US Shale Oil: the test of the Business Model is underway

US Shale Oil: the test of the Business Model is underway

Since 2010, the United States has been undergoing a second shale revolution with the very rapid development of shale oil or Light Tight Oil (LTO), following the revolution in shale gas. The rapid increase in LTO production from less than 1 Mbbl/d in 2010, to nearly 5 Mbbl/d in 2014, was made possible by high investments in US shale ($129 billion in 2014), the high level of crude oil prices, and continuous technological advances. Thanks to this development, the USA has become the world’s largest producer of crude oil and other liquids, ahead of Saudi Arabia and Russia. The production of LTO, accounts for 55% of US crude oil output now, and has enabled the country to reduce its oil imports and expand its exports of oil products. This has important ramifications for the world oil market, traded oil flows, and the oil price. The decline in oil prices, however, makes continued investment in the sector uncertain, and therefore, the growth in LTO production, too. The LTO business model differs from that of conventional oil As operating costs to produce LTO are limited, production at existing wells is not really called into question. However, LTO output is characterised by very rapid declines in initial production per well (between 60% and 90% in the first year). Therefore, sustained and continuous investment in new wells is necessary to maintain and/or increase output. Such rapid output decline also means that projects are very strongly dependent on the price of oil in their first year of operation. This contrasts with conventional oil production whose economics spans much longer time periods. The fall in [...]

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