Investment and production dynamics of conventional oil and unconventional tight oil: Implications for oil markets and climate strategies

Abstract

Unconventional tight oil production has increased fast in recent years. This development can appear threatening to climate change mitigation efforts as more available supply might lead to continuing or increasing consumption, contributing to ‘carbon lock-in’, possibly making a low-carbon energy transition more difficult. However, the investment and production cycles of tight oil differ from conventional oil. This study investigates such differences and discusses whether it has any implications for the oil market and for energy and climate strategy in regard to carbon lock-in and stranded assets. Production and capital investment data for conventional oil fields and unconventional tight oil wells are analysed and standard production profiles are derived. Through a bottom-up approach aggregate investment and production dynamics are then investigated. The analysis shows that in conventional production, once initial investments are made, decades of high production rates can follow. In contrast, tight oil production declines fast with the dominating part of cumulative production produced within the first few years. Both kinds of production are characterised by large initial capital costs and lower operating costs. This cost structure incentivises continued production once initial costs are spent, even if oil prices fall, but since tight oil wells decline faster the amount of locked-in production is significantly lower than for conventional projects. The different dynamics of conventional oil and tight oil needs to be considered when formulating energy and climate strategies. Since tight oil production can entail lesser lock-in effects and stranded asset risks, it might provide a beneficial and more flexible pathway in face of future uncertainty in the development of substitute technology and in climate policy commitments.

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