July 8, 2016
Author: Leslie Wei, Senior Analyst
Publisher: Oil & Gas Financial Journal
Unconventional production is controversial due to environmental concerns, including water safety and earthquakes. Although shale is often regarded in a negative light, it is equally important to consider the positive impact shale has on the domestic and global economy.
Oil and gas production in the United States can be broken down into two periods: pre and post shale. The timeline of each period is observable in the figure below, which shows the oil and gas production in the United States split by the source of supply along with the light oil content. Before the “shale era”, US production was decreasing, where the main contributor to production was conventional fields. During this period, the US relied heavily on oil imports and had to take measures to secure a consistent supply of oil. The introduction of shale completely changed the picture; oil production grew from 5 million barrels to 9 million barrels per day, which has reduced the US trade deficit. Oil imports now contribute to just 1/3 of the trade deficit compared to 2/3 of the trade deficit before the shale revolution, thus further strengthening the solidity of the US economy.
Shale also provides benefits to society through job creation and royalties and taxes paid to landowners and authorities. Figure 2 shows the historical investments (development and exploration) for both oil and gas fields in the US. Over the past five years, shale investments made up 50% of total US investment levels. During the same period, the number of jobs associated with oil and gas activities (source: Bureau of Labor Statistics) increased by ~300,000. In addition to job creation, companies pay royalty, production tax and income tax to the landowners and government for each barrel of oil produced. Government and landowner income from shale peaked in 2014 at 120 billion USD and dropped to about 31 billion USD in 2015.
In terms of the global economy, shale plays an important role as the marginal producer, where it currently has 6% of market share. Without shale, the call on OPEC would have gone from 33 million barrels to 38 million barrels in 2016, which indicates shale is a stabilizing factor for the oil price.
There are countries that benefit from each oil price scenario. A low oil price results in lower transportation costs and gasoline prices, which greatly benefit the developing countries, while a high oil price affects the government income for oil exporting countries. Figure 3 quantifies the effect of the oil price on the top oil producing countries, showing the 2016 oil production along with the oil and gas contribution to the total GDP. The OPEC countries, Saudi Arabia, Kuwait, and Iraq, are the most exposed to income from oil and gas, where the income makes up more than 40% of total GDP. These countries will benefit the most once the oil price recovers. Of the top three producers, Saudi Arabia, Russia and the US, the US and Russian economies are less affected by oil price fluctuations since 1% and 10%, respectively, of the GDP are dependent on oil revenues.
The environmental impact will continue to present a pushback for shale production in different societies. Nonetheless, the introduction of horizontal drilling and fracking has put the US back on the E&P map. With considerable growth in production over the last 5 years, the US has been able to move close to being energy independent and may be completely independent by 2020. The shale industry has also benefited other parts of the economy by creating 300,000 new jobs, which was important in the post-financial crisis period. In the global context, the introduction of shale has geopolitical influence by lowering the oil price and offering stable oil price to developing countries.
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