Crude Prices Need to Go Lower to Right-Size the Industry

NEW YORK (TheStreet) --"Refracking" is an extension of the horizontal drilling "fracking" techniques that have revitalized oil production here in the United States. So, how much more oil can 'refracking' add for U.S.energy companies and what does this new technology mean for the idea of U.S. energy independence?

Fracking is the process where water and chemicals are sent into new wells that have been drilled horizontally, designed to tease oil and gas out from between the rock formations where it hides. This process has caused a revolution in energy production here in the United States, where oil production has nearly doubled in the last five years. Refracking looks to use some of the same technology on vertical wells, or wells that have been already drilled and emptied, but can sometimes be coaxed back into life using injection technologies.

These opportunities have been gaining more interest as the efficiency of fracking unconventional wells has improved. Vertical conventional wells that have been abandoned as dry almost always contain more oil. But the question for every well, whether it is conventional or unconventional, is how much of that oil is recoverable. Refracking technologies are quickly increasing the amount of recoverable oil from "old" conventional wells.

This becomes an interesting opportunity for oil companies that have been seeking production growth by either adding acreage or drilling more. Refracking might give that growth to oil companies merely be returning to already drilled wells they already have access to that have been left for dead.

The economics do not make much sense for the wide scale use of refracking technology now as oil prices would need to be well above the breakeven prices for many of the "regular" shale oil projects already being placed on hold. The massive drop in rig counts caused by the collapse of oil prices means that oil companies will look to reinstate production in the shale wells that got immediately scuttled in the last six months before looking towards further opportunities that refracking of old wells is likely to deliver.

But even with that hold, the possibility of even more oil from U.S. producers being made available in the future is adding to the excitement that fracking technology has brought. Many have seen U.S. oil fracking, and now the promise of refracking, to possibly lead to American independence from foreign oil sources -- an idea that's been dubbed "Saudi America."

While I don't believe that the U.S. will be able to establish full energy independence, no matter how successful U.S. production is destined to become, there is certainly a lot of room for oil drilling expansion and job creation in the oil patch for the next decade.

And that alone is a very good thing.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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