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Energy Insights: Energy News: The Peak Oil Crisis: The Shale Oil Bubble

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The Peak Oil Crisis: The Shale Oil Bubble


By Tom Whipple

Most of us are aware by now that the introduction of widespread hydraulic fracturing into the oil and gas business has resulted in a rapid growth in U.S. production. U.S. crude output is up by nearly 2.5 million barrels a day (b/d) since mid-2007 and natural gas production is up by 25 percent. The key question of course is how long production will continue to grow before it inevitably declines. Optimists maintain that we have just scratched the surface of our shale oil reserves and that production will continue increasing for years, if not decades.

Realists are not so sure, noting that not only is fracked oil very expensive, requiring circa $80 a barrel to cover the costs of extraction, but that production from fracked oil wells drops off quickly so that new wells have to be drilled constantly to maintain production. Until recently information about just how fast our fracked oil wells were depleting was rather hard to come by, so that the hype about the US becoming energy independent and a major oil exporter became conventional wisdom for most.

Last week the US’s Energy Information Administration issued the first in a new series entitled Drilling Productivity Report- For key tight oil and shale gas regions. This report analyzes the six onshore oil and gas regions in the U.S. where 90 percent of the growth in oil production and nearly all of the growth in natural gas production has taken place in the last few years. The report tallies the number of drilling rigs at work in these six regions; the amount of new oil and gas they are bringing into production each month; and most importantly the rate at which production from those wells already in production is falling.

Nearly all of the growth in U.S. onshore crude production these days is coming from North Dakota’s Bakken field and Texas’s Eagle Ford. They account for nearly 2 million of the 2.4 million b/d increase in oil production that the US has seen in recent years. North Dakota publishes detailed data on its oil industry, and from this we learn that the state now has about 9,600 producing oil wells each of which is producing about 100 b/d.

The 183 rigs currently drilling in the Bakken formation are bringing an average of 150 new wells per month into production or about 1,800 per year. Efficient use of these rigs is improving so that the 183 rigs currently active are drilling nearly as many new wells as the 220 that were drilling in the spring of 2012.

There are two key questions which will determine how much longer these shale oil plays will continue growing. One is how many economically viable sites are left to drill; and how long it will it be before production from the 10,000 or wells already pumping in the Bakken will fall to the place where the 150 or so new wells coming into production each month will not be enough to keep total production growing.

While not making a forecast as to when production will peak in the shale fields, the EIA, however, does make a projection as to what will happen in November 2013, not a particularly bold prediction but at least it is something. According to the EIA report, what it terms the decline in “legacy oil production” (i.e. those wells that have been producing for more than a month) for the Bakken field is now at 60,000. The Texas’s Eagle Ford field’s production is now declining at 80,000 b/d and the no longer growing Permian Field is declining at 34,000 b/d.

Winter in North Dakota can be rather harsh and we have already had some snow up there, so bringing new wells into production in the next few months can be difficult. Last winter the number of new wells coming on stream was closer to 100 per month rather than the 200 or so during better weather. In South Texas bad weather is not much of a problem, but the availability of fracking water is.

Anyway the EIA is forecasting that in November the Bakken Shale will bring 86,000 new barrels per day into production for a net gain of 26,000 b/d by the end of the month. In the Eagle Ford shale 105,000 b/d of new production is forecast to come on stream for a net gain of 24,000 b/d or 50,000 b/d for the two oil fields. The other four shale oil fields should have negligible increases in production.

This of course raises the important question of what will be the state of our shale oil production by December of 2014 and during the following year. Remember the number of producing wells in North Dakota is increasing at about 1,800 a year and even more down in Texas.

In looking at the steep decline in production from legacy wells in the Bakken and Eagle Ford shales, decline between November 2012 and November 2013 increased from 44,000 b/d to 60,000 b/d and from 54,000 b/d to 78,000 b/d respectively. Given that there will be another 4,000 or so legacy wells in production by this time next year the decline going on by this time next year is certain to be considerably greater.

While the EIA does not seem willing to make a forecast, it sure looks as if the increase in production for these two fields will be unlikely to keep up with the rate of decline within the next 12 to 18 months and that US shale oil production will no longer be growing.

While it is possible that a surge of investment will increase the drilling to keep up with declines in production from the older wells, this is expensive, and for now it looks as if oil prices are heading for a level where fracked oil production is not profitable. Outside geologists with access to proprietary data on decline rates have been forecasting for some time now that as the number wells increases and their quality declines, the shale boom will be coming to an end in the next two years. The release of EIA data seems to confirm these predictions.

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