Strategies & Analysis
has created a world changing event. This new-found economic
energy and raw material source translates into new opportunities for coating manufacturers and suppliers of resins, additives
and specialty polymers to achieve sustainable growth.
What kind of growth are we talking about? Consider this:
The U.S. Energy Information Administration estimates that
more than half of the domestic natural gas and close to half of
the crude oil produced is shale gas and tight oil. U.S. production of crude oil in 2014 has nearly doubled since 2007 and
is close to the highs of the mid-80s after Alaskan North Slope
production came on-stream (figure 2). Some forecasts project
that within a of couple years U.S. petroleum production will
surpass the record years of the early 70s. Natural gas withdrawals are at an all-time high and growing yearly; production is
now 30 percent above the turn of the century average. In 2013
the U.S. became the number one producer of natural gas in the
world; and the number one global producer of crude oil. These
achievements would not be possible without the extraction of
tight gas and oil through fracking.
Global Energy Economics
Although crude oil market prices have dropped from $100/bbl
to $40-60/bbl, U.S. production is expected to not only be sustainable but grow over the next half dozen or more years. The
price reduction is attributed to several causes: (1) an excess in
supply driven by an increase in U.S. shale based tight oil production, which grew from 0.6 mbbl/day in 2008 to 4. 7 mbbl/day in
2014 (2) growing and even record crude inventory levels due
to increased production and sluggish growth at many of global
economic leaders and ( 3) geo-political efforts to curb the tight
oil production in the U.S. through lower pricing. As expected,
the number of shale drilling rigs decreased significantly during
the early part of 2015, potentially knocking a couple percentage
points off the growth curve.
However, the cost of refining crude oil is more complex than
the extraction process. Geopolitics, especially where oil prof-
its are funding government programs, tend to require higher
pricing; and crude oil transportation, over land or sea, can play
a huge role in cost. In spite of the constant U.S. Congressional/
Executive wrangling over projects like the Keystone pipeline or
ANWR, and local (state or county) bans on fracking operations,
the U.S. (and Canada) are very stable politically and exert rela-
tively, minimal impact on exploration and drilling.
The more critical cost factor in North America is transportation of the new tight oil, specifically the lack of available pipelines and the need to use rail to convey the crude to the refinery.
For example, North Dakota, now the second largest petroleum
producing state, in not nearly as well connected by pipeline to
the refineries on the gulf coast (or elsewhere) as the oil fields in
Texas, still the number one producing state. Some estimates on
the break even point for tight oil fields are below $40/bbl; other
sources indicate that tight oil is competitive with other high-price resources at $50-80/bbl.
Whatever the break even cost may be, the hydraulic fracturing process has significant potential for cost reduction, and
as pipelines connect shale gas and oil fields, transportation will
become less costly versus shipment by rail car. (It may also become safer, given some of the recent crude oil train wrecks in
Quebec, West Virginia and Illinois).
These developments will continue to lower tight gas and oil
cost and further drive down break even costs. Further, tight oil
fracking operations are very flexible. Drilling rigs can be shuttered or redeployed quickly – in a matter of weeks or months
– when crude prices decrease or recover; and they pump at a
greater rate than conventional drilling wells. Thus, the flexibility
of tight oil production, now over 6 percent of the global output,
may have significantly diminished the influence of OPEC to set
prices, especially ceiling prices, and may exert a stabilizing effect
on pricing at levels significantly below $100/bbl.
Impact of Fracking on coatings and its
associated value chain
There is no doubt that tight oil and gas production is expected
to grow for many years to come. So how does that impact the
market for coatings and the polymers, resins and additives used
to formulate them?
We need to review the typical hydro-fracturing operational
system and from this we can understand where growth can
be generated. For example, the equipment used to build the
site, access and store the raw materials, extract and store the
resource and transport it to market are all potential areas of
sustainable growth. Conventional coatings are required in every aspect of this process, and the fracking process itself uses
new technologies that employ specialty coatings and polymer
systems that represent new markets for the industry. Being
close to this industry and having rapport and built in loyalty
can help coating suppliers both participate as well as support
these growth opportunities.
Next month, part 2 of this article will describe the fracking
process and explore specific areas where coatings are expected
to grow and what new technologies are required to extract oil
and gas from tight places. CW
Source: www.eia.gov
