The Fourth Shale Revolution: Supermajor Tech

Hey all, Peter Zeihan here. Coming to you from Los Angeles on the California coast. And today we’re to talk a little bit about oil. There have been a couple of technological breakthroughs that I think are worthy of mentioning in the shale era. So ExxonMobil, big company, one of the largest players in the world, produces just under 5 million barrels a day. 

Has basically started mucking around with something called prop. So dial back…Hydraulic fracturing or fracking was basically how the United States produces 80% or more of its crude oil these days, as well as the vast majority of its natural gas. It’s not a fringe technology. It’s the backbone. What you do is you drill down vertically, and then you make a horizontal split that goes two, three, four, maybe even five miles. 

And then you inject water that is laced with sand. The water hydraulics, does not compress under pressure. So it cracks the rock apart. And then the water goes in with the sand and accesses tiny, tiny, tiny, tiny little deposits of petroleum. Then you stop the pumping. And because those tiny pockets of petroleum have now been exposed, they produce a back pressure that pushes the water out, but the sand stays lodged in the cracks, keeping them open so the flow can continue. 

The sand is called it, and it’s one of the biggest expenses in a fracking operation. Well, what ExxonMobil has now done is change the prop and is triggering what is basically the fourth shale revolution back backstory for that first shale revolution is when we figured out how to do this and brought out natural gas. The second shale revolution is when we figured out how to do this to bring out liquid oil. 

The third is when we built the infrastructure. Things like LNG facilities or chemical facilities or refineries to metabolize all this raw product where we’re now producing all of that stuff, all of that’s in the past. Fourth Revolution is taking the capital and the technological skillsets of the majors, like Exxon, and applying them for a whole new generation of technology. 

So one of the weird things about the shale revolution is when it started most of the super majors and kind of written off the American oil patch, and we had seen oil output from the United States dropped to historical lows well over the last century and a half. 

What that meant is we had small mom and pops that were doing everything, and they were trying everything they could come up with in order to get incremental increases. 

And that’s what generated the first few million barrels a day. Well, as time went on, oil does what oil does. And it rises and it falls and it rises and falls. And so we got a series of busts, and ExxonMobil was able to come in with its better capital position and buy up a lot of the smaller companies, to the point that it and Chevron now dominate the space and collectively produce almost 9 million barrels a day. 

Now you apply what Exxon has across its entire value chain, and you get a very different proposition. So for profit, specifically what we’re talking about today, they went into their refineries and they found waste product, something called petroleum coke. And they were able to manufacture that into a kind of a synthetic sand, if you will. The profit is where a lot of experiment has been going on and a lot of subsectors for the last several years, and you got some pretty expensive stuff that’s called ceramics called ceramics. 

It is ceramics. Petroleum coke is cheaper than that, more expensive than sand. But the real advantages it has that it’s a lot less dense, maybe 40, 50% less dense than sand, which means you can suspend it in the water better, which means it pushes into the formation better, which means it holds open cracks deeper in the formation. 

And for a small increase in cost, using what used to be a waste product. Exxon has seen their numbers increase by 10 to 20 to maybe even 30% in some wells. And that alone changes the math of the shale revolution a ten to a 30% increase in output for only a slim investment in what was a waste product. 

That’s amazing. And so the shale revolution is nowhere near done. You’ll hear people saying that eventually the shale revolution going to run out. There’s only much oil, but that misses the point. In the pre shale era, we were able to access about 10%, 9 to 10% of global energy reserves. There’s a lot down there that we just don’t have the technology to get to. 

The shale revolution doubled the percentage of what was accessible within the US space. So we’re talking about 150 years of output. All of a sudden we have access to something like that again. And we keep making these incremental increases, like with profit, that pushes the horizon back even further. So the shale revolution continues to set new records for output, adding somewhere between a half a million and a million barrels a day per year, and has now been doing that since 2009. 

You get a lot of output when you do it for that long. So this year is not the last year the shale revolution. Neither is next year or the year after or the year after that. 

Because the numbers keep getting better, the technology keeps pushing further, and the break even cost for what it takes to get a chunk of oil out in an economically viable way keeps going down.