Hydraulic Fracturing, commonly known as hydrofracking or just fracking is a process of extracting oil/gas from the earth. Fracking has been a bone of contention during election season in U.S.A and other geographies. However, it remains the talk of the town during steep price movement of the crude oil. Many believe that hydraulic fracturing (HF) may cause earthquakes and demand complete ban on the HF operations.
Let us first discuss the basic process of hydraulic fracturing.
When oil and gas wells are drilled, the well needs further stimulation to start the production and achieve the planned productivity. Perforation of the casing or liner is done to connect the wellbore and hydrocarbon reservoir. Perforation involves high-velocity projectiles which puncture the liner/casing wall. The debris from the perforation may enter the nearby reservoir formation and can choke or impair the permeability of the formation.
Every hydrocarbon-bearing formation has some degree of porosity and permeability. Porosity is the measurement of the total void space available in a rock. These void spaces store the hydrocarbon hence higher the porosity; higher will be their capacity to hold hydrocarbon.
Permeability is the interconnection of the pores or void spaces in the rock. If the voids are not connected, then the fluids in the rock will to not flow and will remain stored. In order to extract hydrocarbon, reservoir rock should have good porosity and permeability.
The primary goal of HF is to increase the productivity of a well by superimposing a highly conductive structure onto the formation. This is done by creating and extending a fracture through the perforation holes deep into the formation. The process causes an increase in the surface area for the fluids to flow into the well.
Now creating a flow channel can be done by injecting fluids at high pressure to cause a fracture in the formation. Proppants (solid material, usually sand) are then pumped which enters and occupies the fracture region and provide rigid support so that fractures are not closed.
Even the best drilling and completion methods can cause some degree of near-wellbore damage in most wells. The damage done to the near-wellbore area is called skin. The additional pressure loss caused by the damage of near-wellbore region is proportional to the production rate. The skin can be thought off as the measure of the quality of a well.
A highly conductive flow path from the reservoir to wellbore is created through hydraulic fracturing which involves below steps:
A fracturing operation requires precise volumetric calculation, and high pressure pumps to deliver the proppant into the reservoir. Generally, a combination of high-pressure pumps is used with interconnected tankers filled with fracturing fluids.
Components of the hydraulic fracturing fluids.
What are capital goods? Capital goods are physical assets or durable goods used as a factor of production by a firm in a business sense. But in microeconomic terms, capital is a separate factor of production, primarily used to acquire capital goods. Capital goods include items like heavy machinery, equipment, vehicles, plant, computers, building. As a tangible asset for the firm, they are capital intensive products having many components. Final goods are produced with the utilisation of capital goods. A printing press for a press firm is a capital good used to print newspapers, which is a source of revenue. Similarly, robots used in assembling automobiles are also capital goods for automobile companies. Firms require investments to acquire capital goods. In accounting terms, the investment in capital goods with useful life over one year is a capital expense. Despite an expense for the firm, it is recorded under assets of the firm on the balance sheet and is expensed on the income statement over its useful life. Capital goods have resale value over its useful life. To account for the wear and tear, depreciation expense is incurred by the firm on the balance sheet, thus reducing the value of an asset on the balance sheet. In macroeconomics, capital goods are a factor of production and investment in capital goods is referred to as capital expenditure, which indicates the level of core investments in factors of production for an economy. Capital expenditure levels of a nation also reflect the ability and intention of producers to increase the capacity of production, and its influence on the gross domestic product of a country. What is the importance of capital goods in an economy? Capital goods are an essential consideration in an economy and also reflect the outcomes of research and development undertaken in the economy. As a crucial factor of production, countries seek to develop and commercialise capital goods according to the growing needs. Increased intensity of research and development enables the country to develop sophisticated and futuristic capital goods, which also exhibit the latest technological advancements and enhancements from the previous models. Capital goods are crucial to improving the long-term productivity and capacity of a nation. Investments in capital goods industry and goods create manufacturing jobs in an economy. They are crucial to producing finished goods and have an important role in the economy. Development in an economy is driven by making use of capital goods, increasing the productivity of capital goods. At the same time, it is necessary for an economy to nurture skilled labour to produce capital goods and robust research and development. Therefore, education and skill development are also precursor to improve the productivity of capital goods, which are crucial for economic development and manufacturing independence of a country. Capital goods Vs consumer goods Consumer goods are used by households and are a type of finished goods, which are produced with the help of capital goods. Consumer goods can be durable goods such as refrigerator, television, washing machine etc. They are not used to make capital goods after the purchase, unlike capital goods that are used as a factor of production across many industries. But there could be differences in terms of utilisation as well. Oranges consumed by a household are consumer goods. However, when they are used by a company to produce orange juice as a finished good, orange will be a capital good for the company producing orange juice. Most of the time capital goods don’t create revenue for a firm directly since they are used as a factor of production. For companies engaged in the manufacturing of capital goods are the source of revenue for such companies. Consumer goods are also an important part of the economy, and the consumption of final goods (consumer goods) is used to calculate the gross domestic product. Capital goods indicate the level of capital expenditure in an economy and are also an important consideration in the gross domestic product. Some of the well-known capital goods companies The Boeing Company Boeing is a US-based company engaged in design and manufacturing of aircraft, rockets, satellites, defence, space and security systems. It also provides services and aftermarket support to its customers and is famous for its aeroplanes. It supports the airlines' industry globally with customers in over 150 countries. Boeing also manufactures tailored products such as weapons, electronic defence systems, military aircraft, launch systems, information-based communication systems etc. Siemens AG Siemens AG is a German company and is one of the largest manufacturing companies in Europe with a worldwide footprint. It emphasises of automation, electrification and automation. Siemens is a large developer of resource-saving and energy-efficient technologies. It is also a leading supplier of equipment for power generation and transmission, medical diagnostics. Siemens contributes to industrial and infrastructure solutions for a range of industries. Caterpillar Inc. Caterpillar is a US-based company established in 1925. It is a leading manufacturer of diesel and natural gas engines, mining equipment, construction equipment, diesel-engine locomotives, industrial gas turbines. It also provides financial and related services to consumers. Caterpillar provides services throughout the product life cycle and develops new technologies with decades of the domain expertise. It has a global presence in the industries served. Cummins Inc. Cummins Inc. is an industrial goods manufacturer based in the USA. It is engaged in the design and manufacturing of diesel and natural gas engines, high-speed horsepower engines, power generation equipment, alternative-fuel electric generators. Cummins is also involved in turbo technologies, filtration, emission solutions etc. It sells in over 190 countries and has a global footprint. Daikin Industries Ltd Daikin is a Japanese multination company. It is a leading manufacturer of air conditioner and equipment. It also operates chemicals, filter, oil hydraulics, defence systems, and electronic businesses. Daikin is present in over 150 countries and manufactures in markets where the demand exists, thus it manufactures in over 100 location across the world.
Shale oil is a viscous material of high molecular weight containing hundreds of compounds along with Hydrogen & Carbon. Although the terms shale oil and tight oil are used reciprocally worldwide; in the United States, the oil and gaseous industry commonly refer shale oil to tight oil. Tight oil refers to the production of resources from low permeability tight formations including carbonates, sandstones, and shales. Typical shale oil refers to the production of resources specifically from tight shale formations. The growing demand for energy and dearth of easily accessible oil & gas reservoirs have pushed petroleum engineers & geologists to think about other unconventional sources of energy. Advancement in petroleum exploration technology has steered engineers to shift their attention towards shale oil. Gradually, shale oil has become very popular in various countries like the US, that has witnessed a boom in production from 0.4 million barrels per day in 2007 to more than 9 million barrels per day in March 2020. The production rate, however, has fallen to 7.6 million barrels per day in June 2020 due to Coronavirus led disruptions in operations. Conventional Oil vs Shale Oil Shale Oil or Tight Oil is an unconventional source of energy and different from conventional oil. The concepts and theories related to petroleum exploration state that the presence of a Petroleum System containing Source, Reservoir, and Seal rocks is mandatory for the generation and accumulation of Hydrocarbon. Source rock is necessary for deposition of organic matter; Reservoir rock is needed to accumulate the migrated Hydrocarbons from source rock and Seal acts as a barrier to check the further migration of Hydrocarbons. For most of the cases observed, the main type of source rock found for the generation of Hydrocarbons is “Shale”. It is a low-porous and low-permeable rock into which the organic matter gets deposited and in due course of time, with deeper burial, increased temperature and pressure, the deposited organic matter gets converted into kerogen and finally into petroleum. The main difference between conventional oil and shale oil is the way both get accumulated and collected. Conventional oil is found in the form of porous giant rocks soaked with hydrocarbons found underground in the form of big jars, whereas shale oil is found in smaller batches. For collecting oil from conventional sources, engineers have to drill a straight vertical well to the reservoir and oil is essentially sucked with the help of pumps or under naturally occurring formation pressure and Darcy flow conditions. For unconventional sources like shale oil, which is found in small patches, it is difficult to collect all available hydrocarbon from a single well due to Non-Darcy flow, which makes the process economically non-feasible. For the sake of economic feasibility and ease of exploration, the reservoirs need to be hydraulically fractured (fracking) so that isolated patches become interconnected and recovery can be made using a horizontal well. Worldwide Occurrence of Shale Oil: As per various leading reports like the ARI & Oil & Gas Journal, total recoverable shale oil resources in leading 42 countries including the US consists of around 10% of the world's total crude oil. As per EIA's assessment Russia, U.S., China, Argentina, Libya, Australia, Venezuela, Mexico, Pakistan, and Canada contains around 345 billion barrels of world shale oil. This assessment is based on previously known shale formations whereas the new assessment will include some more recently discovered shale formations which eventually will increase the reserve assessment figures. Currently, only Canada, Argentina, and the United States are commercially producing shale oil. Other countries are still trying to overcome the technical challenges and operational challenges for oil firms to help them launch the shale revolution in their countries. Impact on Global Oil Prices and Oil Market due to Shale Oil A lot of controversies like shale oil is a marginal short-term phenomenon and that its reservoir will not last longer, have been proved wrong. After around two decades of declining production, US shale production supported the country to become a net exporter of oil from being an importer. US shale oil production is the only reason which balanced the volatility in global oil prices despite a decline in the production of Iran & Venezuela. The shale oil revolution in the US has attracted other countries too to explore their shale oil reserves but it has not yet been exported. The progress in other potential countries has been slow. Although various prosperous countries like Russia, China, and Africa have the potential, only Argentina & Canada started to explore their shale oil at a reasonable pace with the help of different O&G giants like BP and Chevron. Oil Price decline due to Shell oil production A rapid decline in the global oil prices was observed after the mid of 2014 which can directly be related to the enhanced production of US shale oil which started to grow since 2014. Although the US was not exporting shale oil in the international market at that time to net importers, the global oil demand has fallen with the US achieving self-sufficiency and hence importing relatively less. Due to this imbalance caused by relatively less demand and surplus supply, the prices of oil start declining. With an increasing production in shale oil and declining oil prices, the margin of the shale oil producers is taking a hit. It is worth noting that the cost of producing per barrel of shale oil is higher than other conventional oil production. Hence, the dynamics of shale oil production and consumption challenges the oil industry performance significantly.
The oilfield is a territory of land from where raw petroleum and natural gas is created. It can extend to numerous miles as hydrocarbon reservoirs commonly spread over a massive zone beneath the subsurface. Various oil or gas wells can be drilled in a solitary Oilfield. An Oilfield can be characterised as a surface zone which is on top of the subsurface accumulated hydrocarbon. A hydrocarbon field comprises of a reservoir in a shape that will trap hydrocarbons, and that is covered by an impermeable cap rock. Understanding Oil Field: The overall oil and gas industry is classified into three classes that are upstream, midstream and downstream businesses. Upstream deal with the exploration and production of subsurface deposited hydrocarbons whereas mid-stream is related to the transportation of extracted hydrocarbons from their place of origin to the refineries and downstream is pertaining to the processing and further marketing of petroleum products. Image Source: Kalkine Group Image Oil field is a part of upstream petroleum business as it consists of multiple wells and oil pools. The wells may be in the production stage or about to drill stage. As endless wells are operational in the oilfield, it contains associated facilities and infrastructure which are required in exploration and production. For example, oil rigs, cementing trucks, drilling mud related apparatus' etc. Across the globe there are more than 40,000 Oilfields, both onshore and offshore, the largest ones being the Ghawar Field in Saudi Arabia and the Burgan Field in Kuwait. Oil Field Infrastructure: Constructing an oil field can be a challenging task. We don't only need drilling equipment, but many associated facilities are also required like accommodation and food facility along with water and electricity for the crew working there. If the oil field lies in a very cold area, there is a requirement to keep the pipelines warm. In the absence of gas storage facilities at any remote location, the associated gas needs to be flared out so; one must require pipes, furnace and chimneys for that. As a secondary source of recovery, nodding donkeys or pumpjacks are installed to produce more from the reservoir. Oil field service companies have a long history of supporting E&P companies with an extensive global network of experienced worldwide professionals for both conventional and unconventional fields, including oil sands. The service companies provide support in planning, manufacturing, commissioning, drilling well maintenance, development and other offsite related tasks. Complications in Oil Field Set-Up: As stated in the previous section, the whole petroleum industry is divided into three sectors, and most of the companies have expertise in a particular sector of the industry making them dependent on others for other services they don't excel in. On the other hand, there are other types of companies which are known as integrated oil & gas companies which have an expertise of the entire supply chain of an O&G industry, but the numbers are limited. Frequent technological advancement to effectively extract the technically challenged subsurface deposited hydrocarbon is a critical problem for the organisation. Each company is not able to upgrade itself as per the current requirement, in each and every sector to prove its excellence, thereby creating a dependency on others. New technologies like hydraulic fracturing, tight oil exploration, horizontal drilling have dramatically increased the efficiency in the extraction of O&G. Lowering production cost is the prime objective of any company working in the extraction of hydrocarbon. Birth of Oil Field Service: Below are the most significant elements which empowered and improved oilfield service industry that accounts for most of the innovation and advanced skills over the existing pattern of an oil and gas industry. Image Source: Kalkine Group Image Economics: The specialisation of organisations in a specific service domain allows a healthy competition and technical innovation among suppliers. An in-house specialisation of all services from toe to head might not provide an innovative and cost-effective approach which may become a hurdle in the quick ascent of the petroleum technology that the industry has seen in the recent past. Capital Requirement: To excel in each and every service, the company requires a lot of capital. Many integrated oil & gas companies may manage it, but most of the companies are not able to invest the enormous amount needed to develop and excel in every field. Accountability: Third-party service suppliers seemingly consider extended responsibility and effective profit margin among service provider and receiver. Outsourcing may also lead to greater accountability of the service company in the operational risk, delays in execution and mispricing in a contract.
OPEC basket, also known as the OPEC reference basket, is a weighted average of oil prices from selected 13 oil-exporting developing nations, also known as OPEC member countries. It is used as a critical crude oil benchmark to track the trend, stability, and oil prices. The basket holds a variety of crude, ranging from light to heavy, from various OPEC member countries. OPEC refers to the Organisation of the Petroleum Exporting Countries. It is an intergovernmental association, which came into existence in September 1960 at the Baghdad Conference. The association was founded by five countries which were later joined by 11 additional nations. The target of the organisation is to facilitate and normalise the oil policies in member nations & balancing out oil costs in the worldwide market, protecting the smooth channelisation of oil from explorers to oil shoppers. OPEC Basket Members At present, the OPEC reference basket comprises member countries -- Iran, Iraq, Kuwait, Saudi Arabia, UAE, Algeria, Congo, Equatorial Guinea, Angola, Venezuela, Libya, Nigeria, and Gabon. Numerous nations all over the world also produce oil, but they are independent and are not the OPEC members. Russia, the US, China, and Canada are the four most significant oil producers who are not the OPEC members. The OPEC Reference Basket of crudes Kalkine Constructed Table, Source: Opec.org OPEC Market Share According to OPEC Share of World Crude Oil Reserves 2018, the OPEC members host around 79.4% of world's proven oil reserves with about 64.5% of them situated in the Middle East. The net expansion in total production during 2009-2018 by the Non-OPEC nations was 24.6 billion barrels. Conversely, it was 186.2 billion barrels for the OPEC nations. Kalkine Constructed Image, Source: Opec.org Prices of OPEC Reference Basket oils 2002-2020 From 2002 to 2019, costs of the OPEC Reference Basket oils varied significantly. For instance, Saharan Blend from Algeria remained at about US$25 per barrel in 2002. After 10 years, this figure had expanded to over US$111, before diminishing to US$64.49 in 2019. Plummeting prices and recovery Prices started to increase from the 2008 worldwide financial crisis and reached on top in 2012, preceding a significant decline. In 2014, the average annual price of the OPEC crude oil dropped by almost half due to surplus supply of crude oil in the market. From then, recovery has been progressive. However, the OPEC prices are not expected to go back to the levels of the initial 2010s in the next two decades. Shale oil overproduction The 2010s’ oil excess was caused to some extent due to the upgraded production of domestic heightening shale and tight oil in the United States. It happened after the improvement of pressure-driven hydraulic fracturing as an extraction technique in the wake of the worldwide downturn. Despite the fact that almost 80% of global oil stores are found in the OPEC nations, the United States has become the biggest producer of oil globally in last 10 years.