEC added to the pressure by keeping production high, saying it didn’t want to lose customers to U.S. shale drillers. OPEC nations can still make good profits at low oil prices because their crude costs $10 or less per barrel to produce.
Now drillers and service companies are laying off tens of thousands of workers, smaller companies are looking for larger, more stable companies to buy them, and fears are rising of widespread loan defaults. OPEC said in a recent report that it expects U.S. production to begin to fall later this year, echoing the prediction of the U.S. Energy Department.
To compete, drillers have to find ways to get more oil out of each well, pushing down the cost for each barrel. Experts estimate that shale drillers pull up just 5 percent to 8 percent of the oil in place.
“We’re leaving behind a large amount of hydrocarbons, and that’s quite unacceptable,” Freitag says. “It requires different thinking now.”
U.S. shale drillers will never push costs as low as OPEC countries. But the U.S. industry may be able to survive – or even thrive – if drillers can learn to quickly adapt.
“There is a significant portion of this that is competitive on a global basis,” says Exxon Mobil CEO Rex Tillerson at an annual investor meeting earlier this month. “North American tight oil supply is more resilient than some people think it is.”
