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Will ‘Oil Factories’ Burst The Saudi Bubble?

The future of oil production may be here, and it should make Saudi Arabia very worried.

The Denver-based energy company Liberty Resources is building an “oil factory” just north of Tioga, North Dakota. Liberty CEO Chris Wright wants to revolutionize oil production through a streamlined, factory-like production process that cuts down on costs and is more responsive to price shocks.

“Our idea was to build the world’s greatest oil factory,” Wright told The Wall Street Journal.

“It is focused on cutting operating costs and boosting output,” reports the Journal. “And it is flexible, allowing oil output to be started and stopped— something that could be a big plus as volatile global crude prices require U.S. companies to adjust production levels.”

U.S. oil production has boomed because of hydraulic fracturing, or fracking, coupled with horizontal drilling. Oil production boomed while prices were relatively high, but the industry has lately been hampered by low oil prices which is cutting into their revenues.

Things only got harder for U.S. oil producers after Saudi Arabia announced it would not cut oil production to raise prices. The move has been interpreted by some analysts as an “oil price war” between the U.S. and the kingdom.

Fracking in North America is a relatively more expensive than drilling for oil in Saudi Arabia — a dynamic that’s changing with improving technology. But Liberty’s oil factory could break the paradigm of low oil prices favoring the Middle East.

Liberty’s factory, called Stomping Horse, aims to centralize the extraction and transportation process of oil production by getting of ad hoc drilling and trucking. Instead, the system is built more like a utility, with pipelines interlinking all the different stages of development.

“Getting trucks off the road is one of the main drivers in controlling the costs,” says Stomping Horse production manager Chris Clark. WSJ notes that eliminating trucks can save Liberty $3 per barrel of oil from reduced costs. Fewer workers are also needed to produce oil, further driving down costs.

“We’ll still make money at $50 a barrel,” Clark said.

The project is eventually expected to cost $800 million and house 96 wells. Liberty plans to begin producing oil in August when crude oil prices have rebounded somewhat from lows earlier this year.

“In the fall, everyone believed that once we got below $80 or $70 that all of America’s tight oil would shut down,” Wright said. “It may shut down a lot of players, but there are tons of players that are very good at what they do and have much lower costs of production.”

Such centralized projects could not only prove more economical, but more environmentally friendly as well.

“It makes both practical sense for the industry because it reduces their cost and it makes good environmental sense because it reduces the footprint for development,” Joseph Kiesecker, head scientist at the Nature Conservancy, told the WSJ.

“Nobody is saying we shouldn’t develop these resources. We all turn the lights on. It is about just being smarter,” he said.

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