Drilling technologies may erode prices

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Yergin: Global impact of increasing use of horizontal drilling, hydraulic fracturing to tap shale, tight oil could hurt prices

Rose Ragsdale

For Petroleum News Bakken

In its April 24 edition, the Calgary office of the Toronto-based Globe and Mail reported that Daniel Yergin, chairman of energy research firm IHS CERA, said the future strength of oil prices hangs in the balance as tight oil-production methods sweeping North America spread around the world and unlock new energy supplies.

Yergin said Russian, Chinese, European and Saudi companies are rushing to adopt the horizontal drilling and fracturing technology that has opened up a wealth of new oil and gas reserves in Canada and the United States, according to writer Nathan Vanderklippe.

The stage is set for international price pressure, much like the way new output has weighed on oil and gas prices in Canada and the U.S. in recent years, Yergin warned, during a presentation at the University of Calgary’s School of Public Policy.

“This technology is not going to migrate. It’s already migrating,” he said. “And I think in three or four or five years, if we want to talk about surprises that are there, it might be the global impact of these technologies.”

The impact is already being felt in North America with the explosion of shale gas supplies, which has severely depressed prices of natural gas.

The development of so-called “light, tight” oil plays, such as the North Dakota Bakken, also has had an impact, said Yergin, who the Globe and Mail described as a respected voice on energy issues.

“U.S. oil production is up 20 percent since 2008. If we hadn’t added 1 million barrels per day of supply in the U.S., we’d be looking at much higher oil prices,” he said. “You have a spare capacity of between 1 (million) and 2-million barrels per day in the world market. You take away 1 million (barrels), you don’t have much spare capacity at all.”

Development of new oil and gas sources around the world stands to deliver a similar impact, but on a much larger scale.

At the same time, a series of factors could erode oil demand, even in the face of continued growth in much of the developing world. China’s thirst for oil and new cars is rising fast. But elsewhere, cars are losing some of the allure that once drove heavy demand.

The current generation of young people “doesn’t have the same intense attachment to automobiles that earlier generations had,” Yergin said, per the Globe and Mail’s report. “And it’s not just in North America. It’s in Europe, too.”

Today’s oil prices are high enough to effect change, he added. He said oil prices in 2011, on an inflation-adjusted basis, were higher than they’ve ever been since the 1860s, and if that persists for a few years, it “will be a tremendous stimulus to innovation, substitution, greater efficiency.”

That’s not to say that oil prices are likely to crater. For one, the entrepreneurial energy that motivates North America’s energy industry — where competition between hundreds of companies leads to rapid adoption of anything new and profitable — doesn’t exist elsewhere. That factor is likely to moderate the global spread of technology, as are political obstacles, such as France pushing away fracturing technology.

In addition, the drilling and fracturing used to unlock new energy supplies are inherently expensive.

“Many of these new developments in tight oil, oil sands and offshore oil don’t exist at $20-a-barrel oil,” the newspaper quoted Yergin as saying.