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Why The Shale Revolution Is Not About To End

Why The Shale Revolution Is Not About To End thumbnail

Doubts about the sustainability of the North American oil and gas boom centre on rapidly declining output from many shale wells after they are initially drilled.

Shale sceptics point to the need to drill an ever-increasing number of new holes just to replace the declining output from existing wells, let alone expand production. At some point it will become impossible to keep up, they argue.

The problem has been likened to the Red Queen’s Race in Lewis Carroll’s “Through the Looking-Glass” where the chess piece warns Alice that “it takes all the running you can do, just to keep in the same place”.

Geologists have worried about the problem of replacing declining output from old wells for more than a century. U.S. geologist Carl Beal voiced concern that the “limit of production in this country is being approached” as long ago as 1919.

“Although new fields undoubtedly await discovery,” he wrote, “the yearly output must inevitably decline, because the maintenance of a given output each year necessitates the drilling of an increasing number of wells.”

“Such an increase becomes impossible after a certain point is reached, not only because of a lack of acreage to be drilled, but because of the great number of wells that will ultimately have to be drilled,” Beal explained in a careful monograph for the U.S. Bureau of Mines on the “Decline and Ultimate Production of Oil Wells”.

Ultimate Recovery

Shale’s doubters point to the faster decline rates on horizontally drilled and fractured wells bored into shale compared with conventional wells drilled into more-permeable reservoirs to suggest the replacement problem is much worse for unconventional oil and gas plays.

But there are plenty of reasons to think the focus on decline rates is misplaced and is unlikely to constrain North American oil and gas output in the next decade.

First, oil and gas producers have learned to drill and fracture wells much faster, using mass production techniques borrowed from manufacturing, so the same number of rigs and crews can drill many more wells than before.

Second, the sceptics focus too much on the decline rate rather than the total amount of oil and gas recovered from a well over its lifetime, which is more relevant to the sustainability of the shale revolution.

The relationship between initial production (IP), the decline rate (DR), and the estimated ultimate recovery (EUR) is subject to tremendous uncertainty. It varies significantly from play to play, county to county and even well to well.

But in general, producers want oil and gas wells with a large EUR and high IP, because that means they receive more revenue overall, and more of it in the first few months after the well is completed rather than having to wait for years.

Wells cost millions of dollars to drill and fracture, and all the costs must be paid up front, either by the producer using their own funds or with borrowed money. The faster the oil and gas are produced, the faster the costs are covered and the more profitable the well will be.

Well Decline Curves

From a financial standpoint, rapid decline rates are not a problem. What matters is the EUR. But the relationship between IP, decline rate and EUR is fairly loose and notoriously difficult to pin down.

There is some evidence to suggest oil and gas wells that have high initial flow rates tend to decline fastest but yield the most oil and gas over their lifetime.

“In general, wells of small initial yearly production decline more slowly than those of large,” Beal said of conventional fields. But the more barrels per day a well produced in its first year of production, the more it was likely to produce during its lifetime.

Still, it remains notoriously tricky to predict ultimate production accurately from initial flow rates because there is so much variability and the data is not readily available.

(There is a clear data availability bias in much of the published research. Most analysis uses commonly available data on the total number of wells and average daily production for large aggregates, such as whole states, and then tries to draw conclusions about the sustainability of shale production, even though such numbers are not really relevant.)

For individual wells and plays, forecasters use “decline curves” based on the average of past experience to estimate how much oil and gas a well might eventually produce.

Even so, the forecasts can be out by a wide margin. “Estimates of future production based on the first few months of initial production can differ significantly from later estimates for the same well,” according to the U.S. Energy Information Administration (EIA).

For example, one well examined by the EIA was predicted ultimately to yield 574,000 barrels of oil based on the first year of monthly production data, but that was later slashed to just 189,000 barrels once four years of data was available.

In another case, an initial EUR of 105,000 barrels based on 12 months of production data was raised to 224,000 barrels based on four years of data.

In general, however, it is possible to make a reasonably stable and accurate forecast of EUR after about three years, when almost all wells will have produced more than half their eventual output, according to the EIA (“U.S. tight oil production: alternative supply projections and an overview of the EIA’s analysis of well-level data”, April 2014).

Productivity Boom

There is plenty of evidence that oil and gas production companies are improving productivity and extracting more oil and gas from each shale well.

The EIA analysed EURs from more than 5,000 wells drilled into the Eagle Ford shale formation in Texas . The average EUR was almost 170,000 barrels, but it has been rising, with wells drilled in 2012 (191,000 barrels) and 2013 (169,000 barrels) far more productive than wells drilled near the start of the play in 2009 (57,000 barrels) and 2010 (117,000 barrels).

There is enormous variability in the play, with wells in DeWitt county expected to average 334,000 barrels compared with 226,000 in Karnes and 80,000 in Webb. Even in DeWitt, EUR varies from 98,000 barrels (25th percentile) to 440,000 (75th percentile).

But across the United States there is a clear trend of rising average EUR from shale wells.

Productivity improvements can be traced to several factors. Shale producers are drilling and fracking longer laterals, increasing the amount of shale accessed by each well.

Through a combination of trial-and-error and better seismic work, drillers are increasingly able to target the highest-yielding parts of shale plays, improving average recovery factors and minimising the cost of drilling subpar wells.

Other productivity improvements are in the pipeline. In most sedimentary basins, including North Dakota’s Bakken and west Texas’s Permian, there are multiple oil- and gas-bearing formations, layered one on top of another like a stack of pancakes. The most advanced drillers are experimenting with wells that have several laterals at different depths to produce from different formations all from the same surface hole.

Well-spacing is another area where improvements are being tried. Minimum spacing is set to ensure two wells do not communicate with one another underground (drain the same part of the formation). But the minimum gap between wells is being reduced to cover the whole shale formation more completely as producers learn more about how big an area each well drains.

Individual shale wells are therefore becoming more productive, and plays are being exploited more efficiently and completely. And there are good reasons to think that the shale revolution is still in its infancy, with scope for further efficiency as current best practice is applied more widely.

There are also plenty of other shale plays in the United States, and internationally, with subtly different geology, which makes them harder to produce at present, but which might be brought into successful production with comparatively minor innovations.

For all these reasons, the shale boom is not about to bust any time soon. As long as the oil is needed, and prices remain fairly high, shale production is set to grow.

15 Comments on "Why The Shale Revolution Is Not About To End"

  1. rockman on Fri, 29th Aug 2014 9:24 pm 

    “For all these reasons, the shale boom is not about to bust any time soon.” But only as long as “prices remain fairly high”. Well Da! LOL.

    And with respect to newer wells being “far more productive than wells drilled near the start of the play in 2009”. And for a good reason: early wells were drilled with shorter laterals and just several frac stages. Recent wells are drilling much longer laterals often with 20+ frac stages. In fact in many currentbwells the frac’ng phase now costs more then the drilling phase.

    But the plays will continue to be developed as long as higher oil prices support the effort. But I find that such articles intentionally ignore THE most important aspect of our shale boom: while the US is producing more oil today this “success” has come at a huge expense. The US consumer is spending about 3X as much for oil now as when we were producing less. And despite importing fewer bbls we are sending more $’s overseas then when we were importing more.

    As I’ve pointed out numerous times the US consumer doesn’t give a rat’s ass how much oil we produce. They care about how much their fuel costs. So once again I’ll ask for a simple poll: how many here would prefer the days when the US was producing less oil and gasoline cost $1.95/gallon or the current situation where we’re producing more oil and paying $3.65/gallon?

    With the exception of the Rockman and a few other oil patch here no one should prefer the current situation. Debating what the EUR of the shale plays might be is a waste of time IMHO. It’s a false premise that tries to ignore the damage done to our economy by the higher oil prices that gave us the shale boom.

    But I know my words won’t stop the discussion. Those who wish to focus on EUR’s and production rates must stay the course. Otherwise all they would have to discuss is the economic damage being done to our society by the POD. And that would be a real bummer, dude. LOL.

  2. sunweb on Fri, 29th Aug 2014 11:11 pm 

    I believe much more damage is being done with fracking than economic. And I believe this will be longer term and far more disastrous for future generations. It is direct environmentally and indirect.

  3. MKohnen on Sat, 30th Aug 2014 12:39 am 

    Hey, Nony,

    “As long as the oil is needed, and prices remain fairly high, shale production is set to grow.”

    Um, I thought you told us that fracking could support much lower prices. In fact, I believe lower prices are what you, Lynch, and Yergin are predicting. So does Rigzone have it wrong? Cause I’ve always viewed Rigzone as rather cornucopian.

    As for EUR, correct me if I’m wrong, but who (outside of the O&G industry) gives a crap. Since I’m a user, not a shareholder, all I care about is price and availability. EUR says nothing about the rate of production. If the rate can’t be maintained, fuel becomes scarce, and the price goes up. BAD FOR CONSUMERS! BAD FOR THE ECONOMY (outside of O&G industry.) Effectively, peak oil! Collapse of economy! End of shale revolution!

  4. marmico on Sat, 30th Aug 2014 4:59 am 

    With the exception of the Rockman and a few other oil patch here no one should prefer the current situation

    Talk about the counterfactual with the steelmakers, truckers, heavy equipment operators and assemblers, aggregate, cement and barge operators, construction workers, railway tank car assemblers, accountants, attorneys, restaurant and accommodation staff, etc.

    One person’s spending is another person’s income.

    Do not overlook that the shale revolution also includes increased natural gas production which has translated into lower household gas and electricity prices relative to the prior trend.

  5. Kenz300` on Sat, 30th Aug 2014 5:02 am 

    Climate Change —- we need to get off of fossil fuels….


    Years of Living Dangerously Premiere Full Episode – YouTube

  6. Nony on Sat, 30th Aug 2014 6:02 am 

    If we didn’t have the LTO coming in, prices would be even worse: 150+.

  7. marmico on Sat, 30th Aug 2014 6:38 am 


    Yes, Rockman’s POD analysis completely misses the point. Well he gets an A+ for geology but a D for economics. The U.S. shale oil revolution commenced when WTI hit 100+. It is quite disingenuous to compare gasoline prices from a point in time in the past when, for instance, the EFS field in 2008 extracted a nominal (rounding error) amount of domestic hydrocarbons.

  8. JuanP on Sat, 30th Aug 2014 8:48 am 

    This article is BS.Booms always go bust. The longer and higher the boom, the louder the bust!

  9. Nony on Sat, 30th Aug 2014 12:46 pm 

    MKH: you must be confusing me with one of my double-logins. I’ve always said that the shale oil turns off at low prices (we even saw this in 2008-2009).

    But the Marcellus gas is pretty interesting. Those fields are making money with sub 3$ wellhead gas. It really is a might source. Not geology or price limited. Takeaway limited. Displacing conventional production. Kicking Haynesville ass. Kicking Rock’s gas drilling out of the Gulf.

  10. Charles on Sat, 30th Aug 2014 1:14 pm 

    Natural gas and coal costs are at an equivalent btu at about $35@ barrel. Oil will get there in about 10-15 years. Maybe a bit less.

    What will drive the price of oil to $35@ barrel however, will not be added oil production. Rather it will be that natural gas houses trains trucks and buses plus electric cars will drain off demand and thereby collapse the price of oil.

    I’m actually hoping that the price of oil stays over $90@ barrel for the next couple of years so that US oil production can rise to 14 million barrels@ day. That’s what would make the USA oil independent. Currently the EIA predicts that US oil production will go up by 1 million barrels @ day for 2014 & 2015 and then flatten out. However, they’re behind the curve currently it looks like US oil production will will increase by at least 700k barrels@day from 2016 through 2019….IF oil stays over $90@ barrel or so. Oil at $80@ barrel slashes into new oil drilling.

    This rapid rise in US oil and gas production is literally shifting capital flows around the world.

    Then once the USA is fully oil independent –that’s when I’m hoping the really big stuff starts to happen.

    The really big stuff –I’m hoping –will happen after 2020 when rising natural gas use in buildings trains trucks & buses plus electric cars collapses demand for oil and forces the price of oil down.

    This will cause an explosion of wealth around the world as it did in the 1990’s.

  11. adamx on Sat, 30th Aug 2014 2:32 pm 

    “There are also plenty of other shale plays in the United States, and internationally, with subtly different geology, which makes them harder to produce at present, but which might be brought into successful production with comparatively minor innovations.”

    This is the kicker. How much will it cost to produce, how much is available, and how “minor” are those innovations? It’s clear that there is more out there, but there is some point at which it is not economic to produce, PERIOD. We’ve seen that the uneconomic price is over $100 a barrel. Our need for fossil fuels is only growing on a global scale.

    In order to produce from the new wells that he asserts are plentiful, the price will have to rise. It’s been fairly steady but at some point we’ll have to go for those harder to get resources. I suspect the economy can keep going, not as well but certainly not badly, if oil goes up in price to $150 or $200. I expect there would be an economic crisis and return to “normal” much like the current one (where normal for most people is slightly worse than before).

    This cycle can only repeat so many times, but it seems to me as though it could do it at least once more. Really, though, it’s all speculation. One thing I DON’T think we can count on is another long period of low prices like the 90’s.

    Right now, oil is still relatively cheap. People can afford to feed cars in the west. How long will it last?

  12. Charles on Sat, 30th Aug 2014 4:32 pm 

    “There are also plenty of other shale plays in the United States, and internationally, with subtly different geology, which makes them harder to produce at present, but which might be brought into successful production with comparatively minor innovations.”
    The real play is in the Permian basin. That basin alone can grow by 500k to 1 million barrels @ day annually for the next 6 years.

  13. JuanP on Sat, 30th Aug 2014 7:04 pm 

    Charles, At first I wondered if you were kidding, but on seeing your second comment, which is not funny, I have to conclude you are for real. I envy your optimism, and hope you are right, but I fear you are terribly wrong.

  14. JuanP on Sat, 30th Aug 2014 7:09 pm 

    Adamx, good comment. I hope you are right and we can recover from the coming bust, but like you pointed out sooner or later one of these busts is going to destroy the global financial system and do us in, IMO.

  15. Nony on Sat, 30th Aug 2014 8:09 pm 

    I’m more worried about the financial system than about oil getting harder to find.

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