Why Has It Taken So Long to Develop Shale Resources?
oil prices would be needed to make the shale plays economic, if ever.
It seems that it has taken a very long time to finally start to develop the vast shale resources of the United States. Indeed, we knew about the potential oil & gas resources of many shales over 50 years ago, yet they have not been really actively targeted until just 8-10 years ago.
The combination of new frack treatments and very long laterals, plus higher oil prices, is what has finally allowed our oil shales and gas shales to be commercially produced. Even so, an average well in the Bakken costs $8-$10 MM, requiring a crude oil price of around $90/bbl. for a profitable well. Under current conditions, the Bakken is estimated to contain about 24 billion barrels of oil reserves.
The reasons for this involve technology, oil prices, and economics. I personally drilled a test of the Cretaceous Niobrara Chalk (limey shale) play in the Denver basin over 20 years ago, with abundant signs of oil & gas while drilling, and yet with no success. I also remember drilling through the now-famous Devonian Bakken Shale in North Dakota in 1984, and there was abundant oil floating on the surface of the mud pit (an exciting sign of production potential) as we were drilling. Yet we didn’t even consider trying to complete that part of the well for oil production, since it was known to be nearly impossible at that
Can the US Achieve Energy Independence with the New Shale Resource Boom?
The reasons for the shale failures in the 1980s and 1990s were that we couldn’t drill long laterals (horizontal wells), and we used frack jobs in the shales that had the perverse effect of shutting down production rather than enhancing it. This happened because we used fresh-water fracking fluids whose chemistry caused the clay minerals embedded in the shales to expand rapidly, sealing off all fractures and preventing oil & gas from flowing to the well bore where it could be produced. Only recently has it become possible to treat the water chemically so that it can be used in fracking without causing this kind of “formation damage.”
“Resources” are listed by many observers as being in the area of 250 billion barrels of oil (BBO) in the Bakken play alone, which if true would rival the discoveries of Saudi Arabia and Iraq. However, energy resources are defined as the “original amount of oil or gas in place” (OOIP). The more important parameter to watch is the amount of “reserves,” which are defined as the amount of oil or gas that can be economically recovered with current technology under current economic conditions. For the Bakken, that reserve figure is less than 10% of the OOIP, or about 24 BBO. While this is a huge amount of oil, it is a much smaller number than many commentators have been talking about.
Given the lower oil prices of the late 1980s and 1990s, shales were not attractive targets because although horizontal drilling was producing longer and longer well laterals (effective “pay zones”), the frack treatments were still ineffective, limiting production but not costs. Economics suggested much higher 12
For example, the U.S. Geological Survey has estimated that the shale gas reserves in the U.S. can be reasonably expected to exceed 700 trillion cubic feet of gas (TCFG). For comparison, the total gas in storage for use this winter in the U.S. is about 3.7 TCFG.
Many people are interested in the shale resources boom in the U.S. There have been some pretty optimistic claims made in the media and by commentators about how the shale resources boom will lead to energy independence. Much misinformation has been inadvertently broadcast to the public due to widespread misunderstandings of some of the terminology used to describe how big the new resources are. To bring some perspective into this discussion, it is important to realize that people are conflating two very different concepts when they talk about the size of the new oil & gas shale finds.
time. Others actually tried to complete wells in the Bakken, but all efforts failed.
Nevertheless, this is the real number that should be evaluated when one is considering our potential for energy independence. Recent estimates on shale gas reserves are huge also, which is why some observers think low natural gas prices are here to stay.
PERMIAN BASIN ENERGY MAGAZINE | www.PBEMag.com | FEBRUARY 2013
that even under an optimistic scenario, the U.S. will be burning 20-25 million BOPD in 2020, which is about 20 times what we will probably produce from oil shale. So with respect to oil production, we will not achieve energy independence in the foreseeable future.
It should be noted also that what matters to consumers and policy makers is not just the amount of reserves, but also the amount of daily production that can be produced from those reserves. Because shale plays have such poor reservoir characteristics (as evidenced by the need for fracking them), they produce at relatively low rates, once the first two years of “flush” production have occurred. In fact, during that first two years it is not unusual to see production declines of around 70% from the initial production level. So a 2,000 BOPD initial production from a Bakken well would normally decline to only about 600 BOPD in the third year of the well’s life. Given all this, and noting also that since the average Bakken well costs as much as $10 million, the break-even crude oil price for such a well has been estimated at $83/BO. So oil prices need to stay above that level if Bakken drilling is to continue. With regard to the impact of oil shale production on our potential energy independence, we have already seen our imports of crude oil drop from 60% of daily use to 42% of daily use. Oil production from the Bakken, the Eagle Ford, and other shale plays is rising very rapidly. Based on recent studies of shale decline curves and drilling activity, it has been estimated that oil shale production will rise to about 1.2 million BOPD by 2020. However, some analysts think it may take until 2040 to reach this level of production. Either way, the problem is
With respect to natural gas production, we have so much available that a re-tooling of several industries will likely happen. If we decide to build the infrastructure needed to turn natural gas into a new type of low cost transportation fuel, perhaps a major increase in our energy independence will occur.
Some Investing Ideas Investing in the oil and gas shale boom is risky, but there are many different ways to do it and rewards have been substantial in some cases. Whether that continues to be the case will depend in large part on the trends in oil and natural gas prices. One obvious way to invest is to buy the stocks of exploration and production companies known to be successfully developing one or more of the shale plays. Another way to invest is to buy the stocks of domestic oil field services companies known to be heavily engaged in one or more shale plays. Yet another idea is to buy the actual resources (oil and gas properties) still in the ground. One could also invest in the sand deposits used to produce fracking sand, which is used in the 1 million pounds per well range in many shale plays. Because there is a shortage of pipeline capacity, one could invest in pipeline companies known to be involved in building new pipelines to service shale plays. And since railroads have had to take up the slack for oil transportation, the stock of the bigger railroads known to be hauling oil or ordering tanker cars might also be prospective.
FEBRUARY 2013 | www.PBEMag.com | PERMIAN BASIN ENERGY MAGAZINE
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