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Shale Revolution Deniers Face An Inconvenient Truth

Shale Revolution Deniers Face An Inconvenient Truth thumbnail


Despite turning the U.S. into the world’s largest producer of natural gas and driving a 3 million barrel per day surge in U.S. oil production in just the last three years, the shale revolution still has its doubters. They couldn’t be more wrong.

The Montreal-based Centre for Research on Globalization recently dismissed shale fracking as a “Ponzi scheme” and “this decade’s version of the dot-com bub ble” that’s about to burst. But time and again over decades, the naysayers and “peak oil” advocates have grossly underestimated the energy industry’s ability to innovate and beat production forecasts. Today’s shale pessimists continue to do so.

Shale pessimism is constructed on the theory that U.S. development has so far largely centered on sweet spots — the most resource-rich areas of geologic formations. As drilling continues and moves further from these sweet spots, productivity of newly drilled wells will allegedly fall. Shale development is already a complex and highly capital-intensive process. The profit margins between an economic well and an uncompetitive well can be razor-thin. In theory, less productive wells, drilled in the margins of shale plays, will quickly become uneconomic and put producers in the red.

Shale pessimists also point to the sharp decline curves of shale wells to support their bubble theory. While newly drilled and producing wells may be highly productive initially, their output falls sharply over time — nearly 50% a year. Continuing to increase overall production, much less just maintain it, supposedly takes constant drilling.

Theory Vs. Data

The sharp decline curves and the movement of drilling into the margins of shale plays seem like a recipe for production to peak and then fall, according to the “peak oil” advocates. But even as producers have moved away from sweet spots, and even as the rig count in many plays has either stayed flat or fallen, production of shale oil and gas continues to grow significantly. If you’re a “peak oil” shale contrarian, the data unfortunately just aren’t on your side.

There are two important reasons why the shale pessimists are wrong: innovation and expertise. The shale revolution was launched because of breakthroughs in a range of technologies, most notably advances in horizontal drilling paired with advanced hydraulic fracturing.

Competition and innovation drive the oil and gas industry, particularly in the U.S. The innovation that unlocked the nation’s oceans of shale resources hasn’t stopped but instead has actually intensified. New ideas, technologies and ways of cracking the shale code emerge daily. And America’s amazing “petropreneurs” have obviously gotten very good at what they do.

Output Per Well Soars

Crews are working more efficiently, bringing wells online in shorter periods and producing more oil and gas from each new well. Consider Arkansas’ Fayetteville Shale, where the average drilling time for a new well has fallen from 17.5 days in 2007 to just 6.2 days in 2013. In the Marcellus Shale, America’s largest single shale gas field, each well is producing eight million cubic feet of gas per day on average — more than eight times what each well produced as recently as 2009.

Impressive production gains have also taken place for America’s crude oil production — oil production per rig in the Bakken oil field of North Dakota has increased fivefold since the shale revolution started there in 2007, and oil output per rig in the prolific Eagle Ford region of south-central Texas has doubled in just the last two years.

The same gains in efficiency and innovations that are allowing our producers to drill deeper and pull more oil and gas from each new well are not only going to unlock new domestic shale formations but will soon allow the shale revolution to take off outside the U.S. Mexico just passed groundbreaking energy reform after 75 years of a state-run energy monopoly — largely because of the need to bring in U.S. expertise to tap its own shale — and our neighbor to the south is now poised to join the shale revolution. The U.K., China and Argentina, all with significant shale resources of their own, are also working to jump-start production.

Shale pessimism and the belief in “peak oil” still have a handful of followers, but surging oil and gas output in the U.S., rapid gains in production and drilling efficiency, and the steady march of technological innovation all tell a much different story of a new, unprecedented era of energy abundance. Instead of moving toward its twilight, the shale revolution is likely only in its opening act. Stay tuned.

• Mark Perry is a resident scholar at the American Enterprise Institute and a professor of economics at the Flint campus of the University of Michigan.

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63 Comments on "Shale Revolution Deniers Face An Inconvenient Truth"

  1. coffeeguyzz on Thu, 25th Sep 2014 2:57 am 

    Geez, rockman … now you’ve done it. I read Brooks’ article earlier in Rigzone also and it didn’t make much sense so I did not pay it much attention. However, since you quoted his numbers – originating from the DMR, I checked the last two (July/June) Director’s Cuts reports dated Sept. 12 and Aug. 15 2014.

    June Bakken/TF increase 1,048,462 bbls. New wells 177. 30 day month gives us 197 barrels/day from new wells.
    July Bakken/TF increase 1,047,034 bbls. 31 day month gives us 171 barrels/day from new wells.
    I would suggest any reader to verify/disprove these figures as it is late and I’m dog-assed tired. The numbers are what they are right from the last two Director’s Cuts readily available online.
    Finally, Mr. Rockman, when you were getting your papers and headin’ out to the patch four decades ago, this writer was starting a multi year career on offshore oil rigs, a venue you are most familiar with. While I would defer to your vastly more expansive knowledge on virtually all things oil-field related, we gentlemen should not be too dismissive of all – newbies and old salts alike – who are always apt to teach us a thingortwo.

  2. coffeeguyzz on Thu, 25th Sep 2014 3:00 am 

    Addendum: July DMR sez 197 new wells for the month. G’nite all.

  3. Nony on Thu, 25th Sep 2014 4:18 am 

    Rock, the quote you have is talking about production/well and includes the entire POPULATION of wells. (old and new). production/well will change just because of the age distribution of producing wells even if every new well added is just as good. (DCoyne has a whole post on this, but I hope you get this intuitive concept, anyhow.)

    Looking at production/well for a changing population won’t tell you the quality of the new wells coming on, Rock. It’s just the wrong analysis. You need to compare type curves BY YEAR.

    Enno has done the analysis to compare each year’s type curve (using the production data for every well in ND Bakken). What we see is that type curves have not gotten worse (they have slightly gotten BETTER over the past 6 years of production).

    This info has been shown to you before, Rock. I’m not sure why you don’t get it (or remember it). Enno’s analysis is rock solid…and he’s even a peaker. But it doesn’t matter his ideology or if he’s “drilled any wells”. This is just cold, hard, production math.

    P.s. If you look at yearly type curves for Marcellus wells (or IPs, they’re a proxy for type curve), the change is phenomenal in terms of improvement of the production rate. It’s up 60% over the last few years. Not only have rigs moved out (and production kept going up linearly), because of pad drilling efficiency. But the rate of new wells added has actually dropped, yet production still keeps going up linearly at 3 BCF/d/year. NOT TRIVIAL. And what has made the Marcellus the biggest NG producing trend in the country in just a few years (and sidelined you from NG drilling in the GOM). This is an example of keeping AHEAD of the Red Queen. Kicking her shiny red butt. 🙂

  4. meld on Thu, 25th Sep 2014 4:36 am 

    Increased efficiency brings decreased resilience. When someone says something is becoming more efficient the first thing that springs to mind is how much more fragile it is becoming to outside shocks or black swans.

  5. Davy on Thu, 25th Sep 2014 5:47 am 

    Ada, what you are describing is the bumpy plateau we are on as a complex interconnected global system bumping into limits of growth with diminishing returns with our systematic productivity. The other side of the coin is a population in overshoot to carrying capacity with world ecosystem either in decline, with systematic failures, and scattered destroyed ecosystems. This is both plant and animal species and land and water systems. Deadly pollution is increasingly unmanageable. The population sustainability and resilience are both brittle to change and fragile to failure. The whole system is losing energy with declining quality and declining growth of the quantity of its primary liquid fuel hydrocarbons. The population is fed by a vast monocultures of food sources with diverse locations that must be distributed with energy intensity long distances to be effective food sources. The system’s all-important financial structure is in a debt bubble threatening the production of vital goods in a just-in-time, energy intensive, and vast system of distribution. This financial system is nothing more than a confidence based system allowing monetary liquidity to allow trade and support this vast distribution system. This financial system is increasingly parasitic destroying the social fabric through a wealth transfer to a small class of wealthy from the productive middle class. As frogs in a pot or yeast in a dish we have been conditioned by 200 years of growth so we fail to see the creeping collapse. The complexity hides the fragility to a collapse. The complexity with its corresponding efficiency in this system has a strong resilience within the parameters of all vital support variables being in place. IOW having gas to fill its tank. What good is that SUV of BAU without gas? We can address shortages and problems reasonably well and have for years because we have gas for BAU (so to speak). The problem is we are at the point where the smallest of issues can derail the train of this business-as-usual. The dangers are really a matter of systematic risk at this point. In 3-5 years the issue is liquid fuel decline despite what the cornucopians crow about. At minimum liquid fuels will stop growing and with it the economy. This GROWTH oriented economy can’t stop growing or trade grinds to a halt. Creeping food shortages are very near. Our geopolitical multipolar world is fragmenting with trade wars, cold wars, and vital regions as hot conflict spots. I do not see the climate a serious issue for 10 years but the climate is an ever present black swan with abrupt climate change always possible. The system has so much fragility and brittleness that multiple black swans of known potential contagions and unknown contagions lurk. The above is a word salad as Marmico calls it but it tries to describes that aspect that is abstract and represents the most fundamental risk and that is everything working together to allow a complex state to continue. In this situation of vast complexity and self-organizing events and processes the probability of deadly chaos and dysfunction entering this system is increasing with every increase in complexity and decrease in vital imputes. IOW, the randomness of descent can strike at any point without notice like an earthquake. We are not OK but it appears OK. I hope we have 5 to 10 years but I suspect 3-5 years. Then all hell is going to break lose.

  6. Davy on Thu, 25th Sep 2014 5:55 am 

    Meld is right on track!

  7. karellan on Thu, 25th Sep 2014 10:09 am 

    “The shale revolution was launched because of breakthroughs in a range of technologies, most notably advances in horizontal drilling paired with advanced hydraulic fracturing.”

    Statements like these are supposed to instill so much hope in readers. Oh boy! When shale starts to fail us, some new technology will come along and we’ll all still be fine! Except directional drilling was invented back in the 1920s and fracking was invented in the 1940s, so innovation is clearly not the driving force here. The price of oil went up to the point that previously unprofitable technology started to make economic sense, and the easy oil all dried up, eliminating other options.

    Innovation doesn’t do us much good if the cost of those techniques prices everyone out of the game.

    It’s no wonder issues like peak oil and climate change are so difficult to get through people’s heads when articles like this one are so misleading. If you actually take the time to put two and two together, you can see right through this, but most people don’t have the time or inclination to do it. The author should be ashamed of himself. This is unethical.

  8. Nony on Thu, 25th Sep 2014 11:12 am 

    If all the geology and all the technology was known so long ago…why is the Marcellus growing like crazy NOW instead of years ago? (Given NG prices are low and that shale is actually outcompeting conventional sources?) Also, why did IPs (and EURs) improve from year to year during the development of the play?

    No the technology is not “new” like the Manhattan Project. But there has been an iteration of techniques and capabilities to do extraction from shale.

  9. meld on Thu, 25th Sep 2014 5:49 pm 

    It’s called a bubble nony. People convince themselves that something is the next big thing, they pump loads of money into it, the price drops when they all extract too much, they pile debt on debt to keep it all going while trying to convince everyone that it’s the steal of the century so they can get more loans. Then the bubble pops and everyone points out how they knew it was a bubble all along. It happens again and again and again and again and again and again and again….

  10. Nony on Thu, 25th Sep 2014 10:52 pm 

    Go SHALE!

    46.5 MMCF/day IP

  11. Nony on Thu, 25th Sep 2014 10:56 pm 

    “We believe that this new discovery on the Stewart Winland Pad announced today represents the greatest flow rate and one of the highest sustained flowing casing pressures of any Utica well drilled in the entire play of Ohio and West Virginia. Additionally, it is one of the highest flow rate gas wells ever reported in any shale play located in the U.S. The initial shut-in casing pressure of this monster well was 9,050 psi. Even at a gas flow rate of 46.5 MMCF and choke size of 32/64 inches, flowing casing pressure was maintained at 7,810 psi. We look forward to further extending this play to the south with our existing lease acreage position.”

  12. Davy on Fri, 26th Sep 2014 5:31 am 

    Noo, that sounds great. You crowed some big fancy words too that blew past my feeble mind. I am happy for you and your friends at Winland pad. Can you increase these results 1000 times and in 6 months to help out the rest of the world? I want more than gas too Noo give us some oil. I do believe you understand we are part of the rest of the global interconnected world. You do realize this world depends on each other? So, NOO, when problems with energy start cropping up elsewhere that is going to hit home. You do realize that don’t you NOO. I don’t want to destroy your thunder I just want you to be realistic about the “no time, no money” predicament we are in as a global people.

  13. Nony on Fri, 26th Sep 2014 8:39 am 

    The benefits will mostly be restricted to North America because natural gas is hard to transport.

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