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Current Perspectives Summary

  • Commodities

An Unconventional Tonic for Old-School Oil

September 27, 2011

So much has been written about the prospects for alternative energy like wind and solar that the word on the street appears to be that it is now competitive with the old-school energy industry of fossil fuels and nuclear fission. However, the old school is not going to die quietly. Oil, for instance, is still, in many ways, the easiest and most efficient mechanism to create, store and transport energy.

Moreover, a combination of new techniques and higher prices means that vast swathes of previously uneconomic oil and gas reserves can now be exploited.

The key to this revolution is new engineering techniques which extract oil and gas from “source rocks”: the layers of organic matter that generated the oil and gas in the first place, rather than the reservoir rocks to which the oil and gas migrated.

Reservoir rocks have been the dominant source of energy for transportation and a major contributor to power generation for the last 100 years or so. However, all the oil and gas that has been discovered and produced from conventional reservoirs accounts for less than 10% of the total generated by source rocks. Of the rest, it is estimated that 50% has escaped to the surface through natural leakage over geological time, leaving 40% in, or adjacent to, the source rock that created it in the first place.

Although the recovery factor from unconventional source rocks is only about 5% (as against nearly 50% from traditional reservoirs), at current high oil prices the exploration and extraction of this form of oil and gas is very profitable. For instance, production of shale oil in North Dakota has soared (Download the pdf from the right side bar to view the display). It is why a focus on unconventional exploration by many exploration and production companies has made them much better investments than the big integrated oil companies.

Given the pace of advance, we don’t think it would be too demanding a target for the oil and gas industry to find ways to extract from these new sources a volume approaching half of all the oil and gas that has been discovered and produced from conventional exploration to date. Of course, energy costs need to remain high to support the cost of future research and development of unconventional energy. But that looks entirely likely from where we are sitting today.

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