Vauhini Vara | The Atlantic | Jan/Feb 2017
In November 2014, opec ministers gathered in Vienna for a tense meeting. Oil prices had fallen to their lowest point in four years. For decades, the cartel had responded to situations like this by restricting production and sending prices higher.
But things were changing. During the mid- and late aughts, more companies in the United States had begun using an alternative to traditional land-based drilling and deepwater offshore drilling. The method—fracking—involved using a mixture of water, chemicals, and proppant (sand or sand-like substances) to crack underground shale rock and release oil from it.
In 2014, U.S. shale oil represented about 5 percent of the oil being produced worldwide. But the process was expensive, which suggested to many that shale producers could not stay in business if oil prices dipped too far.
The main question at hand for the opec ministers was whether their countries should lower oil production and thereby raise prices. The oil minister of Saudi Arabia, Ali al-Naimi, spoke up. He argued, according to widely reported accounts of the meeting, that if the opec countries stopped pumping as much oil, non-opecproducers, such as U.S. frackers, might step in and supply more oil themselves.
What’s happened since has been a surprise. Even as oil prices fell and stayed low—by January 2016, they had dropped to less than $30 a barrel; today, they’ve rebounded, but only to about $45—shale-oil companies kept pumping. Their average break-even price has fallen by more than 40 percent, to about $40 a barrel. In some parts of the country, that figure is much lower. In the Bakken shale formation in North Dakota and Montana, where the economics of fracking are particularly favorable, the average break-even price is $29.
Fracking, it turns out, is a remarkably nimble industry—which perhaps, in retrospect, should not have been such a surprise. In the early years of the fracking boom, a Harvard Ph.D. student, Thomas Covert, studied records related to wells fracked in the Bakken shale formation. Wells that were newly tapped in 2005, he found, captured on average only 21 percent of the profits they could have produced if they’d been fracked in the most optimal way—that is, with the best mix of water and sand. By 2012, though, newly fracked wells were capturing 60 percent of maximal profits.
When oil prices fell, frackers responded by continuing to innovate. David Demshur, the CEO of Core Laboratories, a Dutch company that analyzes the ground into which oil companies drill, recalls suddenly getting a lot of phone calls in the summer of 2014 from shale companies desperate to squeeze more oil out of their wells. Demshur’s business with shale companies, until then, had amounted mostly to producing reports on the characteristics of a given chunk of rock; it was up to the companies to make use of the information. Now Core Laboratories started recommending the best cocktail of water, proppant, and any of several chemicals to get the most oil out of a particular well. Some of the biggest shale companies signed up.
Thanks to all these factors—not to mention the likelihood that Donald Trump’s administration will be quite supportive of fracking—it has become clear that the shale-oil business is going to survive, at least for now. And that could have major implications for the global oil market. Saudi Arabia and the other opec countries have long worked together to cap supply so prices don’t tumble. However, with sustained competition from shale companies, opec is unlikely to be able to keep prices as high as it once could. “Certainly, the days of $120 barrels of oil are a long way away,” Jacobs says.