Shale Oil vs. Conventional Oil: What's the Difference?

The Price of Shale Oil vs. Conventional Oil: An Overview

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.

Key Takeaways

  • Hydraulic fracturing, or fracking, opened up more natural gas for production, but the technology added costs to the oil extraction process.
  • Shale oil costs more than conventional oil to extract, but cost-per-barrel of production can be as low as $35 a barrel as of 2020.
  • The cost of conventional oil varies so much that Saudi Arabia can produce at under $10 per barrel. 

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 wells will take a 90-degree turn in the deposit and run alongside 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 mean 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 new shale oil wells in the U.S. may have a break-even point of less than $30 a barrel despite the higher drilling and fracking costs. However, the average break-even point for new wells ranges from $46 to $58, depending on the site, with the higher-cost wells coming in at $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.

Shale oil drilling and extraction are far more labor-intensive than conventional oil extraction, making the process necessarily pricier.

Conventional Oil

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. In the Middle East, non-producing onshore fields can produce oil for less than $20 per barrel with an average of $31.

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.

Article Sources
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  1. Rystad Energy. "Oil Production Costs Reach New Lows, Making Deepwater One of the Cheapest Sources of Novel Supply."

  2. Federal Reserve Bank of Dallas. "How the Saudi Decision to Launch a Price War Is Reshaping the Global Oil Market."

  3. Federal Reserve Bank of Dallas. "Energy Slideshow," Pages 33-34.

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