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Shale Gas and Tight Oil: Boom? Bust? Petering Out?

The oil and gas industry promises “a few days of fracking” for “decades of … production.” But is it true?

Believe it or not, some people don’t buy the fracking boom story. Some predict bust. Others, more of a petering out. What gives? Let’s begin with a story about a lunch.

Lunch with a Skeptic

In the spring of 2008, I was anticipating a lunch meeting with Matthew Simmons. In the oil and gas industry Simmons was considered something of a legend or a pariah, depending on one’s point of view. Either way, he was an iconoclast.

Having served as an energy advisor to President George W. Bush, Simmons had become increasingly concerned about Saudi Arabia’s ability to keep its oil spigot flowing indefinitely. In his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” (Wiley, 2005) Simmons predicted that, with Saudi Arabian oil past peak production, hard times would fall on a world disproportionately dependent on Saudi oil to power its cars and stabilize prices.

Was he right? A good deal of debate surrounds the answer; some have said he was off his rocker, others have called him prescient (see here and here).

And while his predictions of $200 per barrel of oil by 2010 never came to fruition (prices peaked at about $145 per barrel in 2008 — click on chart below for history of prices), the financial crisis of 2008 might have had something to do with that.

weekly oil and gas prices

The left axis/red line represents the weekly West Texas Intermediate spot price per barrel, the main benchmark for North American crude. The right axis/blue bars indicate the U.S. weekly average per-gallon retail price for all grades. (Data sources: Weekly Cushing, Oklahoma WTI Spot Price and Weekly U.S. All Grades All Formulations Retail Gasoline Prices)

 

Talk of Bluster on a Blustery Day

Anyway, back to the lunch. I remember the day as sunny and blustery. Through the windows the trees swayed to and fro and the flowers on the azaleas held on for dear life. Inside, things were popping too; Simmons was full of energy, warm, forthcoming and absolutely sure of himself.

Eventually the conversation turned to shale gas, a topic whose buzz about the coming shale gas revolution had just begun to reach a fevered pitch. A couple of years later many experts (and some non-experts, such as yours truly in posts like this and this) would hail shale gas as a “game changer.”

But Simmons distanced himself from those “experts.” “It’s all hype,” he told me over lunch that blustery day, a sentiment he later conveyed to energy consultant Steve Andrews (co-founder of the Association for the Study of Peak Oil & Gas USA): “I’ve never seen the industry hype something crazier.”

When I asked him about such characterization, Simmons explained it had to do with the long-term productivity of fracked wells. The industry was claiming (and still is, by the way) that a single fracked well “can be in production for 20 to 40 years.” If it’s true, it’s quite a deal — frack a well, then stand back and pump out energy and profits for decades.

But the unconvinced Simmons argued that he’d seen the data from existing fracked wells and they simply did not support a decades-long production curve. He was convinced that the productivity of fracked wells rapidly declined with time — by 70 percent in the first year and another 20 percent in the second year, leaving only 10 percent for all those supposed decades of production.

That lunch-time discussion was memorable and I was saddened to learn a couple of years later that Simmons had died.

Was He Wrong About Fracking?

Was Simmons just plain wrong about fracking and tight oil and shale gas? One could argue he was. Because of shale gas, natural gas prices are as low as they’ve been in more than a decade, coal usage in the United States is down, and tight oil production in the Bakken and Eagle Ford formations is on the rise. Because of tight oil and shale gas, America’s energy prospects have never been brighter. A recent report by the International Energy Agency predicts that the United Sates will become the world’s largest oil producer by 2020 and a net oil exporter by 2030.

Maybe Not

And yet, while the fracking business is booming, there are some naysayers out there who have argued that this particular king has no clothes. (See here, here, here and here.)

Now add J. David Hughes of the Post Carbon Institute to the naysayer list. Seeming to channel Simmons in the Comment section of last week’s edition of the journal Nature, Hughes claims that “the production of shale gas and oil is overhyped.” As Simmons did, he points to the rapid decline in production rates of fracked wells. Having studied the data from 65,000 U.S. shale wells from 30 shale-gas and 21 tight-oil fields, Hughes concludes that

“Wells decline rapidly within a few years. Those in the top five US plays typically pro­duced 80–95% less gas after three years. In my view, the industry practice of … inferring lifetimes of 40 years or more, is too optimistic.”*

Hughes argues that to keep total production up in the face of declining production from existing wells, the industry will need to continue to drill more and more wells in less productive areas — making the whole enterprise less profitable. Either production will halt or energy prices will head upwards.

Hughes closes out his comment with the following not-so-optimistic assessment of the promise of shale oil and gas:

“Governments and industry must recognize that shale gas and oil are not cheap or inex­haustible: 70% of US shale gas comes from fields that are either flat or in decline. And the sustainability of tight-oil production over the longer term is questionable. … Declaring US energy independence and laying plans to export the shale bounty is unwise.”

Could be that despite fracking and its current bounty, we’re not going to be able to drill our way to energy security after all.

__________________________

End Note

New data [pdf] by the U.S. Energy Information Administration shows a similar steep drop-off in well productivity.

Content Discussion

John Miller's picture
John Miller on March 1, 2013

Bill, Mr. Simmons could be right this time or he could again be wrong.  We have all been exposed to the potential threat of running out of domestic hydrocarbon reserves since Hubbert’s peaking oil theory published in the 1950’s and many Government sponsored studies since.  Why have these predictions failed to fully materialize?  New technology developments.  Many 50+ year old conventional oil fields within the U.S. should have been fully depleted decades ago.  With the development of new secondary and tertiary production technologies (heat, fluid displacement, etc.), many of these aging wells are still producing today.

U.S. conventional natural gas production peaked about 10 years ago.  What changed?  New hydraulic fracturing technologies.  Yes, all wells will deplete eventually and possibly over shorten periods of time then what some special interests may advocate, but to assume that technologies will stagnate, leading to rapid depletion in the next few years is not necessarily a good assumption.  Even hydraulic fracturing, which is a relatively new technology, will be further improved in coming years.  This will not only extend the life’s of existing production fields, but will also make existing low yield formations possibly more economical in future years.

I agree with Mr. Hugh’s comment that hydraulic fracturing is more expensive than conventional gas production, however, if it were not reasonably economic currently we would not be witnessing flooding of the markets with excess supply, depressed market prices and increased pressure to allow exports.  I suggest you research the level of recorded proven crude oil reserves in the U.S. over the past 50 odd years to see that they have yet to show rapid depletion as Hubbert predicted many years ago.  Today the largest risk to gas and oil reserves depletion has been the Government shutting off access to new development of Federal lands/off-shore.  That’s why the majority of recent production has come from private and state lands.

Geoffrey Styles's picture
Geoffrey Styles on March 1, 2013

Bill,

There's nothing wrong with a little healthy skepticism, but with all due respect to Mr. Hughes, his leap from the decline rates of individual wells to his categorization that " 70% of US shale gas comes from fields that are either flat or in decline" is not warranted, when most of the slowdown of growth in these fields is a response to current low gas prices and the expiration of contractual requirements to "hold leases by production."  Drilling fewer wells because they're currently unprofitable certainly slows output, but that is not the same as a decline driven by geology and the limits of the technology. 

David Lewis's picture
David Lewis on March 2, 2013

Consider the argument that climate science is a hoax perpetrated by a world wide conspiracy of liars bent on ending the free enterprise system.  Doesn't that argument seem remarkably similar to your argument that claims that fracking technology has fundamentally changed the global energy outlook are "all hype"? 

Robin Mills wrote The Myth of the Oil Crisis to explain in depth why he was skeptical about "the peak oil is upon us now" theory.  He wrote Capturing Carbon because he believes the global fossil fuel energy system "threatens catastrophic climate change".  These books establish Mills as one who can argue persuasively from a deep understanding of both the fossil fuel industry and climate science.  

In this article "Greed and ingenuity in US turns drillers into gas-price killers"  Mills points out that "analysts are extrapolating the US experience around the world", and comments that "the certainties that once put the Gulf at the centre of the energy map have been shaken to the core".  

 

Stephen Nielsen's picture
Stephen Nielsen on March 7, 2013

Such worries are, of course, rendered moot and unnecessary in a 100% renewable world. Take the potential for scarcity out of the picture, and you take crisis, resource wars, a large portion of the greed and a large portion of the pollution out of the picture as well.  Renewables may not be completely there yet, but the goal of a world fully powered by inexhaustible energy sources is currently a far more worthy goal for humanity than any goal of a trip to some distant planet. Regardless of climate change, this is what we as a nation and a species should turn our most ardent efforts toward.

Charles Weber's picture
Charles Weber on March 7, 2013

         It is a fallacy that gas prices are high. Gas is probably selling for one quarter what it would cost to make it out of limestone. It is stupid to be using our petroleum for trivial purposes such as keeping warm or surface transportation. It should be confined to making lubricating oil and plastic or aerial transportation. Burning oil is like burning your furniture to keep warm.     

        A moratorium had been imposed on ocean drilling, It is not ocean drilling that should be stopped, it is terrestrial drilling and even pumping. Ocean wells are too easy to sabotage in a war. So it is poor policy to suck our terrestrial oil dry during peacetime. Of course we should have floating steel barriers standing by in the case of Gulf oil. It is insane to allow oil to flow out across the ocean unimpeded.

       Everyone is stressing excessive use of fossil fuels as causing a green house affect on climate. However, that is the least of our problems. Sucking our petroleum reserves dry, even our oil shale, will have disastrous consequences in the future on our economy (USA) and our security, especially military security. We should use foreign fuel as much as possible as long as they are selling it for one fourth of what it would cost to synthesize it out of limestone.. If we lose our freedom to the likes of Hitler, Osama Bin Ladin, or Stalin it will not make any difference what the temperature outside is. Life will not be worth living anyway.

      As for using food to make liquid fuel in a world where people are starving to death, goes beyond stupidity and starts to nudge against insanity.

      Increase in atmospheric carbon dioxide is undoubtedly increasing climate warmth somewhat. However I suspect that at least as great an affect on warmth is the baring of soil by increase in annual crop acreage, roads, buildings, grazing, and desertification currently. You may see an article that briefly discusses this and gives some solutions in more detail in  http://charles_w.tripod.com/climate.html  .

             Sincerely,  Charles Weber

 

 

Asher Miller's picture
Asher Miller on March 7, 2013

Mr. Styles, I'm curious to know if you read Mr. Hughes' report. He did type decline curves for all plays and also shows that the number of wells has gone up significantly while productivity per well has gone down. You can see this at a glance by just looking at the charts: http://shalebubble.org/graphs/.

This is about geology. If the price goes up (which it must to justify continued drilling), it will just mean that the decline -- once sweet spots are drilled and depleted -- will be all the sharper.

Bill Chameides's picture
Bill Chameides on April 5, 2013

John, Let’s wait and see. But it’s kind of interesting that experts are beginning to point at fracking and suggest that the emperor has no clothes.

 

Bill Chameides's picture
Bill Chameides on April 5, 2013

Geoffrey, I believe that once a well is completed, the gas comes out at its own rate. It does not respond to the price of natural gas.

 

Bill Chameides's picture
Bill Chameides on April 5, 2013

Wayne: Not a case of shale fields reaching a peak. It’s a question of how long an individual well continues to yield gas at an appreciable rate.

 

Bill Chameides's picture
Bill Chameides on April 5, 2013

David: Not “hype” in this case because of a hoax. Hype because of a mistaken assumption of how wells will produce over time. Big difference there.

 

David Lewis's picture
David Lewis on April 6, 2013

If your view that there may be more hype than gas in these horizontally drilled fracked wells is correct, it means Exxon-Mobil was not capable of assessing the value of its largest single investment since it bought Mobil Oil in 1999. 

I.e., consider the Exxon-Mobil purchase of the then biggest US shale gas producer XTO in 2009 for a reported $30 to $40 billion.  (see:  The Economist: “Unconventional“, or the NY Times: “Exxon-XTO Deal Forces Congress to Reconsider Natural Gas“)