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Is the U.S. Energy Boom being Oversold?

Is the U.S. Energy Boom being Oversold?

I attended the American Geophysical Union meeting in San Francisco two weeks ago at which I heard a very interesting presentation by David Hughes of the Post Carbon Institute. He is more pessimistic about future production potential from U.S. shale gas and tight oil formations than some other analysts. Here I report some of the data on tight oil production that led to his conclusion.

A number of analysts have issued optimistic assessments of the future production potential of U.S. shale or tight oil. For example, the International Energy Agency recently predicted that the U.S. would be producing over 10 million barrels per day of oil and natural gas liquids by 2020 before resuming a gradual decline. Citigroup is even more optimistic.

IEA 2012 Projection of US Pteroleum
Source: David Hughes, AGU presentation, December 2012.

Citigroup 2012 Projection of US Shale Oil
Source: David Hughes, AGU presentation, December 2012.

Related Article: What does the Future "Really" Hold for US Oil Production?

David Hughes has been studying detailed data on each individual well in shale gas and tight oil formations in the United States as part of a study that will be released by the Post Carbon Institute in February. The most successful new oil-producing region is the Bakken in North Dakota and Montana, which currently accounts for 42% of the U.S. tight oil total and accounts for about 1/5 of the tight oil production that is projected by Citigroup for 2022. Hughes finds that once output from a typical Bakken well begins to decline, within 24 months its production flow is down to 1/5 the level achieved at its peak. This is in line with estimated decline rates separately published by the North Dakota Department of Mineral Resources.

Decline Curve for Bakken
Source: David Hughes, AGU presentation, December 2012.

Given the observed decline rates on existing wells, it is then a straightforward mechanical exercise to ask the following question. Suppose that no new wells were drilled after 2010. What would the path of Bakken oil production then look like?

Overall Field Decline for Bakken
Source: David Hughes, AGU presentation, December 2012.

Increasing the annual production thus requires not just new wells but an increasing number of new wells each year; Hughes estimates that 820 new wells are needed just to offset Bakken field decline. But a second feature in the data posing challenges for that plan is that while a few wells in the Bakken have proven to be very productive, the average well productivity is much lower. A limited number of lucrative sweet spots account for much of the success so far.

Related Article: ExxonMobil Eyes South Africa's Untapped Frontier

Bakken Well Quality
Source: David Hughes, AGU presentation, December 2012.

Bakken Well Quality
Source: David Hughes, AGU presentation, December 2012.

Hughes argues that there are limits to the number of new wells that will plausibly be drilled each year and the number of available well locations. These factors make achieving the IEA or Citigroup objectives difficult and mean a much more rapid decline in the production rate after the peak is reached. For example, here are Hughes' calculations if the current drilling rate were maintained-- 1500 new wells per year leading to a tripling in the number of operating wells-- and if the EIA's estimate of remaining productive locations is accepted. By contrast, the Citigroup projection of a continuous plateau after reaching peak production would require tens of thousands more well locations than estimated to be available by the EIA.

Bakken Shale Oil Production
Source: David Hughes, AGU presentation, December 2012.

Oil produced from shale or tight formations is going to be very helpful to the U.S. economy. But this is an expensive way to try to get oil, and there may have been some overselling of how much these fields are actually going to deliver.

By. James Hamilton

Original Source: http://www.econbrowser.com/archives/2012/12/future_producti.html




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