Posted on 11/17/2013 5:44:15 PM PST by ckilmer
Two recent well-respected and long-running oil industry publications have proclaimed that booming production in North America, particularly in the U.S. shale fields, will hit a plateau as early as 2016 and that production declines will follow soon thereafter. Last week the Organization of Petroleum Exporting Countries (OPEC) set the decline date sometime before 2020 and this week the International Energy Agency (IEA) set the 2016 plateau date.
The boom in U.S. production is set to displace Russia as the top oil-producing country by next year. Had you said this to anyone five years ago, you might have been laughed out of the room. And as both OPEC and the IEA have made clear, the U.S. is not likely to stay on top for long.
That view is not widely shared among the companies that are operating in the Bakken shale play or the Niobrara or the Eagle Ford or the Permian Basin or any of a number of other shale regions. In fact, more than one company think that the boom is just getting underway.
We should assume, of course, that both sides are talking their book, but if we take a look at what’s happening in the shale plays, the scales tip in favor of the operators and away from the cartel and the IEA for two basic reasons. First, technological advances, and second, the vast size of the resource.
Technology first. Continental Resources Inc. (NYSE: CLR) is the largest leaseholder in the Bakken shale play and has been working the field for the longest time. In its third quarter earnings report the company said it had reduced its average well cost to $8 million, two months earlier and $200,000 below its target price. Much of this savings is related to a new technique where one well-pad serves several wells, each of which is draining a different part of the oil-bearing rock.
According to an engineering manager at oil field services giant Schlumberger Ltd. (NYSE: SLB) told Platts that U.S. shale production is only going to go up. His reasons: the vast size of the resource and growing familiarity with it. He also said that there’s plenty of room to improve extraction techniques and minimize the pushback from environmental groups. In the Eagle Ford shale play, for example, Schlumberger now uses well log data to determine the first five wells to drill in a new area. The technique has improved production by 33%.
Everyone knows that fracked wells produce at their maximum level within a very short period of time compared with conventional vertical drilling techniques. Everyone also knows that the maximum level of production tapers off just as quickly and has a very short tail. What not everyone knows is that horizontal drilling techniques and hydraulic fracturing currently recover less than 20% of the oil in place, and in some places even less than that. As technology improves and gets cheaper, companies will return and squeeze more oil out of the reservoir.
Another area where technology has vastly improved is in water consumption. A Texas company is developing technology that uses no fresh water and others have figured out methods for reclaiming 95% of the water used in fracking operations.
Total production costs have fallen from around $80 a barrel three years ago to around $50 to $60 a barrel today at the most advanced producers’ sites. As WTI prices continue to slide, wringing out production costs will become more important than ever. Energy consulting firm Bentek has said that even if oil prices fall to around $60 a barrel production will continue to grow.
We’ve already noted that Continental Resources and Schlumberger are advancing drilling technology and making money while doing it. Other publicly traded firms developing better and cheaper ways of extracting oil include SAP AG (NYSE: SAP), which has developed technology that allows a drilling company to monitor the operation of thousands of pieces of equipment in real time from a single location. The software has cut maintenance and repair time in half, and when downtime can cost half a million dollars a day, the software quickly pays for itself.
Chevron Corp. (NYSE: CVX) currently reuses all the water it uses for drilling in the Marcellus shale play in Pennsylvania, and reuses about 80% of the produced water that flows from producing wells. The company believes that regulatory agencies could soon require that 100% of the produced water be recycled, and it is aiming to do just that.
The fastest growing segment of General Electric Co. (NYSE: GE) is its oil and gas equipment business which contributed more than $15 billion to the company’s 2012 revenues and more than $2 billion to earnings. Like SAP, GE is getting into the big data business as a complement to its existing work as a designer and manufacturer of compressors, turbines, generators, and other drilling equipment.
Will the fracking revolution carry the U.S. to the top spot in global oil production? Absolutely, but the question is how long can it stay there. OPEC and the IEA reckon not for long. But given the size of the resource and the number of big, experienced firms that continue to invest billions of dollars in technology to get even more out of U.S. shale plays, expecting U.S. production to peak in less than six years seems like a foolish bet.
So, if everyone starts fracking....will oil go dirt cheap again?
Without cheap(er) energy, manufacturing will never return to this country en-masse.
If we look at declining energy costs combined with rising labor costs in Asia-Pacific, the conditions are shaping up nicely for a manufacturing renaissance in America.
Just my humble opinion based on what I'm reading. I could be wrong.
Yabut....will they use robots...or union thugs?
Obama will continue fighting fracking, on behalf of his Saudi ‘Miss Havershams’, while claiming credit for its success, in standard Democrat schizophrenic form.
If we look at declining energy costs combined with rising labor costs in Asia-Pacific, the conditions are shaping up nicely for a manufacturing renaissance in America.
Just my humble opinion based on what I’m reading. I could be wrong.
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Yes, I think you’re right. There is an economic reversal in the works as big as what happened during the 1970’s when you US oil production peaked, saudi oil production zoomed upward and the first OPEC oil strike came and pushed up oil prices.
The Renaissance in manufacturing will not be limited to oil/natural gas intensive industries. But that’s another story.
Yep. He just gave a speech claiming credit for increasing U.S. energy production and jobs—although I think he said that it was his green energy schemes that did it.
So, if everyone starts fracking....will oil go dirt cheap again?
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Right now oil at $60@ barrel looks to be in the cards in a couple years. I think that would push gas prices to under $2@ barrel.
I think gas prices will fall further in the USA over the next 5-10 years. The pressure on prices will be mostly downward in the USA because of rising supply and stable to falling demand.
Even if economic activity in the USA rockets upwards as will happen if Obamacare is killed—improved fuel economy and truck/bus conversion to natural gas will dampen demand for gasoline. Ten years from now if the electric car comes down in price and improves in performance—then the electric car will start to cut into demand for gasoline—and thereby undercut the price of oil.
And, I’ve got high hopes for GTL technology for motor vehicle fuels. We’re the Saudi Arabia of NG.
the conditions are shaping up nicely for a manufacturing renaissance in America.
Yabut....will they use robots...or union thugs?
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robots and 3d printing plus cheap energy. (union states will be out of luck)
But remember this is a big secular change that will work out over a couple decades—just as high oil prices decapitalized the USA over a couple decades starting back in the 1970’s.
Good...I'm in a union state.....Ska-rew them.
Do you understand how many decades it took us to change 20% in traditional reservoirs to 30%, and tertiary methods to 40%?
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My understanding is that oil drilling for the last 150 years before the current technological improvements — only extracted something like 10% of “oil in place”
This article suggests that current technology will pull out another 20% of “oil in place” — leaving something like 70% of the “oil in place” still in the ground.
What do we mean by “oil in place” We’ve had these discussions before. I believe it was you who mentioned that there was something like 400 billion barrels of “oil in place” in the baaken. But that commercially extractable oil represented something less than 10% of that number. As well, recent reports that there was something like 50 billion barrels of oil “in place” in the woodford cana formant ion did not mean that that much oil could be commercially exploited. Rather only some small fraction of that number was actually commercially drillable.
I’m all for this, but I hope everybody understands that this buys us a LIMITED amount of time to find better/actual practical renewable energy, like thorium nuclear power, fusion (hot or cold) and so on. The trick bag for drilling oil will eventually run out of tricks.
At the end of this century, people (if any) will wonder what the hell we were thinking when we were burning incredibly useful oil to go places and for heat.
I’m all for this, but I hope everybody understands that this buys us a LIMITED amount of time to find better/actual practical renewable energy, like thorium nuclear power,
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I don’t disagree even a little.
This stuff will buy the USA easily 30 years—which is plenty of time to bring thorium reactors onstream.
I think thorium reactors will happen much sooner. The demand for them has only increased every year for the last couple of years. There are some very sharp people working on making thorium reactors acceptable to the mainstream and moving federal policies to include thorium reactor development.
union states will be out of luck
Good...I’m in a union state.....Ska-rew them.
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that’s worst case.
manufacturing plants that use both 3d printing and robots will not have very many people. The few people that do attend to the factory floor —will need more than a high school diploma. For this reason, likely these kinds of manufacturing facilities will likely go up in blue states as well as red states.
tesla’s s class is being produced in california. That plant likely has many more people working on the floor. I think california is a union state. and the tesla plant may use all the most up to date robots. I’d have to research that to find out.
That would be great.
I've toured the Pratt and Whitney engine plant in North Berwick. It was amazing, it was like I was in another state.
Each operator had a college degree and operated usually three robots. He would set one up and get it started, and then load up the second one...then the third one.
By the time the third one was running, the first one would be done.
They encouraged continuing education and gave each employee a $5000 bonus whenever they achieved another degree.
Let me take a shot at this one. I’ve never drilled a horizontal but I will be involved in one after the first of the year as an observer and a small investor. The standard vertical well has a limited area where it can be fraced due to the horizontal strata in which it lies. That area can be as little as 20 feet to as large as a couple of hundred. The actual fracturing done may only extend from the well bore a few hundred feet giving you very little exposer to the formation. Horizontal drilling gives us the ability to stay in that formation horizontally for several thousand feet. Instead of the normal one stage or two stage frac’s that we normally do, in this one in particular we’ll be doing a 32 stage frac for a length of about 2400 to 3000 feet feet. Plain and simple we’re just exposing allot more of the formation for production. That’s where your 30 to forty percent numbers come from. Instead of drilling 12 vertical wells I can drill one horizontal and get just as much access to the formation.
Oil (often lumping together all petroleum, like kerogen, bitumn, natural gas liquids, etc) in the ground.
Think of taking a bucket of sand, packed in as tight as possible. There is still room in the bucket with sand filled to the rim. Pour in water until it is soaked full.
You could drill to the bottom, stick in a pipe and suck out some of the water, but you would never draw it all out; that sand is going to stay wet. Same thing with oil.
The smaller the volume of the individual holes in the rock containing oil, the higher the surface area to volume ratio. Billions time billions of tiny holes connected together by cracks in the rock. If you could perfectly remove the oil in the holes, you would still leave oil coating all the surfaces.
I'm leaning that way myself. What does matter is the tremendous and disproportionate leverage the Middle East has had over the market for half a century. A lot of things change if it's broken. We'll see.
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