The collapse of oil prices may have a bigger impact on the shale boom than anyone realises.
The biggest threat may not be to the existing wells in the US, but the untapped resources around the world.
According to Bloomberg, “Russia, China, Australia, Mexico and Argentina hold some of the [world’s] richest shale reserves,” but haven’t yet invested in the fracking technology to drill them.
Because the price of oil isn’t high enough to cover the costs, there’s just no economic incentive to start.
As a comparison, here are the breakeven oil prices for the US shale basins, from Citi:
Plenty of them need prices above $US60 to make money, meaning we’re already past the point where it’s worth it to continue production (and definitely past the point when it is worth making huge capital investments).
The international shale projects that are going forward mostly have state backing — in Argentina and China particularly. There are a few state-run oil companies investing in projects in Argentina’s Vaca Muerta basin, according to Bloomberg. But while state backing makes short-term cost concerns less relevant, if prices stay low for too long, eventually it may not be worth it.
The Chinese government seems committed to shale despite the recent drop in prices, but, according to Bloomberg, “has cut its 2020 shale gas production targets to about a third of an earlier estimate.”
But all of this is only accurate until the next oil price swing. This in some ways mirrors the discussion about US shale in the mid-2000s, when oil prices were so low that there was no incentive to invest in new extraction methods. Then, in 2008, prices shot up to almost $US150 a barrel, which incentivized the shale boom.
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