Disruptive Technology: (Noun) An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market.
A disruptive technology consists of elements from a conventional technique, but repackaged or repurposed to provide a different impact. Like the Ford assembly line that changed the auto industry or the system of email that is virtually replacing paper mail, its invention makes the world fundamentally different.
For the oil and gas segment, the game-changer is hydraulic fracturing (“fracking”). The breakthroughs in this technology are almost singlehandedly responsible for the United States’ drastic increase in domestic oil and gas production and its placement on the path to becoming the world’s top oil producing country by 2015, according to some projections from the IEA. Forget altering previous predictions of world oil shortages… fracking has flat-out smashed them.
A paradigm shift comparable to the “Wild West” of the 1840s Gold Rush era, the US shale gale is fostering a flurry of activity. One important difference, though, is that shale prospectors are actually finding their gold – lots of it – thanks to these technological advancements.
Gold Rush? No, Oil Rush!
In order to understand exactly why hydraulic fracturing is a disruptive technology, we first need to take a step back in time. Here’s the thing: Prospecting for shale oil and gas isn’t something new, and neither is fracking. In fact, people were extracting shale before the first Gold Rush, all the way back in 1821. The problem was that the methods used to extract shale oil and gas were inefficient and simply not economical for commercial production.
As far as fracking goes, the initial concept of this method can be traced back to the 1860s. In those days, liquid nitrogen was blasted into shallow, hard rock wells to improve their flow and help recover more oil. Sounds dangerous? It sure was! Fracking as it was done in the early days was incredibly hazardous and often illegal. But as fracturing methods continued to develop throughout the 1930s and 1940s, the technology became commercially viable and was starting to get used in limestone formations to improve production of the oil and gas wells. Commercial fracking became much more prevalent in the 1950s and 1960s, with thousands of wells being fractured per month.
Then came the 1970s, and that’s when everything changed. With dwindling oil and gas resources, the US was increasingly reliant on foreign energy resources. When the Arab members of OPEC decided in 1973 to slash production, increase the price of oil, and stop all oil shipments to the US, the country was hit with gas shortages and severe economic consequences. The future was bleak, and America’s top priority became finding a solution to achieve energy independence.
Fracking, Meet Shale
In 1975, it was already known that the US was sitting on huge reserves of shale oil and gas. Unfortunately, there wasn’t yet an economically viable means of extracting the resources from the shale formations. That’s around the time when George Mitchell, owner of the independent oil and gas company Mitchell Energy & Development, stepped into the picture. Mitchell was one of the few who truly believed there was a commercially viable way to extract shale oil and gas resources.
The fracking fluids that had been used so effectively in limestone formations in prior decades just didn’t work on shale formations. But after 17 years of experimenting with just about every imaginable variation of the fracking process, Mitchell’s team found the solution: a fracking fluid that was budget-friendly, consisting of mostly water instead of a gel or chemicals. Suddenly, recovering shale gas through fracking was possible.
However, it wasn’t until these developments of the fracking process were combined with the latest horizontal drilling techniques that the shale revolution was truly born. This disruptive technology finally made it economically viable to recover the immense reserves of oil and natural gas that had been trapped in shale formations for all those years.
And that is when everything changed.
Shale Oil and Gas: The New Goldmine
Just think about how far the US has come in its quest for energy independence: The same country that was brought to its knees when OPEC stopped shipping it oil is now on pace to become the world’s top oil producing country by 2015. Domestic oil production has increased from 4.5 million barrels a day in 2010 to about 7.5 million barrels a day today, and we’ve seen our daily crude production increase 2 million barrels since summer 2011 alone.
Our reversal of energy fortunes is, in the words of The Economist, “as sudden and startling as a supertanker performing a handbrake turn.” And it’s mostly attributable to the shale revolution sparked by fracking.
The disruption that fracking has created is undeniable. More than 2 million of the 4 million wells ever drilled in the US have now been hydraulically fractured. According to some recent estimates, up to 95% of all new wells drilled today are hydraulically fractured. Furthermore, up to 80% of all US drilling over the next decade is expected to require fracking in order to be economical.
And the disruption of the shale revolution is clear in the plethora of economic benefits being felt by the individual American consumer. Research from Boston Consulting Group indicates the average US household is now saving between $425 and $725 a year thanks to the surge in natural gas production. By 2020, the annual energy savings per household could be as high as $1,217.
According to Lars Tvede, futurist and author of Supertrends – Winning Investment Strategies for the Coming Decades, the full impact of the shale revolution has yet to be seen: “I think the shale gas revolution will have a bigger impact than is generally reflected in the press. Initially it is primarily happening in the US, where oil production is also rising very quickly. Because of this, North America – USA, Canada and Mexico – are likely to be self-sufficient in energy by around 2020. This will most likely mean that USA will partially disengage further militarily from the Middle East at a time where China will be even more dependent on Middle Eastern oil than it is today. As a consequence, perhaps China will feel forced to take a more active political and even military role there in the future. A second effect of the shale gas boom is a reduction in inflationary pressure as well as a reduced risk of big spikes in energy prices. This makes it easier for the world economy to recover from its recent crises. Thirdly, it supports the emerging industrial renaissance in the States, whilst also helping to improve the country’s balance of payments. This renaissance is very important for many reasons. Of course, it creates jobs, but Americans will also be in a better position to innovate if they have their production where their R&D people are. And finally, shale gas is great for the environment since it is much cleaner than the coal that it replaces.”
Shale: A Disruptive Revolution
By any measure, the shale revolution has been disruptive. It has turned the oil and gas industry upside down, radically changing the energy and economic outlook for the US.
Even the skeptics of shale can see this reality. Seasoned geologist James G. Sorrels, CEO of Wolfpack Oil, is a respected expert who has been published in the Oil & Gas Journal. He believes many of today’s shale plays are nothing more than an overhyped “PR play” – but he readily admits to the disruptive impact that fracking has had on the industry. Sorrells, who has been around the oil and gas business since 1976, told us “Those massive fracks they apply to the shales…that’s a new way of doing things. It’s just opened up whole new trends. It’s a great tool for opening up those tight rocks, which could not be produced without it. There’s no way you could produce [from those shale formations] without it.”
The effects of this disruptive revolution can be felt even in other industries. While the US government was fighting to reduce emissions from coal plants and to eventually force their retirements, the disruptive change brought about by horizontal drilling and fracking proved to be a much more powerful force at achieving this. At the same time as this disruptive technology is undermining the importance of coal with low-priced natural gas, it is also revitalizing our domestic oil and gas industry, bringing in jobs, tax revenue, and economic growth. While most energy transitions take decades, coal-powered electricity has already plummeted from 50% in 2007 to 37% in 2012, displaced largely by natural gas.
In a report entitled Coal Killer: How Natural Gas Fuels the Clean Energy Revolution, the Breakthrough Institute declared, “Energy transitions typically take many decades to occur, and the evidence suggests that the natural gas revolution is still in its infancy. The successful combination of new drilling, hydraulic fracturing (“fracking”), and underground mapping technologies to cheaply extract gas from shale and other unconventional rock formations has the potential to be as disruptive as past energy technology revolutions — and as beneficial to humans and our natural environment.”
The shale revolution is even disrupting international economies. Back in November 2012, the International Energy Agency (IEA) saw what was coming: “Energy developments in the United States are profound and their effect will be felt well beyond North America – and the energy sector.” Already, the US has made the switch from being a major importer to being a powerful exporter, thanks to its introduction of its immense shale resources into higher priced global markets. And with the country on pace to quickly become the world’s top oil and gas producer and achieve energy self-sufficiency by 2035, the IEA foresees “a sea-change in global energy flows” that’s sure to have a significant impact on the global economy. Even OPEC’s longstanding domination is expected to one day be challenged by the US.
Regardless of which side you come down on in the debate about fracking, one thing is indisputable: It absolutely qualifies as a disruptive technology. No matter how you slice it, the shale revolution has been a massively disruptive force. And we have a front row seat to history in the making.