With petroleum prices down 50 percent over the past year, many analysts and pundits are predicting the end of America’s shale oil boom. Recent headlines include: “Oil Price Fall Forces North Dakota to Consider Austerity” (New York Times); “Oil Price Drop Hurts Spending on Business Investments” (Wall Street Journal); “The American Oil Boom Won’t Last Long at $65 per Barrel” (Bloomberg Business); and “The Shale Oil Revolution Is in Danger” (Fortune).
High prices, shale skeptics argue, created a bubble of activity in unsustainably expensive shale fields. As shale-related businesses contract, consolidate, and adjust to the new price regime, a major shale bust is inevitable, they add, with ghost towns littering idle fields from Texas to North Dakota.
It is true that the oil-price collapse was caused by the astonishing, unexpected growth in U.S. shale output, responsible for three-fourths of new global oil supply since 2008. And as lower prices roil operators and investors, the shale skeptics’ case may seem vindicated. But their history is false: the shale revolution, “Shale 1.0,” was sparked not by high prices—it began when prices were at today’s low levels—but by the invention of new technologies. Now, the skeptics’ forecasts are likely to be as flawed as their history. This paper explains how continued technological progress, particularly in big-data analytics, has the U.S. shale industry poised for another, longer boom, a “Shale 2.0.”
The End of the Beginning
John Shaw, chair of Harvard’s Earth and Planetary Sciences Department, recently observed: “It’s fair to say we’re not at the end of this [shale] era, we’re at the very beginning.” He is precisely correct. In recent years, the technology deployed in America’s shale fields has advanced more rapidly than in any other segment of the energy industry. Shale 2.0 promises to ultimately yield break-even costs of $5–$20 per barrel—in the same range as Saudi Arabia’s vaunted low-cost fields.
The shale industry is unlike any other conventional hydrocarbon or alternative energy sector, in that it shares a growth trajectory far more similar to that of Silicon Valley’s tech firms. In less than a decade, U.S. shale oil revenues have soared, from nearly zero to more than $70 billion annually (even after accounting for the recent price plunge). Such growth is 600 percent greater than that experienced by America’s heavily subsidized solar industry over the same period.
Shale’s spectacular rise is also generating massive quantities of data: the $600 billion in U.S. shale infrastructure investments and the nearly 2,000 million well-feet drilled have produced hundreds of petabytes of relevant data. This vast, diverse shale data domain—comparable in scale with the global digital health care data domain—remains largely untapped and is ripe to be mined by emerging big-data analytics.
Shale 2.0 will thus be data-driven. It will be centered in the United States. And it will be one in which entrepreneurs, especially those skilled in analytics, will create vast wealth and further disrupt oil geopolitics. The transition to Shale 2.0 will take the following steps:
- Oil from Shale 1.0 will be sold from the oversupply currently filling up storage tanks.
- More oil will be unleashed from the surplus of shale wells already drilled but not in production.
- Companies will “high-grade” shale assets, replacing older techniques with the newest, most productive technologies in the richest parts of the fields.
- And as the shale industry begins to embrace big-data analytics, Shale 2.0 begins.
Further, if the U.S. is to fully reap the economic and geopolitical benefits of Shale 2.0, Congress and the administration should:
- Remove the old, no longer relevant, rules prohibiting American companies from selling crude oil overseas.
- Remove constraints, established by the 1920 Merchant Marine Act, on transporting domestic hydrocarbons by ship.
- Avoid inflicting further regulatory hurdles on an already heavily regulated industry.
- Open up and accelerate access to exploration and production on federally controlled lands.
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Mark P. Mills is a senior fellow at the Manhattan Institute, CEO of the Digital Power Group, a tech-centric capital advisory group, and Faculty Fellow at Northwestern’s McCormick School of Engineering and Applied Science. He is also a member of the advisory board of Notre Dame’s Reilly Center for Science, Technology, and Values. Earlier, he cofounded and was chief tech strategist of Digital Power Capital, a boutique venture fund, and served as chairman and CTO of ICx Technologies, helping take it public in a 2007 IPO.
Mills is a contributor to Forbes.com and is coauthor of The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (Basic Books, 2005), which rose to #1 on Amazon’s science and math rankings. His articles have been published in various popular outlets, including the Wall Street Journal and New York Times Magazine. Mills is also a frequent guest on CNN, FOX, NBC, and PBS, and has appeared on The Daily Show with Jon Stewart.
Earlier, Mills was a technology adviser for Bank of America Securities, and a coauthor of a successful energy-tech investment newsletter, the Huber-Mills Digital Power Report. He has testified before Congress and has briefed many state public service commissions and legislators. Mills served in the White House Science Office under President Reagan, and subsequently provided science and technology policy counsel to numerous private sector firms, the Department of Energy, and U.S. research laboratories.
Early in his career, Mills was an experimental physicist and development engineer, working at Bell Northern Research (Canada’s Bell Labs) and the RCA David Sarnoff Research Center on microprocessors, fiber optics, missile guidance, nuclear energy, and non-proliferation. He earned several patents for his work in these fields. Mills holds a degree in physics from Queen’s University, Canada.