steel on the surface, less right of way, less royalties, less transit fees for the same collection capacity. And now, they’ve figured out how to go into areas that have already been fracked and using micro-seismic, for example, to look for new places and use exactly the same well and exactly the same gathering infrastructure, but do a completely fresh approach. The next big breakthrough will be doing that on pre-existing wells which is called refracking. They’re still working out the kinks of that, because once you’ve already fracked a zone, you already have a lot of cracks in the area, and keeping the pressure different from stage to stage is difficult because with the older wells the cracks intermingle. So, if you put a lot of pressure into one stage, you might actually be fracking the next stage. But if they can figure out a way around that, and there’s a few technologies that Halliburton is working on for that, something called the “sliding sleeve”, then everything we’ve done before, we can come back and do it again and get three times the oil out of it. So just in additional induced recovery, that could be another six million barrels per day.

GC: With all the new techniques, productivity and cost savings, where do you see production going? Do you see a repeat of almost a doubling of production over five years?

Peter Zeihan: I think that a million barrels per day added in calendar year 2017 is just baked in now, and that even assumes a certain price giveback from where we are at right now. The break-even price in the big four fields is now $40. And what you’re seeing now is this initial spike from relatively new players coming in with relatively old technology because the numbers make sense and they don’t have the debt overburden. It’s easy to get a little bit of money to start something fresh right now. It’s when the players who survived this get their fresh funding which is happening right now, that probably by the end of the first quarter that output will really increase. So one million barrels per day of new output I think is a very conservative estimate, but a very safe one. Two million is possible.

GC: You describe an environment of consolidation from June 2014 to June 2016, during which experimental technologies were shared much like tech’s open source culture, driving output rates higher even while they drove per-barrel product costs lower. Was this a result of the Saudi price war?

Peter Zeihan:Exactly. Saudi Arabia’s price war inadvertently created a dream scenario for American innovation. What’s happening now is a leaner, meaner, greener set of technologies that is allowing shale to tackle what detractors rightly see as its greatest Achilles’ heel: high upfront production costs. Such tech advances comprise the bulk of shales recent price advantage. In 2012, before any of those technologies had been operationalized full-cycle costs were about $90/barrel. In November 2014, when the Saudi’s launched their price war, the full-cycle break-even cost across the shale patch was probably about $75 … by August 2015 that figure had plunged to $50 in the Big4 fields. As operators started to redesign wells with the entire lifecycle of production in mind, that per-barrel production cost for new wells dipped to the vicinity of $40 in November 2016. North American shale already is more cost-competitive than the global average. As these technologies continue to mature and play off on another, a price structure of around $25 sometime in 2019 seems within reach.

Your average well involves inputs from more than 100 companies from start to finish. With the technology that exists now, each well now likely can be relied upon to at least triple its long-term output compared to 2014 norms for on average less than a 50-percent increase in cost, with less surface infrastructure. By my math, all in, North America is less than 0.8M barrels per day from being a net energy exporter.

Chart via Zeihan on Geopolitics

Article by Gavekal Capital Blog

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