COMMODITIES

A shale revolution is underway in the US, and soon it will be "exported" around the world, as unconventional drilling is proving to be a boon to energy producers and consumers alike, notes Peter Way in Block Traders' Oil and Gold Monitor.

In many cultures, dancing is an expression of joy, often publicly displayed and enjoyed. The intended pun in the headline is further intended to reinforce the notion that an underlying enormous strength of the United States of America is that its free-market democracy provides continual incentives for individuals to think and create and improve, knowing that substantial rewards often usually follow such accomplishment.

Currently, because of this, the geology of shale formations is playing a significant role in our national well-being.

It is the nature of the extractive industries, in dealing with natural resources, to maximize the values of any deposit by balancing its richer pockets of product with leaner parts, within the average costs of recovery, so that best overall profit from the deposit can be achieved. The costs of extraction define the economic scope of the resource body, and its ultimate depletion then turns production attentions to higher-cost sources.

Those costs of extraction are the result of learned technologies that usually improve through time, hopefully expanding the life of the resource body with minimal increase in its break-even costs and in the ultimate price for what is being extracted.

In oil and gas recovery, the cost-benefit tradeoff of vertical drilling practice and technology has seen severe degradation when applied to smaller, more distant, and more difficult to reach reserves, resulting in prices doubling in crude oil from $50 a barrel to over $100.

But the mother of necessity has spawned a leap of technology that carries huge economic advantages. Skills learned in vertical drilling allow directional guidance of the drill bit, to the extremes of a shift from vertical to horizontal, and in any desired compass direction.

Coupled with water injection under pressure and the accompaniment of granular materials to hold open fractures induced in shale beds by the water, "fracking" now allows the recovery of hydrocarbons known to exist, but previously uneconomic to recover.

The original objective was to acquire natural gas, but the bountiful surprise was that enormous quantities of crude and other hydrocarbon liquids (NGLs) accompanied the NatGas paystream. Some experiences were of liquids above 90% of the total value. With crude selling at a heat content some five or six times the equivalent NatGas content, oilfield development priorities rapidly changed.

Production of NatGas from older, vertically-drilled wells (dry gas production) is quickly being supplanted by the "unconventionally-produced" equivalent from new-technology "wet-gas" wells, because of the rewards coming from their liquids.

The challenge now is to find markets for all the newly-available natural gas, and find ways to get the gas to those markets. The largest NatGas producer, ExxonMobil (XOM), is preparing to export it for consumption in higher-priced foreign markets.

A major potential natural gas market is in the generation of electricity, now primarily fueled by coal. That fuel's contribution to air pollution can be controlled, but at an additional expense that detracts from coal's price. Transportation, typically by rail to most utilities, is another coal-price offset, dependent largely on distance from mine to powerplant.

Tickers Mentioned: XOM