Tuesday, December 9, 2014

Overstated Tight Oil Reserves and a False Sense of Energy Independence

Updated December 2016

An older but still pertinent publication, "Drilling Deeper", by J. David Hughes on behalf of the Post Carbon Institute has proven to be a most interesting resource in this current low-oil price environment.  As a geoscientist, I found this report to be extremely well written and the author's analysis was both compelling and very thorough.  The report looks at the top seven tight oil and top seven tight gas plays in the United States that account for 89 percent of America's tight oil production and 88 percent of shale gas production and then projects when production from those plays will peak and then begin to decline.  It is these plays which have been made viable through the use of multi-stage hydraulic fracturing (aka fracking) that have brought the United States to the position where it is now one of the world's premier oil and natural gas producers.  The author, a geoscientist, then compares his production calculations to those of the Department of Energy's Energy Information Administration (EIA) which gives us a sense of whether or not production from non-conventional shale plays will be robust over the long-term and how long the United States economy can exploit its rediscovered energy independence.  

For those of you that are non-oil industry people, when an oil or natural gas well is drilled, its production gradually declines over time.  The rate of decline can be very steep or it can be very shallow depending on the reservoir.  Here is a well production profile showing what the production history looks like for a typical Eagle Ford non-conventional oil well:


EUR 30 is the total oil recovered from this particular well over a 30 year period, in this case, 228,000 barrels of oil.  You will notice that the decline is quite steep with most of the oil production occurring in the first year to year-and-a-half.  After that, while the well still produces oil, it is at a much lower rate. 

Now, let's look at what happens when we put a number of new wells into the equation as time passes, a typical occurrence as a field is exploited:


If we combine the two, we end up with a chart that shows the how the oil output of a field from all wells varies over time:


Again, we see that production ramps up as the field is developed through the drilling of more and more wells and drops off fairly rapidly as fewer and fewer wells are drilled as the field ages and as each producing well in the field sees its production decline with time.  This is why the decline rate is such an important component of oil production and oil economics.  

Let's open the main part of this posting with this map showing the geographic distribution of tight oil and shale gas plays in the lower 48 states of the United States:
  

Now that you have a bit of oil industry background, let's look at the EIA's reference case forecast of U.S. oil and natural gas production from 1990 to 2040 from its Annual Energy Outlook 2016 (AEO):


As shown on the solid black line, the AEO projects that U.S. crude oil production will rise to 8.6 million BOPD by 2017 and then rise to 11.3 million BOPD by 2040.  Obviously, the EIA is quite bullish on the future hydrocarbon potential of the United States.

Here's a graph showing what happens to domestic production of tight oil and how it impacts imports:


By 2014, the share of imported oil will drop to 7.4 percent compared to between 45 and 60 percent during the 1990s and first decade of the 2000s.

As we all know, the energy business in the United States is increasingly focusing non-conventional or tight oil plays.  Here is a chart showing how the EIA divides future tight oil production among the main plays:


You will notice that the EIA clearly expects both the Eagle Ford and Bakken to form a significant production base for tight oil production in the coming decades with additional relatively significant oil production from the Permian Basin and Austin Chalk.

For the purposes of this posting and to keep it reasonably readable, I am going to focus on the oil side of the equation, in particular the Bakken and the Eagle Ford, the two key tight oil plays.  Here are Mr. Hughes findings:

1.) Current Bakken oil production is approximately 1 million BOPD from 8500 producing wells.  Current Eagle Ford oil production is approximately 1.3 million BOPD from 6100 producing wells.
   
2.) Tight oil production from major plays will peak before 2020 and production will be far lower than the EIA's forecast by 2040.  In the case of the Bakken and the Eagle Ford, the two biggest tight oil plays which now account for more than 60 percent of current domestic tight oil production, production rates in 2040 will be less than one-tenth of the EIA's projections.  As well, production levels from both the Bakken and Eagle Ford will peak in 2017. 

3.) The field decline rate for the Bakken is 45 percent per year and 38 percent per year for the Eagle Ford.  This compares to a five percent annual decline rate for conventional oil fields.  This means that more and more wells must be drilled to maintain field production levels, however, as oil industry geoscientists know only too well, fields are not infinite in size and not homogenous laterally.  Most fields have a core "sweet spot" where reservoir quality is better and hydrocarbon saturation is higher.  Once these areas have been exploited, it becomes harder and harder to maintain production levels through the drilling of additional wells because the reservoir simply isn't capable of producing as much oil.

In the case of the Bakken, here is a most realistic production outcome case that uses three wells per square mile which would see the drilling of an additional 23500 wells on top of the 8500 currently producing oil (in brown) and compares it to the EIA model (in red):


In the most likely rate scenario, peak Bakken production occurs in 2015 at 1.19 million BOPD.  Total oil recovered by 2040 is 6.8 billion barrels, down substantially from the EIA's estimate of 8.8 billion barrels of produced Bakken oil, largely because of steeper production declines.  As well, by 2040, production from the Bakken will be less than one-tenth of that projected by the EIA.  Note that with a 45 percent decline rate, just to maintain current production levels, 1470 wells must be drilled every year or about 17 percent of the current producing wells.  Over the life of the field, the capital required to drill and complete the additional wells totals about $188 billion.

In the case of the Eagle Ford, here is a most realistic case that uses six wells per square mile which would see the drilling an additional 26200 wells on top of the 6100 currently producing oil (in brown) and compares it to the EIA model (in red):


In the most likely rate scenario, peak Eagle Ford production occurs in 2016 at 1.56 million BOPD.   Total oil recovered in 2040 is 7.76 billion barrels, down substantially from the EIA's estimate of 10.8 billion barrels.  This means that by 2040, production from the Eagle Ford will be less than one-tenth of the level projected by the EIA.  Again, it is important to note that just to maintain current production levels, 2285 wells must be drilled each year or about 37 percent of the current producing wells.  Over the life of the field, the capital required to drill and complete the additional wells totals about $210 billion.


Certainly, as the both the author and the EIA note, there are other tight oil plays in the continental United States that will supply oil to the nation, however, the Bakken and Eagle Ford form the foundation of ongoing tight oil production well into the future, particularly since the other major tight oil plays are decades old and have been exploited using tens of thousands of conventional wells.  Unfortunately, as you can see from this analysis, the EIA's overly optimistic forecast could be backing the United States into an energy corner, lulling consumers into a false sense of long-term "energy independence".  It is also important to note the high capital costs involved in maintaining this "energy independence"; if the current low price environment continues for any length of time, the exploitation of tight oil plays will be postponed, perhaps indefinitely, since it was the sustained existence of high-priced oil over the past few years that made these non-conventional plays economically attractive in the first place.

On the upside, as long as the period of low oil prices is not overly lengthy and prices recover to their pre-collapse level, America's tight oil will last a bit longer. 

10 comments:

  1. To all the people who think we can just grow our way out of this or that they can count on predictions from government looking ten or more years into the future you are wrong. To all the people who think the worlds surging population will not become a problem because of new energy sources I say, wake up! Anyone with even the slightest mechanical knowledge will tell you that solar panels, wind mills and such take a lot of energy to build and often are maintenance intense.

    Both these complicated systems have a short lifespan and require a great deal of energy to be expended in just keeping them up and running. Carry no illusions the days of cheap energy are behind us and not only has the low hanging fruit been picked it has been eaten. Sadly, if we look back we will see much of this energy was allowed to go to waste. The article below looks into the cost of failing to plan long-term and questions if collectively mankind is incompetent.

    http://brucewilds.blogspot.com/2014/12/does-peter-principle-apply-to-mankind.html

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  2. Well done and well explained I thought. I'm not really a political person, so the politics of fracking aren't really my interest but I have been an O&G investor for a pretty long time.

    I've thought the "fracking hype", especially oil related, has the makings of one of the biggest busts in O&G and I've seen more than a few boom & bust situations.

    Here's a piece I did about a year ago with similar caution as this excellent presentation.

    http://www.fool.com/investing/general/2013/10/27/a-long-term-risk-for-shale-oil-stocks.aspx

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  3. Thanks for the link. I found it interesting that your analysis included EOG Resources - they just announced that they are pulling out of Canada and have sold off their production.

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  4. Fascinating. I concluded many of the same things from an analysis I did over Thanksgiving. I am an oilfield veteran. I've been through four solid bust cycles and a couple of others along the way. This one, like '98, is contrived and a panic has set in. It will take a long time to go back into the water. We will not be able to catch up with even a slight increase in demand and the decline of existing production that will always take place. The price will spike.... again and higher than before.

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  5. Great article. I have commented on various boards regarding how this artificial price drop in crude will cause a negative disruption in the crude oil industry. Just as quickly as the drop in crude prices, talk of or an actual move to place tariffs on imported oil would shift the world energy scene. A tariff needs to be put in place to promote the continued production of unconventional shale oil. There is not enough conventional cheap oil to supply the world and huge price spikes will occur if shale oil is halted. OPEC is simply over supplying in order to drive the US shale producers out of business along with eroding many US jobs. OPEC will next increase the price of crude after the shale producers are no longer able to finance their business. We need stable prices and prices that encourage conservation of crude, not spikes in crude that encourage waste and a false sense of low prices for crude.

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    Replies
    1. Thanks for all of your comments Daniel. I still stand behind the theory that we have already passed peak cheap oil and that this crude price realignment is temporary at best (save another Depression).

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  6. I agree that a tariff on cheap oil would ultimately help stabilize the energy sector where all the high paying new jobs have come from. We were doing fine on $85 oil, and high priced oil will be back as soon as OPEC breaks the US shale oil industry. The world doesn't have enough supply of conventional cheap oil, thus shale oil will be needed to meet world demand. The 5mbopd of new shale oil that's come online in the recent last 5 years and a soft world economy resulted in the surplus. As soon as the surplus is reduced be ready for high priced oil again. This happened in 1986 when OPEC flooded the market with cheap crude and the large and small US companies cut their drilling immediately.

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  7. From reading the comments here, there are some real misconceptions. The surplus is only 2%, and the amount of expensive shale crude on the market is about 5%. If the expensive 5% is cut in half, we will be balanced regarding supply/demand. We need 'both' the expensive shale oil and the cheaper OPEC crude oil. If the expensive shale crude is run out of business, there will be a supply shortage, and OPEC crude prices will increase. Again, we need both crudes. We will go through the process of eliminating some of the marginal shale oil producers since they will not be able to service their debt.

    The second big factor here will be the unrest that low crude prices will create in the OPEC countries that need higher prices to cover their budget needs. Desperate people do desperate things. At this point there is no risk premium added on to the price of crude. At some point, this political risk premium will be added to world crude prices. Until that time, the shale crude producers will have to cut back on production due to economics. Due to economics there will be production cuts in the Permian Basin of about 50%, and 30% in the Bakken, and 15% cut in the Eagle Ford. That will amount to a reduction of about 1.5 million bopd just due to economics. This cut in shale production will not happen immediately, but will happen over the 1st half of 2015. Also we need to keep in mind that world demand has not dropped, it has only slowed down. 90mbopd takes a lot of capital to produce, and many years of lead time to line up projects where future production needs are meet. If these long range production projects are put on the back burner, we will be in a bind when world demand slowly increases and the supply is not there, prices will go up fast, to fast. This should be an interesting 2015 with mergers and or buyouts by bigger producers. Also, how long can or will Russia be able to hold on to the lower prices they get when so much of their budget relies on crude revenues. It will be interesting.

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  8. Additional comments to articles elsewhere regarding crude oil resources/price.

    This artificial drop in the cost of crude oil will end up hurting most folks down the road. Oil needs to be priced high so that people do not waste oil. With this temporary glut of oil on the market now prices will drop, and then the new unconventional oil shale from fracing will decrease production. The decrease in production will set up the Saudi's for an increase in crude prices down the road. The world in the past 10 years pretty much maxed out on cheap crude oil. This is what set up new unconventional crude oil production which costs more than the conventional oil from the past.

    Once world demand soaks up the glut of oil on the markets there will be a period where world demand rises and the cheap conventional old oil will not be able to meet the higher demands, that is when the price of crude will take off and run way to high. Also with cheap crude people will not be concerned about conserving crude oil, and they also will not be so energetic to advance alternative energy since crude is cheap. This drop in crude prices is not a good event for the markets nor for the world. The world is like having a young teenager --- there needs to be boundaries set so they do not burn themselves up -- with the world, oil needs to be priced where it is not taken for granted and wasted. Unconventional oil costs more to produce, but at least it is available for a higher but fair price. The high cost of crude over the past years has helped 'forced' the world to be more conservative and also to explore different alternative energy sources. That drive to conserve and explore will be diluted now with low energy prices. regards.

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