Is the future bright for shale oil? Depends on whom you ask

HOUSTON -- Has the shale oil boom fundamentally changed the nation's energy supply, or is it just a temporary blip in a longer trend of declining production?

There are plenty of experts on either side of this debate, all armed with statistics and anecdotal evidence to back up their claims. But it's an argument that's likely to continue so long as the U.S. oil and gas industry struggles to understand the long-range decline profile of the thousands of new shale and tight oil wells it is drilling.

The most bullish forecasts see a boom lasting a few decades with crude oil production continuing to rise, albeit a bit more slowly than in early years. Under the scenario, the United States slashes its reliance on oil imports. Opponents in the pessimists' camp think the surge in domestic onshore oil production is a bubble that's set to pop at any moment, as the pace of drilling slows or because of a swift drop in the price of a barrel of crude.

The government's view lies somewhere in the middle.

Analysts at the U.S. Energy Information Administration say tight oil and shale oil production will rise for a couple more years, then reach a plateau that lasts until the end of this decade. EIA projects production will steadily fall after that, and total U.S. oil production could return to late 1990s levels by 2040.


Getting the picture right depends on calculating an accurate production decline curve for an average shale oil well, a vexing process that's ongoing, said Tad Patzek, a petroleum engineering professor at the University of Texas, Austin.

"There are many factors that we still don't quite understand that well, and that is because we only have a few years of production from the Bakken wells, and even fewer from the Eagle Ford wells," Patzek told EnergyWire. "So we're still learning, that's the key point."

But the industry has learned a lot since entering the Bakken Shale formation situated in North Dakota and Montana and the Eagle Ford Shale in south Texas, Patzek added.

After an initial spike in the flow of oil, hydraulically fractured wells experience a rapid decline in production after 12 months, he said. The production is expected to decline gradually over a longer period of time, but by how much and for how long is still an open question.

The methodology the industry is using to model its wells' decline curves is a good one, Patzek said. Still, more data are needed to improve the picture.

"We already know enough to say that the decline curves that the industry is using in fact do represent fairly what's happening with actual flow," he explained, "but there are perturbations on this flow that is described, because of this data or the other, which may change the picture, and we still don't know one way or the other."

For more oil, keep drilling

Last month, Harvard University raised new questions in a report predicting the United States could become the world's largest crude oil producer. By 2017, it predicts, U.S. shale oil production could approach 5 million barrels a day.

But those predictions aren't without a heavy dose of concern about the decline rates. Big questions persist.

"Is oil production from shale formations just a temporary bubble, or is it an event capable of significantly altering the U.S. and possibly global energy outlook?" Harvard fellow and former oil industry executive Leonardo Maugeri asks. He concludes that the shale oil boom will be difficult to replicate outside the United States, but that shale oil production here will grow and stay high as long as drilling rigs are kept busy.

Patzek said drillers can reasonably expect a first-year production decline rate of about 40 percent for an average shale oil well. Maugeri is more optimistic about the future of shale oil, but the decline rates he sees are steeper.

Harvard's Belfer Center studied oil wells in the Bakken and Three Forks formations in the Great Plains and Upper Midwest. Production declines were close to 43 percent in the first year. In the wells the center studied, output declined again by about 35 percent in the second year, then 30 percent the third year. By year five, the decline rate is 20 percent.

For Eagle Ford Shale wells in Texas, Maugeri's study shows a 55 percent drop in oil production from shale wells after the first year and another 40 percent during the second year. Hydraulically fractured Permian Basin wells drop by 50 percent the first year in the study's estimate.

But despite declines that are much sharper than for conventional oil wells, Harvard researchers predict shale oil production could expand by as much as 3.8 million barrels a day by 2017, bringing total shale and tight oil production to around 5 million barrels a day, up from around 1.5 million barrels a day at the end of 2012. That figure is much higher than those EIA is currently using. Maugeri argues that the key factor is "drilling intensity," the race to get more oil out of the ground, and the improvements in technology and efficiencies that make that task more successful over time.

"Because of the dramatic decline of shale wells, oil companies resort to intensively drilling for new wells that offset the loss of production from older wells," he writes. "So far drilling intensity has been the key factor that has made it possible to recover more oil than previously expected from the huge but hostile shale/tight oil formations existing in the U.S., thereby supporting the boom of the country's shale oil production."

Harvard's study was championed by the industry as more proof that success with hydraulic fracturing for shale oil extraction has set the United States on a path toward greater energy independence, posing a major challenge to Middle Eastern exporters for decades. The Paris-based International Energy Agency has expressed similar views.

Irrational exuberance?

Yet the decline rates and the unpredictable elements of unconventional oil drilling are attracting high-placed skeptics around the idea of sustained growth.

In a recent note to clients, Barclays Capital analysts said it would not adjust its longer-term predictions of U.S. shale oil growth trends despite the Harvard report's findings. Barclays raised its 2013 production growth forecast to 1.1 million barrels a day, up from 710,000 barrels. But commodities researchers there kept their forecasts for production growth through 2020 well below Harvard's prediction, more or less matching EIA, which sees total U.S. tight oil production increasing to levels less than half of where Maugeri thinks it could go.

In a recent commodities research notice to clients, titled "Not getting carried away by the shale boom," energy analysts at Barclays Capital in London said the recent surge in oil production from U.S. shale fields has outstripped their earlier projections. Rising U.S. supplies have stripped away some influence that major exporters in the Organization of the Petroleum Exporting Countries once had on international prices.

"Current rates of growth are exceeding expectations and bring into question some of the more conservative assumptions made by the major oil forecasting groups," writes Barclays analyst Kevin Norrish.

But Norrish argued that the sharp decline rates for shale oil wells, downplayed somewhat in Maugeri's forecasts, still matter.

"It is perhaps wise to exercise a degree of caution over longer-term shale oil forecasts, and for now we are sticking with our 2020 projections which imply a sharp slowdown in tight oil production compared with current levels," he writes. "This is partly because of the steepness of decline rates for shale oil wells."

Constraints on crude oil transport in the United States and weaker oil prices will also slow shale oil development, he predicted.

'Very difficult fields'

Patzek urged analysts to be cautious. Too little is known about how shale wells behave over the long run, he noted, and a number of factors influence decline curve models.

For one, he said, do artificial fractures made by drillers to release shale oil stay propped open for 20 years?

Companies also need to consider whether water in the well makes extracting oil more difficult over time, he said, and whether rock compression worsens the longer a well is producing.

The price of oil continues to be the main driver of shale drilling. A steep price drop usually cuts into the rig count. But if prices stay high, then optimists see a sharp spike in shale oil production. Technology will prevail, they assert, and the industry will keep drilling rates high and production growing.

Pessimists point to the geological and technical uncertainty. Both sides are wrong, Patzek says.

"If somebody tells you that we know everything about how these wells will produce 30 years into the future, they probably don't know what they're talking about," he said. "Because there are many things that we still don't know, there are people who only see the downside, and there are people who only see the upside, and the reality is somewhere in between."

Shale oil doesn't fundamentally change the global balance of crude oil supplies and production, Patzek said, but it can't be simply written off, either.

"These are very difficult fields, they are of low permeability, and you have to do these very long, expensive hydrofractured wells in order to get production," he said. "So people should not be under any illusion that we are turning out to be the next Saudi Arabia, because we're not.

"Having said that, this is a very large, large resource, and to the extent that we can figure out how to produce it, perhaps at a lower rate but for a very long time, it's a very significant addition to the oil supply of the United States."

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