We recently met with geopolitical strategist Peter Zeihan to discuss world events since the American election and his new book, “The Absent Superpower,” released last month. In the book, Peter credits energy and resource innovations with reshaping the global geopolitical environment. He predicts by 2019, US oil production costs could drop to $25 per barrel, making US shale producers potentially the lowest cost oil producers on the planet. America’s move into energy independence he says, will reshape global dynamics for at least the next three decades.
We’ve also been thinking hard about America’s newfound energy independence, but from an investment opportunities angle: we’re keenly interested in capturing the innovation going on in the resources sector. We see large-scale productivity increases all over the resources sector and are tracking the companies in a new Knowledge Leaders Resources Index.
We covered so much ground in our visit with Peter, we’ll publish two reports. In this first one, we address the broad impact of the Shale Revolution, which he calls, “the greatest evolution of the American industrial space since 1970.” We hope you enjoy the discussion.
Q&A With Author Peter Zeihan: How the Shale Revolution is Reshaping America and the World
Part 1: Productivity & Innovation in the Resources Sector
GAVEKAL CAPITAL: In the book, you write that innovations in the resources sector have given rise to an American Shale Revolution that is “reshaping the energy politics and energy economy of the United States, and in turn the global system.” What happened to cause this shift?
Peter Zeihan:Shale was supposed to be on the brink of demise when oil prices crashed in November 2014, but due to a confluence of events, the industry has matured far faster and more holistically than I could have expected. During the past two years, the shale sector has evolved in dozens of ways, for the most part in a desperate effort to survive. The resulting changes have transformed the American shale patch from a critical piece of the American energy system to a globe-changing revolution. Understand those changes and you can understand just how transformative shale is about to become.
The best place to start is probably about what’s changed in the shale oil industry. The general technology, fracking, where you drill down, then go laterally, and then put in water and sand at high pressure and crack it apart … that’s nothing new. Everybody talks about the horizontal drilling and the pressurized fracking as what made it possible. And I don’t mean to suggest that that is not true, but what really allows shale to be something more than a big boondoggle is seismic technology. Now, seismic has been around in the industry since the late 1970s. It’s not new, either. But the old seismic is a radically different creature from what we have today. It’s like comparing a Toyota hybrid to an 18-wheeler from the 1950s. Yes, technically, they’re of the same technological tree, but they’re so radically different. With the old seismic you have these giant bulbs of oil-saturated rock that didn’t require much of a sonar cross-section to show up when you would do your seismic. The new ones can pick up deposits about the size of a 500 ml water bottle.
GC: How is this different from traditional drilling techniques?
Peter Zeihan: When the oil forms, it forms in a source rock, and then it tends to migrate through to different types of rock until it hits something that it can’t pass through, a “cap rock” in the lexicon. There, it will continue to build and form up more pressure but not necessarily more heat. The heat is in the source rock. That doesn’t mean that your cap rock can’t be warm, however. Sometimes, the cap rock is hotter than the source material. But if it’s too hot, it will quickly go from kerogen to oil to natural gas to nothing. So, if you have the storage area, for lack of a better phrase, and it’s really hot, you have to drill it at the right geological moment or the oil is going to be gone. That’s why conventional oil has always been seen as a terminal window because there’s only so much of that. And you can drill deeper and you can make money off of smaller deposits, but at the end of the day, there’re only so many places where you have that perfect mix of geology to create the oil, capture the oil and then hold it in a condition for more than a few eons.
GC:Does most oil sit in such an environment, under a cap rock?
Peter Zeihan:No. It’s easier to think of it as a pool of liquid, but it’s not actually a big chasm full of liquid. It’s porous rock that happens to have a lot of oil saturated through it. The difference about shale rock is it’s not as porous to the same degree that the conventional reservoirs are. So, if you have a high-porous rock, the liquid, the oil, the gas can migrate through it until it hits a barrier that it can’t pass through. At this point it builds up pressure and when you tap those, you get a gusher. Shale is porous at the micro level but not the macro level, so the oil can form in it but then it can’t get out. If you have a shale rock versus another oil-bearing rock, the shale rock is much heavier. It’s super-dense, and you can’t squeeze it; you have to shatter it. With the conventional reservoir, you drill down into it and you don’t even have to crack it. The water, which would be the liquid, will seep out on its own in most circumstances. With shale, you have to beat the hell out of it to get it to give up the crude. Micro-seismic allows you to get a more accurate picture of all of that, and micro-seismic is so new it did not exist 30 months ago. More than four-fifths of the petroleum in North America is trapped within the source rock, and most of those source rock are shales. The shale industry is all about developing technologies that make it possible to access the oil that isn’t perfectly packaged. The only way to get shale rock to give up appreciable amounts of petroleum is to turn conventional drilling techniques on their ear –literally. Instead of drilling vertically down through the formation, you instead drill horizontally along the formation. Total reservoir contact between the wellshaftand the shale layer would be but a few dozen feet per well with vertical drilling, but by going horizontally you can now establish over two miles of contact.
GC:Are technologies like micro-seismic allowing drillers to access this trapped oil that was inaccessible before?
Peter Zeihan:Right. Seismic technology has been around for a while and that’s gotten better and better, and we would’ve never had the shale revolution without it, but micro-seismic has changed the approach by sending a series of geophones down an existing well shaft and detecting noise across the entire cross-section. Then, as people are doing other drilling around it, it’s listening to how those much smaller sound vibrations, ergo micro, are bouncing around within the formation. They can now map out the formation as