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Keith Schaefer

Keith Schaefer

Keith is the publisher of the Oil & Gas Investments Bulletin – an investment newsletter that looks at opportunities within the Canadian small cap oil…

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Energy Independence in the US: Is the Impossible Possible?

Energy Independence in the US: Is the Impossible Possible?

The U.S. has become the world's second-biggest oil producer – having passed Russia, and trailing only Saudi Arabia.

But can America's vast shale oil and gas reserves – combined with fracking and drilling technlogies – drive the U.S. to complete energy independence?

According to a report from Credit Suisse, the answer is NO.

But it does suggest that North America in its entirety could one day become energy self-sufficient.

Credit Suisse (CS) bases their findings on these 4 factors:

1. Flow rates from oil wells about 25% higher than now, based on future technology advances
2. More wells that are on average 39% closer together than they are now (what is referred to as  "downspacing" in the oil industry)
3. $95/barrel Brent pricing
4. Increased use of natural gas in the economy?
CS also determined the following constraints to becoming energy self-sufficient:?

1. Fast declining production in shale wells
2. Oil below $75/barrel
3. Enough money to build pipelines and refineries??

CS says US oil production will peak out at 10 million barrels of oil per day (bopd) by around 2022—a double from 2008’s 5 million. 2011 oil production in the US was 5.7 million bopd.

EIA stats show petroleum consumption has fallen steadily for seven years, and in 2011 was 18.8 million bopd—the same as 1997 and 2 million bopd below the peak in 2005.?

Once you include 3 million barrels of US liquids production (natural gas liquids like propane, butane, condensate and biofuels), overall production was still less than 9 million boepd—not even half of the country's total demand of 19.2 million barrels of oil equivalent per day (boepd).?

Canada and Mexico are comparatively small consumers, using only 4.4 million bopd, with combined overall oil and liquids production of 6.6 million boepd of oil and NGLs.

All these numbers show that overall, the U.S. is falling short by 10.7 million boepd itself, and North America as a whole comes up around 8.8 million boepd shy of total demand.

That means that in order for American to become energy independent, it would have to be producing and refining 10.7 million boepd more than it does now. That would be extremely difficult to achieve.

CS expects U.S. oil and liquids production to rise from the current 8.7 million boepd to around 15 million boepd by 2022, while demand will slump closer to 18 million boepd. A modest jump in Canadian output paired with continuing low demand will help bridge the shrinking supply gap, moving North America closer to energy independence. And that assumes a steady decline from Mexico.?

The crux of the report's predictions lies in the Americans' ability to tap their massive unconventional oil resources.

The first key to this prospective boom is the initial production (IP) rates for the country's major shale oil fields -- the amount produced at each well over the first 30 days. (The industry shows this number in print as the “IP30” rate.)

These numbers are often the most important, since the greatest output comes in the first few months before declining rapidly. CS estimates IP30 rates for each of the major shale plays using production numbers at the end of the fourth quarter of 2011.

Some of these assumptions are set far above what actual production numbers are today. For example, actual output in the Utica shale and Mississipian formation was close to nil—so almost no data on which to guesstimate the future. But CS expects wells to eventually reach around 600 and 400 boepd, respectively, as the plays mature.

Other young plays that lack any production data like the Brown Dense limestone and the Woodford shale are projected to top 300 boepd based on the limited data of those regions.??The biggest producers - the Granite Wash and Eagle Ford shale - are already close to their CS assumptions.

On the whole, CS estimates average a 21%-25% bump over actual output numbers from last year. Only the Granite Wash and Cana Woodford oil plays are projected above the CS exploration and production team's numbers.

The report backs up its optimistic IP30 rates with strong early numbers in some of the developing unconventional plays. Over three years, IP30 rates in the well-developed Barnett formation more than doubled.

But in the Bakken and Marcellus shale plays, IP rates tripled in 13 months and nine months, respectively. The Eagle Ford is the only exception, and those numbers are skewed somewhat by an early focus on natural gas over liquids.

A large part of rising IP rates is the assumption that oil and gas companies will eventually learn the nuances of each region. But CS also notes the increased use of pad drilling—where four wells can be drilled from one, two-acre pad—should keep more oil rigs online for longer during the first 30 days, as they don’t need to be moved around as much from well to well.

Pad drilling will also play a role in lowering the spacing between unconventional oil wells.??CS projects the U.S. will need to increase its total oil wells by 27% in order to prevent a decline within the next four years. In order to meet the report's production numbers, the country would have to increase the number of new wells being drilled each year by 39% through 2022.

These estimates are all a bit voodoo—they depend on tight spacing and a lot higher flow rates than now. However, CS says recent experiments in downspacing in the Eagle Ford shale play should help boost production.

The big question when you downsize your wells is—are you just cannibalizing existing production from existing wells or are you able to recover more oil overall (the Recovery Factor) by draining parts of the reservoir that you wouldn’t have gotten otherwise.

If it’s the former, the impacts on the US production outlook would be dramatic.

The biggest question mark for me, however, is what will the decline rates on shale oil be long term? Right now CS suggests average decline rates in the Bakken and Eagle Ford—the two largest shale oil plays right now—are 60% in Year 1, 30% in Year 2 and falling close to 15% in Year 5. CS puts its estimate for the average terminal decline rate - beyond 20 years - of unconventional US oil resources at 8%.??But the Bakken and Eagle Ford shale plays have only been drilled hard for the past 3-4 years. So long term decline rates—which CS thinks will average out at 4% for the Bakken and 6% for Eagle Ford over the life of the well—is an educated guess.

CS estimates expected ultimate recovery per well for the Bakken of nearly 900,000 boepd and 600,000 boepd for the Eagle Ford shale. Less developed projects like the Permian Horizontal, Woodford shale and Granite Wash are all expected to reach near 500,000 boepd, despite a small sample size.


If declines are steeper than they project, then these wells will get shut-in sooner and produce less than CS suggests. Though they didn’t talk about waterflooding, which will likely GREATLY increase overall reserves in US tight oil plays.

CS estimates that the oil industry will need Brent prices of at least $95 per barrel to justify investment through 2014. After that, investment costs will drop low enough that shale fields would eventually draw interest even at benchmark prices of almost $75 per barrel.

The CS analysis is most sensitive to a change in rig counts. A drop to $80 per barrel within the next year would result in 180 fewer rigs operating within the country and $60 billion less in total investments by 2014. Oil production in this scenario would reach only 8 million bopd.

The report says that massive infrastructure spending (pipelines, refineries, etc.) is a key to energy independence—and notes that oil companies have already proven unwilling to invest in new infrastructure at prices as high as $90 per barrel, despite most wells remaining profitable.

A lack of infrastructure spending—specifically pipelines to take crude oil out of the Cushing Oklahoma hub, and to get Bakken and Canadian oil to the east and west coasts—have caused a $15/barrel discount in North American crude prices to the rest of the world.

This is huge lost revenue for US and Canadian oil producers.

Pipelines such as the Seaway pipeline and the proposed Keystone XL should add between 950,000 and 1.25 million bopd of capacity away from Cushing OK, to the Gulf Coast. But Bakken oil will continue to rely on rail and barge transportation, and both the Keystone XL and the Flanagan South pipelines that would service the region are yet to be approved.

CS also gives some consideration to possible regulatory restrictions, primarily in terms of water restrictions. Several states have already considered limiting water use in the energy sector to prevent the decline of local agriculture industries, while concerns about water safety have spurred most of the objections to the use of fracking in the U.S.

US energy independence is a hot topic spurred by the rapid rise in shale oil production—The Shale Revolution.

While it’s hard for anybody to guesstimate what such a dynamic industry will be doing 10 years from now, Credit Suisse data suggests that will remain an elusive goal.

By Keith Schaefer, Publisher of Oil & Gas Investments Bulletin

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  • YJ Draiman on September 27 2012 said:
    Electric cars are they conserving energy? Rev4

    Ask yourselves what is the real cost of “Electric Car”?

    Note: Electricity is a secondary form of energy derived by utilizing one form of energy to produce electric current.

    Let us look at the facts:

    In order to produce electricity, we need some form of energy to generate electricity, whereby you lose a substantial amount of your original source of energy in the generation process.
    In the process we are losing the efficiency of the initial energy source, since it is not a direct use of the energy.

    Let us take it a step further. To generate electricity we utilize; coal, oil, natural gas, nuclear, hydro electric - water, photovoltaic-solar, wind, geothermal, etc. Many electricity generating plants utilize fossil fuel, which creates pollution.

    Do you realize how much of the initial source of energy you lose to get the electricity you need for your electric automobile; you also lose electricity in the transmission lines.

    Why are we jumping to a new technology, without analyzing the economic cost, the effective return and efficiency of such technology; while computing and measuring its affect on the environment?

    Natural gas vehicles are a direct source of energy, where you get the most for your energy source – in efficiency and monetary value. Cost of natural gas to a comparable gallon of gas ranges around $1, it has higher octane and extends the life of your engine, it is also safer than gas.

    In these hard economic times – I would think, you would want to get the most for your dollar – and not waste resources.

    Another economic impact would be the loss of road tax on fuel, these funds are used to build and maintain the highway infrastructure.

    “It is Cheaper to Save Energy than Make Energy”

    YJ Draiman, Director of Utilities & Sustainability


    Will High Electricity Rates Drive Innovation?
    Escalating costs of OIL will produce innovation!

    YJ Draiman's vision is to make Los Angeles as the World Capital of Renewable energy and conservation.

    Electric cars are they conserving energy? No!

    I worked with UPS in Chicago in the early 90's, researching the conversion of UPS vehicles to Natural Gas as a primary fuel with overnight slow fill stations on UPS compound.
    If we are to survive the Energy crisis and become energy independent, we must utilize every effort not to waste our energy resources. Innovation and technology will eventually save the day.
    Electric cars are a fiction of energy conservation, (Look at all the costs associated with such technology); it is not a viable option.
    We must look into other forms of fuel, and invest heavily into R&D.

    YJ Draiman, Director of Utilities & Sustainability
    Energy & Utility Auditor, Energy efficiency analysis
  • Frank John Holmquist on September 28 2012 said:
    Russians now claim that oil comes from deep within the earth and is not fossile fuel. I believe that oil is both a combination of surface hydrocarbons and deep mineral upwelling... The truth usually lays inbetween. The human need for all or nothing solutions, my way or the highway has caused more conflict than anything. I believe in local resources for local consumption. This "global economy has proved a disaster to most and benifits very few 0.1%. better use of oil by more efficent cars, remodeling engine systems to have water injection and hydrogen supplemental systems all make sense in the transition to the Age of Hydrogen which follows the Nuclear Age.It is the unwillingness of the super rich to allow for the new rich to rise. Banks and corporations seem to be bent on keeping ordinary people in their place and away from the exclusive feeding troughs that the unearned wealth seems to flow. Socialism is not the answer in any form but individual capitalism with governance based upon protecting the rights of all rather than the fewCorporations are forms of the collective that avoid the rights and responsibilities given to individual human beings in the societies in which they live. Progressonly comes from the free exchange of ideas with acess to the funding necessary to bring about change. The current global mess is due to the stopping of the free flow of money and the giveaway of money to thiose unwilling to really work for it and create something new and better. Oil has become a global addiction with the cure not allowed. Technoligies have existed for more than 100 years to replace it and the public is no where nearer to accessing these new/old ideas and sources of energy that free men. The problem is not in the technology but in allowing men to be free from the monthly bills and in a form of permenant slavery to the collectives seperate and more equal that the rest of US.
  • Matt Damon’s Anti-Fracking Movie Financed by Oil-Rich Arab Nation on September 28 2012 said:

    Matt Damon’s Anti-Fracking Movie Financed by Oil-Rich Arab Nation
    Lachlan Markay
    September 28, 2012 at 8:03 am

    A new film starring Matt Damon presents American oil and natural gas producers as money-grubbing villains purportedly poisoning rural American towns. It is therefore of particular note that it is financed in part by the royal family of the oil-rich United Arab Emirates.

    The creators of Promised Land have gone to absurd lengths to vilify oil and gas companies, as Scribe’s Michael Sandoval noted Wednesday. Since recent events have demonstrated the relative environmental soundness of hydraulic fracturing – a technique for extracting oil and gas from shale formations – Promised Land’s script has been altered to make doom-saying environmentalists the tools of oil companies attempting to discredit legitimate “fracking” concerns.

    While left-leaning Hollywood often targets supposed environmental evildoers, Promised Land was also produced “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits. A spokesperson with DDA Public Relations, which runs PR for Participant Media, the company that developed the film fund backing Promised Land, confirmed that AD Media is a financier. The company is wholly owned by the government of the UAE.

    The UAE, a member of the Organization of Petroleum Exporting Countries (OPEC), has a stake in the future of the American fossil fuel industry. Hydraulic fracturing has increased the United States’ domestic supply of crude oil and natural gas in areas such as the Bakken shale formation and has the potential to increase domestic production much more in the foreseeable future. That means more oil on the market, and hence lower prices for a globally traded commodity.

    Fracking is boosting the country’s natural gas supply as well. While the market for American natural gas is primarily domestic, the Energy Department recently approved Cheniere Energy’s plan to export about 2.2 billion cubic feet of liquefied natural gas per day from Louisiana. The Department is considering LNG export applications from seven other companies.

    A strong global market presence for American natural gas could also work to the UAE’s disadvantage. The Arab nation ranks seventh worldwide in proven natural gas reserves. For instance, Japan’s energy imports are expected to rise significantly over the next five years. The country is currently a major importer of UAE natural gas. If it decided to import more LNG from the United States to accommodate its increased energy demands, it could deal a blow to the UAE economy.

    Another source of competition might come from other industries that use natural gas to manufacture other products. As American gas grows cheaper the United States becomes a more attractive destination for industries that manufacture petroleum-intensive products. The UAE, meanwhile, has invested billions attempting to shore up its own share of the plastics and chemicals markets, both of which rely on petroleum products and are likely to gravitate towards the cheapest sources of those products.

    All of this suggests a direct financial interest on the UAE’s part in slowing the development of America’s natural gas industry. Pop culture can be a powerful means to sway public opinion. While Promised Land, like anti-fracking documentary Gasland, appears to inflate the dangers of hydraulic fracturing, it may have an impact on the public’s view of the practice.

    Heritage’s James Dean contributed to this report.
    Note: AD Media’s role in financing Promised Land was confirmed by a spokesperson with DDA Public Affairs, not a representative from AD Media itself. This post has been corrected to reflect that fact.
    Posted in Energy and Environment, Featured, Scribe
  • JackyC on September 29 2012 said:
    >>> But it does suggest that North America in its entirety could one day become energy self-sufficient.

    If the author is suggesting that Canada could become self-sufficient, and that Mexico could become self-sufficient, perhaps.

    But if the suggestion is that the US might become self-sufficient but could not do so without the reserves of Canada and Mexico, then, no, the US will not become self-sufficient.
  • Frankshay on September 30 2012 said:
    Not sure where the mis-information on EV's versus nat. gas come from... Natural gas is surely part of the comprehensive answer to transportation, particularly for fleet vehicles which often operate in highly populated areas. But understand: the internal combustion engine is ALWAYS constrained by the Carnot cycle and can never, ever be as efficient as an EV. Typical numbers are 15-20% max for ICE's versus 80% for EV'.

    Even counting electrical generation inefficiencies, transmission losses, etc. EV's are at least twice as efficient as ICE-powered vehicles which means less pollution and fuel usage. The biggest "plus" for EV's is that there are many ways to generate electricity. A typical 16-panel PV array (3.5-4kw) on your rooftop will generate enough electricity to drive 15K miles/year. Numbers vary depending on where you live of course but this is an accurate first-order approximation. This will also be the absolute cheapest way to drive in the future.

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