Twice as bright, but half as long

by April 11, 2013
"Naples Pier" by Remo Daut http://remophotography.com

“Naples Pier” by Remo Daut (http://remophotography.com)

Recent improvements in the ability of the oil industry to successfully drill for oil in “tight” non-porous rock formations like shale, using methods like hydraulic fracturing (“fracking”) and horizontal drilling, have revolutionized the conversation about energy in the United States. Long characterized by a dependence on Saudi Arabian oil and the ongoing depletion of historic fields in Texas and California — along with ever-more-aggressive deep water drilling in the Gulf of Mexico — America’s oil calculus had seemed incrementally more desperate with every passing year. But now that previously uneconomic fields like the Bakken shale — which underlaps (so to speak) Montana, North Dakota, and Saskatchewan — have been opened to full-scale drilling activity, the new talk is of America as the 21st-century’s dominant oil exporter, and of the long-fabled idea of energy independence.

This is the talk. But according to an increasing number of industry analysts, investors, and geologists, the shale oil boom may turn out to be much less revolutionary than its champions have been predicting. David Hughes, a geoscientist and former research manager with the Geological Survey of Canada, has been studying the potential yield of fields like the Bakken. In a report he recently completed for the Post-Carbon Institute (abstract here, full executive summary here), Hughes argues that the production math runs in the wrong direction:

Tight oil plays are characterized by high decline rates, and it is estimated that more than 6,000 wells (at a cost of $35 billion annually) are required to maintain production, of which 1,542 wells annually (at a cost of $14 billion) are needed in the Eagle Ford and Bakken plays alone to offset declines. As some shale wells produce substantial amounts of both gas and liquids, taken together shale gas and tight oil require about 8,600 wells per year at a cost of over $48 billion to offset declines. Tight oil production is projected to grow substantially from current levels to a peak in 2017 at 2.3 million barrels per day. At that point, all drilling locations will have been used in the two largest plays (Bakken and Eagle Ford) and production will collapse back to 2012 levels by 2019, and to 0.7 million barrels per day by 2025. In short, tight oil production from these plays will be a bubble of about ten years’ duration.

Tim Guinness (chief investment officer of Guinness Atkinson Funds, and lead manager of their Global Energy Fund) used well-known comparators to make a similar point, warning an energy strategies seminar last fall, “It is akin to something like the discovery of the North Sea, Alaska, or GOM [Gulf of Mexico]. A useful addition but not a game changer, as the world needs 5 new North Seas every 20 years to provide enough oil to meet growing demand.”

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