U.S. shale is growing at a scorching rate, but will the shale industry be around for the long haul? A new study calls into question the heady projections for shale oil and gas, arguing that expectations of huge levels of production for decades to come are based on shaky assumptions.
The Post Carbon Institute’s report argues that the EIA is overstating the potential of U.S. shale, calling the projections “highly to extremely optimistic, and are therefore very unlikely to be realized.”
The report argues that while U.S. oil production has doubled from 2005 levels, and shale gas has also exploded over the same timeframe, there are underlying problems that will always bedevil shale production. For instance, shale wells typically see production deplete by 70 to 90 percent in the first three years, while fields see output drop off by about 20 to 40 percent per year without new drilling.
That means that the industry has to constantly plough more money back into production, just to keep output flat.
At the same time, not every shale well is the same. The core areas, or “sweet spots,” typically make up just 20 percent of a given shale play. When shale drillers move beyond the core, they tend to post less impressive production figures.
The shocking ramp up in production over the past decade has mostly occurred in these sweet spots, a trend that was accentuated during the market downturn beginning in 2014.
Still, vast improvements in drilling technology and techniques have more than compensated for the depletion. Shale drillers can access a greater portion of a reservoir than just a few years ago. While shale wells have always suffered from steep declines in their production profiles, overall output has trended up over the past few years, aside from the drop off after the market meltdown in 2014. Related: The Shale Driller's Dilemma
More growth is ahead. The EIA sees the U.S. topping 11 million barrels per day by the end of 2019, which means the addition of another 1 mb/d from today’s levels. It is hard to overstate the significance of this, and the output gains could yet lead to another price downturn.
But the long-term is another question. The Post Carbon Institute says that the EIA’s assumption of strong growth for the next several decades assumes that the industry will produce all proven oil and gas reserves, “plus a high percentage of unproven resources — in some cases over 100% — by 2050.” Shale oil production, according to the EIA’s 2017 Annual Energy Outlook, won’t peak until the 2040s.
The report says that scenario is extremely optimistic, and as such, probably won’t happen. The report breaks down the major shale plays to explain why. The Bakken, for instance, is already showing some signs of wear. “Well productivity improvements have flat-lined or decreased in all but two counties, indicating available well locations are running out,” the Post Carbon Institute report argues.
The Eagle Ford is also strained. The report says that the EIA is overstating its potential, with high well density and high depletion rates likely to limit the region’s ability to keep production elevated through the 2040s. “The EIA has overestimated play area by 65% compared to the current prospective drilled area,” the report says.
While the Permian is prolific, the report says that the EIA’s long-term assumptions for the Wolfcamp, for instance, rest on “vast additional, as-yet-unknown, resources” to be recovered. Related: Higher Oil Prices Are Bad News For India
In other words, drilling techniques continue to improve, but it may simply become too costly to produce as much oil as the EIA assumes will be produced. When the industry says that it can produce a lot more oil from an average shale well (higher well productivity), that may be true, but it doesn’t necessarily mean that the total volume of oil and gas that is ultimately recovered is larger. Shale firms might just end up extracting the same volume of resources from fewer wells.
The implications, if true, are profound. “The very high to extremely optimistic EIA AEO2017 projections impart an unjustified level of comfort for long-term energy sustainability,” the Post Carbon Institute wrote. “As sweet spots are exhausted, the reality is likely to be much higher costs and higher drilling rates to maintain production and/or stem declines.”
Ultimately, the report argues, rosy forecasts undercut the urgency for investment in renewable energy, EVs and efficiency, since policymakers hold an overly confident view of the country’s energy predicament. The Trump administration has discarded calls for “energy independence” in favor of “energy dominance.” This kind of triumphalism is wrongheaded and misinformed, according to the Post Carbon Institute report.
By Nick Cunningham of Oilprice.com
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Once the Tier 1 acreage in the oil plays has been totally drilled up under the present pricing environment, which won't take that long in the overall scheme of things, further expansion into less favorable acreage will be/must be based on a different pricing environment. That pricing environment must arrive, too, because the world is going to need that oil.
This technological/engineering/geological revolution in the oil and gas business that we've all witnessed over the last decade is truly a remarkable achievement of human ingenuity. It has taken a monumental effort to bring it all about, eclipsing the effort that went into the NASA moonshot (pun intended). Perhaps another revolution will come around someday, but this one will run its course. Once you've exhausted your source rocks, you can stick a fork in it. It's done.
We heard the same doubt 12 years ago about "peak oil" and the decline of Saudi Arabia. If these so-called "experts" can't get Saudi Arabia and her $5/bbl. extraction costs, how are they going to model all the variables in shale or other unconventional oil ?
Go back 5 years and see who didn't believe we'd double production from shale by now -- it's the same crowd.
I can't say with 100% certainty that production will go up for the next 10-15 years at the forecasted rate. It depends on continued technological improvements, oil prices, and other energy supplies and demand. But the depletion rates, basin drops, and other negatives cited here have ALL been known years ago, and that didn't stop productiong growth.
If someone had told you 4 years ago that oil prices would be cut in half but that shale would be stronger than OPEC and continue to grow output, it wouldn't get editorial approval to be printed. So anybody who says they know for sure what is going to happen -- especially a bet against shale, which has always surprised to the UPSIDE -- is not somebody who should be given the benefit of the doubt.
I see shale oil production having a sustained run till 2023-24 at least. Along with this, countries under severe stress like Libya, Iraq are expected to increase oil output. Russia is also likely to hike oil production to curtail Arabs. Kazhakhstan has dug new rigs for which the investors will have to be repaid by hiking production. Unless oil consumption rises rapidly, the prices are expected to stay below $80-85 till 2020
To see who wins a sporting event, you check out the box score. Go back 3 or 5 years (and this incorporates the 50% drop in oil prices) and see who forecast today's shale or Permian production levels.
Bakken in North Dakota. Prior to 2015 production was about 1.2 million bbls per day. This was done with around 200 drilling rigs operating. Once oil went down in price, and 150 rigs were laid down, production fell rapidly to just under a million bbls per day. Currently there are 58 rigs running and due mostly to larger fracks and slightly quicker drilling they worked their way back to 1.2 million bbls/ day. However, they need to run approximately 50 rigs to fight the decline rate. The economics are fairly simple. They have to cover the cost of drilling and fracking the wells drilled by those 50 rigs within the first two years when the bulk of the well production occurs. They also have to cover the interest cost on the huge debts the operators have incurred in the last 6 years or so. My recommendation is to go over the year end reports very carefully and see if these companies can continue to carry on without piling on more debt. Things look rosy covering the 4% interest rate but the debt still piles up. In a nutshell, shale looks amazing during the production phase but when it “turns the corner” and the decline rate starts to dominate, its hard to make money. It’s better to move to a new shale area than fight the decline rate in an “old” area. Keep an eye on the upcoming year end reports.
Gimme that which I desire
Sooner or later, the depletion rate of the current fracking boom leaves the future of oil in the U.S. in doubt.
In the late 1930s, a study was done that determined oil and natural gas would last another 500 years. Absolutely nobody believes in that number these days. What is even more important is that the era of cheap oil is over. And other forms of energy are growing cheaper by the year. The U.S. will not lack for energy in coming years. The only question is the form it will take.