The Peter Zeihan Podcast Series - Ask Peter: Can Other Countries Replicate the US Shale Revolution?

Episode Date: April 24, 2024

Energy independence has been a global priority over the past few decades, but not all of that black gold is created equal. The US has been able to capitalize on deposits of oil-bearing shale, so can others replicate this success with different types of oil? Full Newsletter: https://mailchi.mp/zeihan/ask-peter-can-other-countries-replicate-the-us-shale-revolution

Hey, everybody, Peter Zine here coming to you from Colorado. We're taking an entry from the Ask Peter Forum today. It's about oil shale. The idea is that the United States has been able to achieve energy independence and any other countries might be able to pull it off. It's specific. He's heard that there's significant deposits of oil shale under the northern parts of the Nigev desert in Israel, which obviously could change some of the regional geopolitics. First things first, there are two different kinds of, well, there's multiple different kinds of oil. You've got your conventional stuff that flows through the rock strata until it hits a cap and forms a pool. And if you punch through the cap, you get a potentially a gusher. That's like the conventional stuff. Second, you've got something called oil bearing shale. That is what has done the revolution in the United States. In that, the rock is not porous. The oil cannot migrate. It's trapped nearly at the point of formation in microscopic volumes. And so what you have to do is drill laterally into the rock formation, inject liquid and sand in order to crack the rock open. Then the sand props the,

those cracks open, the water comes out and those little packets are finally freed and they flow to the surface. That's what's going on in Texas and North Dakota and Pennsylvania. The third type is the kind that the question is about, and that's oil shale. And that is a different kind of form where the oil has migrated a little bit and it's kind of fused with the rock in a manner somewhat akin to what happens with the oil sands in Alberta, Canada. But the oil sands can be scooped.

This is more like a solid rock. And once you get it out of the ground, you have to mine it. Then you can either process it or burn it and it basically requires more water than any other type of energy production. It emits more carbon dioxide than burning coal. It's really dirty

and it's really expensive. Best guess is in most situations, you're talking about in excess of $120 a barrel just to do the processing. You know, you might be able to get some economies of scale from that, but this is definitely not the cheap way to go, and it's definitely not the clean way to go. And so you're talking about costs that, even in the worst case scenario,

are double to triple what's going on in the U.S. shale industry. So conventional oil-bearing shale and oil shale, three very different things. there are very few places they can do something like the United States there's a series of things you need going on number one you need a culture of small mom and pop operators especially on the technical side

who are willing to try lots of different things we've been using fracking technologies for decades really over a century but it took the right combination of technical skills and market conditions in order to create the show revolution we've seen in the United States and with the exception of the United Kingdom there really aren't any countries out there that have

that kind of economic and technical culture. Second, you need the right geology. While there is shale and there are oil-bearing shales in many parts of the world, the United States is unique in the way that it was for, because for a long period during the Triassic and the Jurassic and the Cretaceous period, you know, think dinosaurs, we had a situation where the middle of the country was basically a shallow sea. So you got marine deposits that formed layer upon layer upon layer. That didn't happen in very many other parts of the world. And so you get these wide shales, these deep shales with multiple layers. So there's some parts of the Permian Basin that have upwards of 20 layers of petroleum-bearing rock. And with one vertical drill, you can potentially access all of them.

So the volumes you get per well and the technologies you can apply really go a lot further than some of these really deep and really small and really low petroleum-bearing levels that you're it in a place like, say, the United Kingdom or Poland or South Africa. Third, there's an issue of proximity. For the United States, a lot of the conventional oil plays that we have are intermixed with these oil-bearing shales, especially in places like the Permian Basin and Pennsylvania. In addition, those places aren't too far from population centers. So the Russians have something called the Basinov shale that looks like it has a very favorable

geography, but it's 3,000 miles from where anybody lives, and it's in the Arctic. So if you want to frack, you need water. And if it's frozen in the Arctic, getting the water is a little bit difficult. And so we have the proximity in the United States of not just conventional fields near the oil-bearing shales, and so you don't have to build a completely new infrastructure for gathering and transport, but a population centers are closer as well, so the cost is lower. But the single most important factor in something that almost everybody seems to forget is the concept of private ownership, not just of the land above, but the subsoil rights below. The United States is the only country in the world where a private landowner can actually own the middle rights. Everywhere else, it's a prerogative of the national government.

So as we saw when the United Kingdom tried to get into shale operations 15 years ago, they'd come. contract with a company to go out and do the work, but then the landowners would be pissed off and protest because they didn't get a cent from it. Whereas if you're operating in Pennsylvania, or North Dakota, or Texas, the landowners are part of the process and they profit from it. So there are certainly community objections, but the landowner has bought in from day one because they know they're going to get paid. So you don't have that anywhere else. If you combine these factors, the countries that come close, there's three. The first is Canada, where you've got a similar political culture, a degree of technical expertise. And there's an existing energy play in the oil

sands in Alberta. And on the fringes, especially further north, there are some places that look very favorable in terms of shale production and specifically shale gas. And roughly 25 to 35% of the natural gas that comes out of Alberta is indeed coming from shale formations and using shale technologies. But that's about it. The second one is Mexico, where the Eagleford, which which is the major oil field, shale oil field in the United States, clearly crosses the border. The problem there, of course, is legalities and technical skills because Pemex, which is the National Oil Company of Mexico, is arguably one of the three or four least competent oil producers on the planet. And the country has extraordinarily tight restrictions on what forward investors can do in this space to the point that it's constitutional.

And the current president to Lopez Obrador is hostile in the extreme to any sort of, sort of foreign participation in the oil sector. So there is stuff there and some preliminary work has been done to prove that it's viable, but it would take a significant change in policies from Mexico City for any of it to happen. The runner up to the United States, ironically, is Argentin Freakintina. They've got some excellent deposits in a place called the Vacamorte, the Dead Cow fields. It's pretty close to Buenos Aires. It's a pre-existing energy zone, so the infrastructure issue is not a problem. And ironically, Argentina's particular flavor of fascism come socialism actually works because there's a price for oil that has been set by the government so they know how much they have to pay for subsidies.

And that price is just high enough to guarantee shale operators in Argentina a profit. And so the second largest shale power in the world is Argentina. And I see no reason for that to change in the next 10, 15 years. years.