Studies 19 January, 2015

The Shale Oil Revolution and Implications for the GCC

Paul Stevens

is a distinguished fellow at Chatham House, The Royal Institute of International Affairs, in London. He taught at the American University of Beirut from 1973 to 1979, and at the University of Surrey, UK, from 1979 to 1993. From 1993 to 2008 he served as professor of petroleum policy and economics at the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland, a chair created by BP. In March 2009 he received the OPEC Award in recognition of his outstanding work in the field of oil and energy research

What is the “Shale Technology Revolution”?

The “shale technology revolution” has undoubtedly been a major game changer in global energy.  Although it has only attracted attention relatively recently, in reality it has been over 30 years in the making (Stevens, 2010, 2012). The two main technical components of the revolution are extended reach horizontal drilling and multi-stage hydraulic fracturing. Neither are “new” technologies. Horizontal drilling was developed in the United States in the 1930s and the first well was hydraulically fracked[1] in the United States in 1947 (Zuckerman, 2013). Two other technologies are also contributing to the revolution. The first is three-dimensional and four-dimensional seismic, and the second is coil tube drilling. The seismic allow operators to identify deposits of shale gas or shale oil more precisely and to target the “sweet spots" [2] .Coiled tube drilling is where the drill bit is attached to a flexible cable and liquid nitrogen, rather than conventional drilling muds, lubricates the drilling. The drill bit is directed by an operator observing a 3-D map on the computer and can be manipulated to within a few feet several miles away. 

Several points need to be emphasized about this technology revolution. First, as already indicated, it is not “new”. While attention has focused on shale technology in the last few years, due to the rise of domestic shale production in the United States, the revolution has been in the making for years. Cynics describe this as an “over-night sensation that has taken 30 years”. Second, the government has played a significant role in its development. In the early 1980s, the United States’ Government, aware of predictions of anticipated serious declines in domestic gas production, began to pour millions of dollars into basic scientific research covering low permeability operations for shale plays. The results were then made available to the industry, owners and operators, who then took them and used them in the development of their operations (Zuckerman, 2013). This was a crucial kick-start to the process of producing shale gas and oil since private companies would not invest in such fundamental scientific research[3].

Another point to emphasize is that, although something of a cliché, the whole revolution has been a real triumph of technology. However, for this to work, it has required a huge amount of effort in drilling and fracking. A key characteristic of shale operations is that they are highly differentiated[4]. Different plays differ in their geological characteristics and their responsiveness to fracking operations. Even wells on the same play differ. Therefore, to gain a critical mass of information to create a “learning by doing” curve, requires a great many wells to be drilled and fracked and that information needs to be shared amongst operators[5]. As will be seen in the course of this paper, this presents a considerable barrier to the development of shale operations outside the United States.

The Indirect Impact of its Effects in the United States  on Global Energy  Markets and Geo-Politics

The shale technology revolution has already had a significant impact on energy in the United States, and, as a result, on global energy more generally. Figure 1 shows the source of domestic gas production since 2008 and demonstrates how shale’s contribution increased from less than 10 percent in 2008 to over 35 percent by 2012[6].

To continue reading this paper as a PDF, please click here. This paper was originally presented as part of the ACRPS' Third Annual Conference of Arab Reseach Centers, which in 2014 focused on the GCC states.

[2] The shale technology revolution is spawning its own jargon. For example, what in conventional oil and gas are called “fields” have become in shale jargon “plays”.

[3] No private company would fund Isaac Newton to sit under his apple tree and discover gravity.  While his concepts of gravity underlie Western science they have no commercial value.  The Laws of Gravity cannot be patented.

[4]  Shale operations can produce either shale oil or shale gas.  Shale oil should not be confused with oil shale.  The latter is effectively a manufacturing process whereby rocks are crushed and then “cooked” in order to extract the liquids.

[5]  A good example of this in the United States is the Marcellus Shale Coalition formed in 2008, which has over 300 members and meets regularly to exchange experiences.

[6] As of mid-October 2014, 2012 was the latest year for which Energy Information Administration data is available.  To some extent this delay in data reflects the fact that shale gas is produced by a very large number of small to medium sized companies and therefore it takes some considerable time to collect the data. Estimates for 2013-14 put shale’s contribution at over 40 percent of domestic gas production.