The American oil and gas industry has been changing fast, with new technology uncovering previously inaccessible fossil fuel reserves. As an independent producer, Breitling Oil and Gas has been at the forefront of unlocking these reserves and challenging the status quo
The advent of hydraulic fracturing and horizontal drilling, two old technologies put to good use recently, have brought the US closer than ever to energy self-sufficiency. The so-called ‘shale revolution’ brought US oil production to a 25-year high this past August. Founded in 2004, Breitling Oil and Gas has been riding the crest of the shale wave with much success, by applying state-of-the-art exploration and extraction technology to the development of onshore oil and gas projects in the US. Chris Faulkner, CEO and founder of Breitling, spoke to World Finance about the trends and developments of this ever-volatile industry
What has changed in the oil and gas landscape in the US over the past few years?
Beginning in 2005, the US hit a turning point in its energy production. Most of our oil-producing basin areas have been in heavy decline since the 1970s. At that time all of the smartest people in the US, economy-wise, said the country needed to import up to 56 billion cubic feet of natural gas; but by 2009 – because of the advent of horizontal drilling and hydraulic fracturing (fracking) – that estimate went down to zero. We now have over 100 years worth of gas supply.
It was originally thought that fracking and horizontal drilling were really going to mainly be used in the exploration of natural gases, but in 2008 we thought that this technology might also work for recovering oil. We thought: “we have oil trapped in shale, we have natural gas trapped in shale; we are going to try to see if this technology will work for extracting oil as well.” And lo and behold: it did.
The reality is we are still burning more oil than we produce so right now there is still a big chasm that we have to fill with oil from other countries
The catalyst for that discovery was that the price on natural gas dropped from $15 per million cubic feet in 2008 to about $2. It basically lost 90 percent of its value, roughly, and it became uneconomic in this country to drill for natural gas. In that short period of time, between 2005 and 2009, when those gas import forecasts decreased so drastically, our demand for natural gas in the US remained flat.
So the industry put a huge amount of supply in the market, and we had no increase in demand. So we shot ourselves in the foot, we have so much of this stuff, the technology works so well, that now we can’t drill for gas and make money. So we shifted our focus to oil.
The Bakken shale kicked off this entire idea that the US is sitting on an ocean of oil. The possibility of exploring Bakken shale in North Dakota really painted an unusual picture that we can apply the technology to oil. But more importantly, in a time of economic crisis, the Bakken exploration caused a perfect storm of new technology, a huge amount of untapped oil, the opportunity to create hundreds of thousands of jobs, and generate billions of dollars in revenues for these communities.
North Dakota was kind of a sleepy state; it did not have an awful lot going on, but then the industry moved to bring in this new industry, and in had a huge economic impact. North Dakota today has a $2bn surplus in its budget, and it doesn’t know where to spend the money.
Along the way US oil production began to surge. Between April 2012 and April of this year, our oil production increased by 21 percent. We are producing 7.5 million barrels of oil each day. That sounds like a lot but the US is using 13 million barrels of oil daily, that’s down from 19 million before 2008. The rest we have to import from Mexico, Canada and the Middle East.
Data shows the consumption of crude oil in the US is actually declining. How is the industry responding to this change?
Energy consumption has declined and one of the main causes of this decline is the increased fuel efficiency in cars.
President Obama has dictated that cars should go further on a tank of gas than they ever have before. That has been a huge driver of the decrease, alongside the slower economy. The reality is we are still burning more oil than we produce so right now there is still a big chasm that we have to fill with oil from other countries. The industry is continuing to run 18,000 drills for oil and gas in this country, 1,400 of which drill only for oil.
Is the industry concerned about the decline in consumption in the US?
No, when the economy rebounds demand will go up, the numbers will start to increase again. We are chasing a tiger by the tail, because as demand grows again, we will still be struggling to fill that gap in production.
I think the US can produce 10 million barrels a day. We are not very far away from that target as we currently produce about 7.5 million barrels a day. If we reached 10 million that would be more than what Saudi Arabia produces daily. That would be a big statement.
If you asked people in the US oil and gas industry five years ago if that was possible they would have said no. Now even Saudi Arabia believes this target is within our grasp. It has gone from a pipe dream to reality in short order.
The Middle East is the driver of the catalyst behind the US’ need for energy independence. First and foremost the US needs a strong domestic energy supply, and then be free to import any excess. We are on the way to achieving that, if we continue to bring in more and more production.
We will surpass Saudi Arabia by 2017 in terms of oil production if we continue at this rate, effectively becoming Saudi America. What will that do to the Middle East: will it make it irrelevant? Probably not. Will it give us more power over it? I hope so. Can the Middle East increase its production? Possibly, but the Arab Spring has cost the Middle East a tremendous amount of money, specifically Saudi Arabia, which has bailed out a lot of those countries along the way.
Saudi Arabia’s economy is 92 percent hinged on its oil production. Prior to the Arab Spring it needed the price of the barrel of oil to hover between $83 and $85 in order to break even in its budget. Today, because of the Arab Spring, it needs the price per barrel to be $100. It has created a benchmark that is very high, and it needs to be able to sustain that price in order to pay its bills.
We in the US could bring oil out of the ground for $60 to $65, which is very expensive, but in the Middle East it costs only $13 to bring oil out of the ground. Can it bring the price of oil down below $65 per barrel in order to cripple the US industry? Sure, but it would also be crippling itself.
That gives us some reassurance that they will not ‘cut off their nose to spite their face’ which is very interesting for the US industry. The US has the expertise, the tools, and the technology to someday be a major exporter of oil, perhaps by 2025. If you look at the Middle East, they are concerned about what we are doing here in the US.
There are challenges – the administration, the Environmental Protection Agency – but there are also a lot of positives and the US is finally on the right track. But natural gas is the bridge fuel for the future. It is definitely slowing down research and development of renewable energy because it’s cheap, abundant and burns cleaner than coal.
If there is more power generation infrastructure built in the US it will be for natural gas, not coal. I would like to see transportation shifting towards natural gas. If we could just shift big haul trucks, just that small segment would start running on natural gas, we could displace three million barrels of oil a day. Essentially that alone would put us very near self-sufficiency.
Tell us more about the Bakken shale region
The Bakken region is a shale region that is not dominated by Big Oil. The region is predominantly explored by independents; these are the guys who go out and take the risk. That region holds potentially eight to 12 billion barrels of oil, in just that small area. The Bakken region is about 200 square miles in the western portion of North Dakota, the eastern portion of Montana and part of Saskatchewan, in Canada, so it spans two states and two countries.
If you add the Bakken to the Eagle Ford Shale in Texas, the Permian Basin and the Monterrey Shale in California, the Energy Information Administration estimates that there could be between 150 and 200 billion barrels of oil in the US. We are making new discoveries all the time and that is only onshore – there is a lot more offshore work being done as well. The Bakken is a foundation plate because it shows there is a tremendous amount of oil that has been somewhat overlooked because of our previous technological constraints. Now that fracking and horizontal drilling have been combined, we can unlock this oil.
Fracking is controversial, there is still the mentality that the industry is not safe and environmentalists say that it will always be a risk; and we will always be dealing with that. But the reality is that a million and a half wells have been fracked in the US – we began fracking in 1947– and 95 percent of wells in the country are fracked today.
The Bakken is one of many liquid plays the US is focusing on right now, but it is one of the most prolific. It might turn out to be the biggest, or at least second biggest fields in play in the US. The biggest, scarily enough, may be the Monterrey Shale in California – which might be up to five times bigger than the Bakken. But it may have that many times more challenges to access the oil, because of the all the green and environmental focus there is in California.
There will definitely be more discoveries of this type in the US in the future. For example, beneath the Bakken is a formation called Three Forks, and that formation may be as big or bigger than the Bakken itself. That just highlights how there is still so much work we need to do on our geology and how there are so many new areas that our new tools will allow us to explore. Are there more Bakkens in the US? Yes. We are seeing new discoveries all over the world. My estimate is there may be four to five times more shale oil outside the US than there is in the country. That is a tremendous amount of oil that these tools are unlocking for us.
How can the US government foster the development of the oil and gas industry in the country?
The government does not give the industry any subsidies; it allows us to take manufacturing tax treatments. If you are a manufacturing company in the US and you have a business where you are utilising materials that have no salvage values, they allow you to take write-offs from these irrecoverable materials.
The oil and gas industry is considered a mining manufacturing industry and that allows us to take these same tax treatments as these manufacturing companies. These tax treatments are not a big thing for Big Oil; Exxon, for example, pays a 44 percent effective tax rate.
But those tax treatments are really what fund the independent oil and gas explorers. These tax treatments are a way for the small guys to reinvest their capital back into their business.
The tax treatments allow small producers to drill a $30m well, whether it’s dry or it produces, and still be able to reinvest that money back into the company to drill the next one.
It creates an environment where these companies can flourish and it takes the risk that is needed to drill in our country. It is a very risky business; a company can drill a well and it may or may not work out – millions of dollars change hands. In context: between them, the Marcellus Shale in Pennsylvania, the Eagle Ford Shale and the Bakken Shale, will require $3trn of investments between now and 2035; just those three shales out of 25 regions we explore in the US.
It takes a lot of money to drill and get that energy out, and our government over the past 80 years has allowed us to writeoff that non-salvageable value. The subsidies, the true subsidies, where the government gives you money to go out and perform a tax – which is not what we get – those go to renewable energy, wind and solar. The US government gives huge money, free money for renewable companies to try and produce technology. We, the oil and gas industry, have working technology that is tried and true, legitimate technology that works, but our government has supported only the renewable energy industry for the past 20 years.
At the moment there is a big backlash against the government because a number of renewable energy companies that received government grants have gone bankrupt. The government has spent up to $40bn of taxpayer money in renewable energy that doesn’t work. President Obama has taken a lot of abuse over that, yet the government continues to plough money into those companies.
The government should stop spending money on renewables and put them on a level playing field with other energy industries, and recognise the oil and gas industry for the 10 million jobs it creates. I would also like to see the government stop withholding permits to explore for oil and gas on federal land. Oil and gas production from government land has declined 40 percent since President Obama took office and there is a tremendous amount of oil and gas underneath land owned by our government. Regulation needs to be set out to continue to move the ball and to change things, allowing the industry to work.
Capitalism works when a government comes in, lays out regulation that will allow private industries to succeed and thrive, and then allows them to fail rather than getting involved at every turn. As an administration, they have lost sight of this.