Hydraulic fracturing, also called fracking, is an important technological advance for the oil and gas industry. In addition to opening up a staggering amount of natural gas for production, fracking allows extraction companies to recover what is called tight oil from deposits that were unworkable just a few decades ago. However, the new technology has also introduced new costs to the oil extraction process. In this article, we will discuss the expense of extracting conventional crude oil versus extracting oil using fracking technology. (Read more What Determines Oil Prices)

Pipe and Pump Production

Conventional oil production generally refers to the pipe and pump production off a vertical well. This means a hole has been drilled straight down into a deposit and a pump jack is put on it to help pull the deposit to the surface where it can be sent on for further refining. The cost-per-barrel of conventional deposits varies, with Saudi Arabia able to produce oil the most cheaply, sometimes under $10 a barrel. The Middle East and North Africa are also very efficient, producing oil as cheaply as $20 per barrel down. Worldwide, conventional oil production typically costs between $30 to $40 a barrel.

Of course, conventional can be a misleading term because oil production methods tend to be called conventional if they’ve been in use for a long time. For example, offshore drilling can be viewed as pipe and pump production, just with the small matter of an ocean between the drilling rig and the first layer of rock. There are also a number of processes, including perforation, that are now a part of every well.

Perforation is the use of explosives to blow holes in the sides of the pipe to allow the hydrocarbons to flow in. Because this can cause debris to shift and slow the flow, acids or fracturing (if legal) are then used to open up the deposit around the perforated section of the pipe. So even conventional wells can be using the techniques developed for unconventional deposits to increase their production. But in general, a conventional deposit will yield oil with a number of vertical wells pumping from different points on the deposit. The problem is that, in North America at least, there are not many untapped conventional deposits left.

Getting At Shale Oil

Conventional production establishes the basic costs of drilling a well. You need a rig, drill stem, casing, the crew and all the other pieces that go into a vertical well. The difference with shale oil is that, instead of drilling just past the target deposit, the well will take a 90 degree in the deposit and runs along it horizontally. These wells go thousands of feet down to reach the deposit, but they also run thousands of feet horizontally. This type of well takes more time to drill, which means higher labor costs and more basic inputs like drill stem.

Once the well is drilled and perforated, millions of gallons of water, proppants (materials, like sand, introduced to keep the fracture open), and chemicals are pumped down the hole to fracture the formation and allow the oil to flow back into the pipe to be pumped out. Millions of gallons means a lot of hauling, with either added capital and labor costs for the trucks or, more likely, an oil service firm contract for the fluid hauling. All of this adds to the cost of the well. Some shale oil wells may have a break even point of $40 a barrel over their production life despite the higher drilling and fracking costs. However, many sources put the average break even point for a fracked horizontal well above $60 a barrel with the higher-cost wells coming in at over $90 a barrel.

The Bottom Line

There is no doubt that shale oil costs more than conventional oil to extract. Beyond that, there is a lot of variability in the cost of extracting shale oil, meaning that every well has a different level of cost-per-barrel of production from as low as $40 a barrel to over $90 a barrel. With these costs paid upfront for a comparatively short production life compared to a conventional well, it makes sense for the shale oil industry to suspend new wells when world oil prices dip and ramp up when the prices are strong. That means there are a lot of shale oil deposits sitting idle when crude oil prices are hovering around $50 a barrel.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.