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Page added on February 16, 2017

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Learning to Frack

Production

Technological advances and learning-by-doing have made U.S. shale oil profitable even at $55/barrel.

Just ten years ago shale oil was expensive. Global oil prices spiked to $135/barrel in 2008 but shale oil didn’t and couldn’t respond. Now, at only $55/barrel, U.S. oil producers are going all in, announcing billions of dollars of increased investment, particularly in Texas and North Dakota, and energy experts like Daniel Yergin are expecting U.S. production to increase this year by more than 500,000 barrels per day or about 6%.

This remarkable transformation is a perfect example of learning-by-doing.  Cost reductions in solar, wind, and batteries get a lot of attention.  But fossil fuel producers also learn from experience, and the pace of learning in U.S. shale oil over the last couple of years has been impressive. Recent research by Thom Covert and others help us make sense of what happened, and identify several key lessons for other industries.

Shale Oil Ramps Up, Even at Lower Prices

U.S. oil production in 2015 reached its highest level in decades, driven large increases in production from shale oil.  With shale oil and other forms of “tight oil”, producers drill horizontally and then use hydraulic fracturing to reach oil trapped in low-permeability rock like shale, sandstone, and limestone.  Over the last decade, these technologies have provided access to vast areas of oil reserves that were previously out of reach.  The growth has been particularly dramatic in the Eagle Ford, Permian, and Bakken, but other areas have grown rapidly as well, and shale oil now represents almost half of all U.S. production.

shaleoil

Note: After slowing down in 2016, U.S. shale oil is expected to ramp up again in 2017, continuing a decade-long surge. Constructed by Lucas Davis (UC Berkeley) using EIA data.

Production slowed in 2016 as oil prices briefly dipped below $30/barrel.  Companies made severe budget cuts, reduced drilling activities, and U.S. oil production fell 12% between July 2015 and September 2016.  Remarkably though, even at $30/barrel, production still continued at a solid pace.  Despite historically low oil prices, the U.S. still produced almost 9 million barrels per day during 2016.

Now with oil prices at $55/barrel, U.S. producers are pushing their chips to the center of the table.  Hess, one of the biggest producers in North Dakota, just announced a $2.25 billion investment budget for 2017, up 18% from last year.  Noble Energy has said they will spend up to $2.5 billion for 2017, up 67% from last year.   Companies believe these investments will be profitable because U.S. production has become so much more efficient.

Practice Makes Perfect

Economists have long studied learning-by-doing. As a company makes more of a good, it tends to become more efficient at production.  That is, the company learns to make output using fewer resources; or, equivalently, the company learns how to make more output for a given set of inputs.  Leaning-by-doing has been shown to happen in virtually all industries, with some of the best-known studies in economics coming from aircraft, semiconductors, and shipbuilding.

These industries may at first seem quite different from hydraulic fracturing, but there is a key similarity.  In all of these industries, companies are performing a repetitive production process.  Boeing builds hundreds of airplanes.  Chesapeake Energy drills hundreds of wells.  Key to learning is repetition, so industries like this are best suited to learning-by-doing.

rig

Note: Oil production in North Dakota’s Bakken shale.  Photo from here.

Tens of thousands of oil wells have been drilled in the United States since 2010.  This repetition has allowed producers to experiment with innovative new approaches to drilling and finishing wells; new combinations of drilling fluids, well depths, and other factors. This trial-and-error over thousands of wells has facilitated learning, pushing new techniques forward and reducing the cost per well.

Not all markets look like this. For example look at building nuclear power plants.  Nukes are such massive projects, undertaken so infrequently, that there is less scope for learning.  Not surprisingly, studies have found only limited learning-by-doing for nuclear power plants.  See here, here, and here.  This is exactly the rationale for small modular reactors – proponents argue that in building much larger numbers of smaller reactors they can benefit from learning-by-doing and decrease costs.

Evidence from the Bakken

In the most comprehensive study to date, University of Chicago economist Thom Covert documents rapid learning-by-doing by shale oil producers in North Dakota’s Bakken Shale.  Covert gathered detailed data from all oil wells drilled in the Bakken over an eight year period, including total oil production as well as information about the sand, water, and other “inputs”.  Covert shows that over just a small number of years, producers learned to make much more profitable choices, squeezing up to three times as much profit out of a given well.

One of the interesting patterns is that over time, producers have learned to be much more aggressive, extending the horizontal section of wells much farther and then using much more water and sand. By the end of the period, producers were using five times (!) as much water and three times as much sand per foot of horizontal length.  This “super-size’’ approach has been adopted successfully with natural gas production as well.  Super-size wells cost more upfront, but yield much larger amounts of oil and gas.

bakken.png

Note: Reproduced with permission from http://home.uchicago.edu/~tcovert/, this map shows the expected returns from using additional water and sand.  The black dots are the locations of actual wells.

It is complicated, however.  Covert shows that the optimal set of inputs varies dramatically across locations. The heat map above shows that some locations are much more suited to super-sizing than others.  Using more water and sand increases production in some places (the red areas), while decreasing production in others (the blue areas).

Global Technology Spillovers

Learning-by-doing in U.S. shale oil is important not only for the United States, but also because of the prospects for global technology spillovers.  The United States is not the only country with shale oil formations, and it would be naive to think these techniques will not quickly spread around the world.

That said, there is an important feature of the U.S. oil and gas market that makes it particularly well-suited for learning. Unlike most other countries, in the United States there is a wealth of publicly-available information.  Regulators and third-parties collect and disseminate detailed data on each and every well drilled in the United States.  Other countries hoping to grow their oil production would do well to adopt similar practices for information disclosure.

Moreover, the United States has private mineral rights.  This makes it possible for many firms, including smaller firms, to enter the market and try new drilling approaches.  In contrast, where mineral rights are government controlled, it can be harder for companies to enter the market and we might expect there to be less experimentation. U.S. oil and gas production has long been characterized by ingenuity, innovation, and risk-taking – all typical of competitive markets.

Still, it seems inevitable that these techniques will quickly spread around the world.  Globally there are already an estimated 400+ billion barrels of tight oil reserves, so there are a lot of places where these techniques could be profitably employed. This means the global supply curve for crude oil will continue to shift outward, applying continued downward pressure on global crude oil prices.

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37 Comments on "Learning to Frack"

  1. Midnight Oil on Thu, 16th Feb 2017 6:43 am 

    We will “frack” ourselves right into a grave..
    Wonder when they will add “fricking” to their arsenal of “know how” tricks to squeeze more back goo from Mother Earth…
    Boy…talk about kicking the can

  2. twocats on Thu, 16th Feb 2017 7:59 am 

    Regulators and third-parties collect and disseminate detailed data on each and every well drilled in the United States. Other countries hoping to grow their oil production would do well to adopt similar practices for information disclosure

    thought fracking fluids were proprietary?

    anyway, this sounds more like pitch for overseas marketing than actual analysis.

  3. yoananda on Thu, 16th Feb 2017 8:09 am 

    So what? 400bb is worth 10yr of oil, right?
    If so, not really a big deal (LTO is poor quality)

  4. Goat1001 on Thu, 16th Feb 2017 8:13 am 

    We are becoming more adept and efficient at warming our planet every day…

  5. joe on Thu, 16th Feb 2017 9:51 am 

    Fracking is great and all, but you can’t frack without investment capital. Come talk about fracking when fed rates are 4,5,6%. See whats cheap and what’s not then.

  6. peakyeast on Thu, 16th Feb 2017 11:05 am 

    @joe: Just what I have been thinking recently after reading that the FED thinks its about time to raise interest rates significantly.

    That must hurt the frackers a lot – if the price of oil doesnt increase simultaneously.

  7. Sissyfuss on Thu, 16th Feb 2017 11:16 am 

    Goat, not warming. Frying.

  8. Wildbourgman on Thu, 16th Feb 2017 11:36 am 

    Twocats, fracking fluids are proprietary they are owned by the service companies that perform the frac job not normally the Operator. I think the available information the author is talking about are records that the states collect from Oil companies such as well depth, location, and lateral length.

    Now yes there is a learning curve where you become more efficient and there is the law of diminishing returns too. One thing the author leaves out of his story is that service companies and drilling contractors have lowered their fees which drastically reduces well cost. So you can’t attribute all of the savings per well to gains in efficiency because companies will adjust their charges accordingly with every added rig to the national rig count.

  9. dave thompson on Thu, 16th Feb 2017 11:58 am 

    This article is trying to tell the investment crowd of suckers that oil drilling is a good investment. They leave out the part that the oil industry is facing a low return on EROEI. This biophysical issue is never addressed when you are looking for investors.

  10. Jerome Purtzer on Thu, 16th Feb 2017 12:01 pm 

    Learning by doing. I guess the suckers who invested hundreds of billions in the fracking fandango fiasco didn’t learn a thing losing everyone else’s money. Start the printing presses! Time for some more quantitative easing with some slick water.

  11. Dredd on Thu, 16th Feb 2017 12:49 pm 

    Learning to frack is like learning to smoke.

    Smoke-Qaeda is the parent of Oil-Qaeda (The Lying Family Tradition).

    “Smoking does not harm your health.” – Smoke Qaeda

    “Polluting does not hurt the Earth.” – Oil-Qaeda

  12. Apneaman on Thu, 16th Feb 2017 12:56 pm 

    …and on the 8th day god said “let there be cancer” and there was cancer and God saw that it was good.

    Humans as Cancer

    “As seen by astronauts and photographed from space by satellites, millions of manmade patterns on the land surface of Earth resemble nothing so much as the skin conditions of cancer patients. The transformation of the natural contours of the land into the geometric patterns of farm fields, the straightening of meandering rivers into canal-like channels, and the logging of forests into checkerboard clearcuts all have their counterparts in the loss of normal skin markings in cancer victims. Green forests logged into brown scrub and overgrazed grasslands bleached into white wasteland are among the changes in Earth’s color. Highways, streets, parking lots and other paved surfaces have toughened Earth’s surface, while cities have roughened it. Slag heaps and garbage dumps can be compared to raised skin lesions. Open-pit mines, quarries and bomb craters, including the 30 million left by US forces in Indochina, resemble skin ulcerations. Saline seeps in inappropriately irrigated farm fields look like scaly, festering sores. Signs of bleeding include the discharge of human sewage, factory effluents and acid mine drainage into adjacent waterways, and the erosion of topsoil from deforested hillsides to turn rivers, lakes and coastal waters yellow, brown and red. The red ring around much of Madagascar that is visible from space strikes some observers as a symptom that the island is bleeding to death.”

    http://www.churchofeuthanasia.org/e-sermons/humcan.html

  13. Apneaman on Thu, 16th Feb 2017 1:12 pm 

    Oklahoma hits 100° in the dead of winter, because climate change is real

    This is what climate change looks like.

    https://thinkprogress.org/its-been-45-above-normal-in-oklahoma-this-february-ba30f7bde27a#.azsiaaujd

  14. Boat on Thu, 16th Feb 2017 1:13 pm 

    DaveT,

    Show us the current EROEI of today’s fracked wells. Can you?

  15. Apneaman on Thu, 16th Feb 2017 1:20 pm 

    Boat what do you think the EROEI is when you rightly include the ever growing externalities? Rescuing folks all the time from rain bomb floods and the repairs, rebuilds and flood control all count. If society is not already in the red it’s close.

  16. dave thompson on Thu, 16th Feb 2017 1:22 pm 

    Boat, there is loads of info on the subject (google?), the fracked wells vary and there most likely are only estimates. However the overall picture is not good. If you do not believe it then go right ahead and invest in fracking.

  17. Apneaman on Thu, 16th Feb 2017 1:29 pm 

    Boat here’s some Canadian cancer kings dumping more externalities onto the public. You need to count the energy/money that it will take to clean up these private investors mess.

    Alberta orphan oil well tally jumps as Lexin licenses suspended

    “The provincial regulator ordered privately-held Lexin to cease all production, saying it failed to comply with multiple orders and lacked enough staff to manage its more than 1,600 sites.

    Calgary-based Lexin also owes more than C$1-million to Alberta’s orphan fund and more than C$70-million in security for its obligations to clean up its oil and gas facilities at the end of their producing life.

    “The closure order is the result of a year of trying to work with the company to come into compliance,” said AER spokeswoman Cara Tobin. “With the number of non-compliances and the debt that was owed we felt it was important to take these steps.”

    Lexin did not immediately respond to a request for comment.”

    http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/alberta-orphan-oil-well-tally-jumps-as-lexin-licenses-suspended/article34031308/

  18. GregT on Thu, 16th Feb 2017 1:32 pm 

    Boat already has enough on his plate to try to figure out DaveT.

    Here Is The “Catalyst” For The Market’s Inexplicable Surge: A $17 Billion Trade Gone Wrong

    http://www.zerohedge.com/news/2017-02-15/multi-billion-trade-meltdown-here-reason-markets-inexplicable-surge

  19. Boat on Thu, 16th Feb 2017 3:47 pm 

    As expected there is no EROEI information except old data. Same with wind and solar. Just another talking point with very little data. Even the so called experts can’t even agree with what inputs should be used. You doomer types are good at getting carried away with no real data to back questionable claims.

  20. CrudevsCondensate on Thu, 16th Feb 2017 4:21 pm 

    The article does not explain that 70% of shale production is condensate. 100% of the Eagle Ford shale production is now condensate. Condensate can not be directly blended into gasoline. It needs to be further refined. So the question is: what is being done with the 2.8 million barrels a day of condensate? For example, what are the percentages in a barrel of condensate of ethane, propane, butane and the pentanes-plus and what are their industrial uses?

  21. dave thompson on Thu, 16th Feb 2017 6:10 pm 

    CrudevsCondensate; Yes you got it plastic crap spewed across the land and then some.!

  22. Apneaman on Thu, 16th Feb 2017 6:10 pm 

    Record high temperatures bring winter floods to Prince George

    Water can’t empty into drains because they are still frozen

    “High temperatures in Prince George broke a weather record more than 100 years old this week, flooding homes and streets as ice from a recent deep freeze clogged up storm drains.”

    http://www.cbc.ca/news/canada/british-columbia/record-high-temperatures-bring-winter-floods-to-prince-george-1.3986797

  23. Apneaman on Thu, 16th Feb 2017 6:13 pm 

    Third Record High In A Week Set As Winter Heat Wave Continues

    “DENVER (CBS4)– For the second day in a row and the third time in a week, Denver set a new daily record high on Thursday when the temperature climbed to 75 degrees at Denver International Airport. The old record for Feb. 16 was 70 degrees set in 1970.”

    http://denver.cbslocal.com/2017/02/16/third-record-high-in-a-week-set-as-winter-heat-wave-continues/

  24. Apneaman on Thu, 16th Feb 2017 6:14 pm 

    Century-old temperature record broken in Calgary

    Wednesday’s high of 16.4 C broke previous mark of 15.6 C set in 1916

    http://www.cbc.ca/news/canada/calgary/calgary-weather-record-high-1.3985229

  25. Apneaman on Thu, 16th Feb 2017 6:17 pm 

    West Coast sizzles; Mangaluru records all time high temperature for February month

    http://timesofindia.indiatimes.com/city/mangaluru/west-coast-sizzles-mangaluru-records-all-time-high-temp-for-feb-month/articleshow/57192119.cms

  26. Plantagenet on Thu, 16th Feb 2017 6:25 pm 

    The explosion in fracking and the improvements in fracking technology and the huge increase in oil production in the USA all happened on Obama’s watch. Surely he deserves some credit for the “drill baby drill” approach to energy policy that was in place during his administration.

    Cheers!

  27. Apneaman on Thu, 16th Feb 2017 6:33 pm 

    Frack the fuck outta da place little cancer monkeys – your fates are already sealed.

    Unprecedented Climate Extremes: One Year After Record Drought, Lake Oroville is Spilling Over

    “We know that climate change pushes the weather toward extremes, but this is getting ridiculous. In California, in less than a span of 24 months, water levels at a key reservoir have shifted from record drought to a flood that’s now endangering the state’s water supply system. Unfortunately, it’s these kinds of extreme shifts that we’ve come to expect from human-forced climate change.”

    – Record California Drought

    – Followed By Record California Flooding

    – Weather Extremes Damage Critical Water Infrastructure

    – Harmed by Drought, Harmed by Flood

    “It’s a case of too much or too little. From 2011 through 2016 drought threatened Lake Oroville’s water supplies. Now it’s flooding. And unfortunately, with climate change, we can expect the weather in many regions to take on extreme characteristics or switch hard from one extreme to the other — as has been the case with California.”

    https://robertscribbler.com/2017/02/16/unprecedented-climate-extremes-one-year-after-record-drought-lake-oroville-is-spilling-over/

  28. makati1 on Thu, 16th Feb 2017 6:48 pm 

    Difficult to plant and harvest when the weather is chaos, as many American farmers are going to find out. Two wet to plant. Too dry/hot to grow. To wet to harvest. Too cold. Too hot. Too…. Chaos.

  29. Anonymous on Thu, 16th Feb 2017 9:01 pm 

    Hey plantatard, your buddy obomber is no longer da prez. Or did you not get the memo retard? Its the trump administration now, and hes going to make amerika retarded, I mean great, again. Trump is now solely responsible for all oil and not-quite-oil drilling that goes on in the u S of a, just like obomber was personally responsible for every drop of oil produced during his time as figurehead-in-chief.

    …idiot.

  30. Boat on Thu, 16th Feb 2017 9:22 pm 

    mak,

    More disinformation. Google US grain crops 2015, 2016. You will find they did well. Record production one of those years. Thanks to genitically altered seeds we export the hell out of corn and soybeans. Not to mention a huge exporter of wheat.

  31. Boat on Thu, 16th Feb 2017 9:25 pm 

    Plant,

    Not only that but give Obama credit for killing coal.

    Cheers

  32. Anonymous on Thu, 16th Feb 2017 9:33 pm 

    Hey look, its two retards for the price of one. Boat high-fiving his autistic OCD buddy plant.

    Cheerios boatard.

  33. makati1 on Thu, 16th Feb 2017 10:52 pm 

    Boat, reality is NOT your thing is it?

  34. rockman on Thu, 16th Feb 2017 11:04 pm 

    OK, some clarity is desperately needed. “…and the pace of learning in U.S. shale oil over the last couple of years has been impressive.” The tech used today to frac is identical to what was used 3 or more years ago: same drill rigs, same frac trucks, same proppant, same chemicals, etc. The big difference is lower costs thanks to a decrease in demand.

    Crudevscondensate – “Condensate can not be directly blended into gasoline. It needs to be further refined. So the question is: what is being done with the 2.8 million barrels a day of condensate?”. First, condensate is crude oil. Light OIL but none the less it is still oil. Just one of many dicumented references:

    http://allenergyconsulting.com/blog/2015/02/19/eagle-ford-who-are-you/

    “There is much discussion on this production being mainly condensate. Condensate is a crude oil – just a really light crude oil. A common unit of measurement for the density/gravity of the crude is API. The higher the API, the lighter the crude oil becomes. Some consider 45+API to be condensate.”

    Second, nothing is “blended” to make gasoline. Gasoline is a specific group of hydrocarbon molecules:

    “The bulk of a typical gasoline consists of hydrocarbons with between 4 and 12 carbon atoms per molecule (commonly referred to as C4-C12). It is a mixture of paraffins (alkanes), cycloalkanes (naphthenes), and olefins (alkenes), where the usage of the terms paraffin and olefin is particular to the oil industry.”

    The primary refining process of crude oil is separating out the various different molecules…”fractional distillation”. A typical Eagle Ford oil will yield 20% to 25% of its volume as those C4 to C12 molecules…IOW the “gasoline yield”. That groups of molecules exist to some degree in all oIls.

    A bit more detail about the origin of gasoline and diesel:

    “Petroleum is refined to produce gasoline and diesel. Fractional Distillation process is used on petroleum and at various temperatures, different by products are formed from it. Gasoline and diesel both are derived at varying temperatures during refining process. Gasoline is produced at temperature between 35 degrees to 200 degrees while diesel is produced at a boiling point of 250-350 degrees. After distillation, in order to use these byproducts as commercially acceptable gasoline and diesel, some blending with other elements has to be done. Gasoline is produced first in this process as it is produced at a lower temperature than diesel.

    Chemical composition – Diesel is composed of about 75% saturated hydrocarbons (primarily paraffins including n, iso, and cycloparaffins), and 25% aromatic hydrocarbons (including naphthalenes and alkylbenzenes). The average chemical formula for common diesel fuel is C12H23, ranging from approx. C10H20 to C15H28. Gasoline consists of hydrocarbons with between 4 and 12 carbon atoms per molecule but then it is blended for various uses. Overall a typical gasoline sample is predominantly a mixture of paraffins (alkanes), naphthenes (cycloalkanes), aromatics and olefins (alkenes). The ratios vary based on a various factors”.

    You may be confusing it with the fact that all crude oils refined are actually blends of different oils. Condensate/light is and always has been a critical component of blended oils refined in the US. The refinery infrastructure is most efficient refining a very narrow gravity range: 31° to 33° API. Before the Eagle Ford boom Gulf Coast refineries had to import condensate to blend with our heavy oil imports. Which is why east coast Canadian refineries have paid a premium to import hundreds of millions of bbls of Eagle Ford condensate with their heavy oil imports.

    BTW about 130 MILLION bbls per year of US condensate was being exported to Alberta to blend with oil sands production to make “dilbit”…look it up. And about 160 MILLION bbls per year of Canadian condensate was being used. Without the condensate not 1 bbl of oil sands production could be pumped down a pipeline. And even mixing light oil with the bitumin the dilbit still had a gravity around 23° API.

    And with all that said most now understand a bit more about refining then before. But in reality the above was just a somewhat simplified version.

    And to expand on what the Wildman said:

    “…fracking fluids are proprietary they are owned by the service companies that perform the frac job not normally the Operator.”. IOW any company anywhere in the world can have Haliburton frac their well with the identical frac fluid Big Red used on an Eagle Ford well: all the have to do is write them a check. The frac fluids are PATENTED…not secrets. Anyone can buy a drum of any frac fluid being used and have it analyzed. What they can’t do is sell an exact duplicate of it.

  35. antaris on Thu, 16th Feb 2017 11:17 pm 

    Rock, so if it is not a secret, how come always the big question ” we think what they are pumping down that hole is causing us to feel sick up here” .

  36. Anonymous on Fri, 17th Feb 2017 2:43 am 

    Rockyman has answer for that ant, he always does, and its the same.

    Ill paraphrase for him so he doesn’t have to. (You can thank me later rockerman).

    -Fraking is totally safe, and its never been (proven) to have done anyone any harm. And anyone that protests fraking and has used oil is either a hypocrite, and or is trying to put the squeeze on honest gawd-fearin amerikan oil corporations with their stupid ‘protests’ and ‘lawsuits’, and bad publicity.

    The end.

    Rockyman.

  37. yoananda on Fri, 17th Feb 2017 12:33 pm 

    @Rockman

    you say:
    “The tech used today to frac is identical to what was used 3 or more years ago: same drill rigs, same frac trucks, same proppant, same chemicals, etc. The big difference is lower costs thanks to a decrease in demand.”

    other says:
    “* Since then the most productive wells have become multilateral, with multiple horizontal spurs going off every vertical well shaft. Since each of these multilaterals is crafted by a single drill, the rig count watch is utterly irrelevant.
    * Micro-seismic techs are enabling operators to take much — if not all — of the guesswork out of drilling and fracking. Such precision drilling means not only looking at the volume of steel used per well or per barrel of output is immaterial, but also that mass layoffs of rig workers can occur with no reduction in oil production.
    * Water intensity per barrel of output continues to shrink as liquids pits are replaced wholesale by mobile water tanks. Less water usage means less cash flowing through the oil sector, gutting one of the last few “reliable” means of indirectly gauging end-output levels.”

    I’m lost!
    Multilateral is not new? cost is not down?

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