For the last four or five years, we have been bombarded with a stream of stories about the “shale revolution.” Horizontal drilling and fracking, mostly in the U.S., were said to have released oceans of new oil and a virtually endless supply of natural gas. These developments have brought, or will soon bring, great benefits to the American people. Our oil imports are down as are gasoline prices. Factories utilizing the flood of natural gas will soon create many new jobs as manufacturing returns to the US. We will soon have so much oil and natural gas that we can export much energy to our friends and teach our enemies a lesson.
Now it is perfectly true that there has been a major increase in US oil and natural gas production in recent years. Oil production is up by some 4 million b/d and natural gas production is up by 5 trillion cubic feet/year since the boom began. What the stories about all this abundance fail to address, outside of vague generalizations, is just how long this upward surge is going to last and what happens then.
To fill in the gap between oil companies, their consultants, their financiers, and friendly media hype, we have only the Department of Energy’s Energy Information Administration (EIA) to guide us on the many critical decisions ahead. Now the EIA does not have a very good track record when it comes to projecting the future. Until last winter two-thirds of America’s shale oil reserves were supposed to be buried under California which would become fabulously wealthy when we brought it to the surface. Then all of a sudden, and likely under pressure from outside observers, California’s shale oil was not there. The whole notion of oceans of oil under California was nothing but oil company hype, aided by a consultant, and a stamp of approval from the EIA.
To be fair to the EIA, nobody – not the White House, not the Congress, not any elected official, not any living, breathing American — wants to hear our government tell us that there are big changes ahead and that things might be considerably worse in the years ahead. Therefore, for the most part our government tries to paint an optimistic picture of the future, with minimal concern for the consequences of bad forecasts. Take the U.S. invasion of Iraq ten years ago, which clearly has made a major contribution to the destabilization of the Middle East, as a case in point.
Now just what is the EIA telling us about the prospects for our shale and gas in the coming years? To their credit, the Administration is saying that U.S. shale oil production will stop growing in the next few years so that total U.S. oil production, currently about 8.9 million barrels a day (b/d), up from around 5 million b/d six or seven years ago, will top out at around 9.6 million b/d in 2019. However, the EIA is very optimistic about how slowly production will fall after it peaks, and that is where the problem lies. Moreover, the Administration sees few limits to US shale gas production in the next 25 years so we can burn and export as much as we like and all will be well.
Fortunately in America, we have other institutions looking over the government’s shoulder and in this case an independent examination of shale oil and gas production came up with markedly different conclusions. This week the Post Carbon Institute (PCI) released a detailed study of the prospects for US shale oil and shale gas production entitled Drilling Deeper – A Reality Check on the US Government Forecasts for a lasting Tight Oil and Shale Gas Boom. This new study takes a hard, detailed look at what has actually happened during the shale boom to date and at the EIA’s projections.
While there are many variables and assumptions that need to made in forecasting the future, the PCI study says that shale oil production from the two top fields, the Bakken and Eagle Ford which account for more than 60 percent of U.S. shale oil production, are likely to peak around 2017 and that all shale oil production will be declining rapidly by 2020. This is in marked contrast with the EIA assessment which sees U.S. shale oil production gradually contracting so that in its most likely case production will only drop from 4.5 million b/d to 3.5 million in the next 25 years. Given that production from the average shale oil well declines by 72 percent in its first year of production, the likelihood that the tens of thousands of these $8 million wells that would be have to be drilled as new well productivity drops markedly means the EIA’s scenario is highly unlikely.
The EIA’s projection for the future of U.S. shale gas production is even more far-fetched. While the PCI study acknowledges that U.S. shale gas production will be cheap and abundant for the next few years, it questions whether growth will continue much beyond 2020 – about the time the U.S. is supposed to be ramping up LNG export terminals and switching coal fired plants to natural gas that will bring about large increases in demand. The PCI estimates that production from the seven major natural gas fields that provide about 88 percent of U.S. shale gas will peak in 2016-2017. To maintain production much less increase it for another 20 years will require unprecedented drilling programs and very large capital investments, even if satisfactory places to drill are found.
Shale oil and gas have a limited number of highly productive “sweet spots” inside the larger regions where the fuels are found. Once these sweet spots are exhausted, new wells become increasing less productive although the costs of drilling them (some $6-8 million a well) remain the same. It is this well-known phenomenon that the EIA seems to ignore in its projections. There is a cost aspect to oil and gas production and at some point the cost of production becomes more than the markets will pay.
It is hard to see how all this is going to work out in the next few years. Currently we are seeing a major slump in prices that is coming from too much supply and too little demand. Some believe that many shale oil and gas projects are not economically viable at current prices. Industry leaders, however, worried about their continued access to capital markets, staunchly maintain that they are still profitable and that prices would have to fall another 20 percent before they will curtail new drilling.