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Doomsday Postponed

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  • Tue, Oct 23, 2012 - 06:34pm


    Stan Robertson

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    Doomsday postponed update.

Stan Robertson wrote:

As part of my usual routine, I read the completion reports for new wells in the mid-continent states. It has been apparent for a year or two that horizontal drilling technology has changed the game of oil and gas production in the U.S. In addition to the large new natural gas reserves being found in shale formations, a great deal of new gas, rich in liquid condensates, and new oil as well, is being recovered from “tight” sands. Many of these low permeability formations have been found over the years, but until now it has not been economical to exploit them. There are many places in the U.S. where one couldn’t drill a dry hole, but one previously couldn’t make any money either. That has changed. U.S. liquids production has increased by about one million barrels per day over the last two years with a like increase to be expected in the next two years. Despite well costs that are more than double those of conventional vertical wells, they are capable of producing at high initial rates while exploiting about 8X the reservoir volume open to a vertical well. Despite the additional costs of horizontal drilling and massive hydraulic fracs, these horizontal wells are typically EROI ~ approximately 10 to 20 ventures.

If I may be forgiven for quoting my own remarks from a year ago, they can be updated as follows: This week’s new well completion reports for Oklahoma are typical of what has been occurring for the past two  years. 59 of 86 new wells reported oil production in amounts ranging from  6 to 901 barrels per day with an average rate of 154 barrels per day. (Significant quantities of new natural gas were also reported.) This is new production, primarily from horizontal wells drilled into low permeability formations rather than shales. This level of new production from the mid-continent region should add about 1.8 million barrels per year of new production capacity. Despite the rapid rates of decline of low permeability wells, this level of activity can be sustained for many years. There is no dearth of prospective drilling locations.

I think it unlikely that the U.S. can become self sufficient in oil production, but when the new production from the mid-continent is combined with new productive capacity from the Bakken formation of ND, the Utica shale of OH and the Eagle Ford of TX, it seems clear that the U.S should have the capability of sustaining our present levels of oil consumption for another decade. That may only sustain our no-growth economy for a while longer, but if it does, we should use the time wisely.

Lastly, I would like to provide some clarity for people who know little about the oil and gas business. “Big Oil” is not the beneficiary of huge tax breaks. The several billions of dollars that are supposed to be subsidizing “big oil” actually go to the independent producers who are responsible for drilling the vast majority of new wells. The “subsidy” consists of allowing them to write off the unrecoverable expenses of drilling wells in the year in which they are incurred. These include fuel costs, drilling mud and labor. A dry hole is an instant, and nearly complete, loss. Forcing these costs to be amortized over a period of years would have the effect of stopping drilling. Perhaps that is the plan of some.

  • Wed, Oct 24, 2012 - 04:13am


    Mark Cochrane

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    Not sure how long this can be done

Hello Stan,

I don’t see how the math works on this. With the decay rates that you state for the well outputs (65% year 1, 50% year 2, …), if you started with 10,000 wells (or any other arbitrary number) and added 10,000 wells every year you would top out at a production only 1.7 times that of year one’s. Put another way, doubling all of the infrastructure gives you a 35% bump in production, adding the next 10,000 rigs gets you only 13% increase in production from year 2 levels, then only 6% in year 4, 3% in year 5 and down from there. In order to expand production there needs to be an exponential growth of the number of wells which leads to all of the common themes Chris talks about. What is the area that theoretically can be produced and what is the maximum density of wells?

The other problem may be the story that Doug was alluding to (possibly this story – After the Boom in Natural Gas). I’ve seen this in a few forms now and basically it comes down to the current shale play being more about land access than the gas or oil that can be produced.

The drillers punched so many holes and extracted so much gas through hydraulic fracturing that they have driven the price of natural gas to near-record lows. And because of the intricate financial deals and leasing arrangements that many of them struck during the boom, they were unable to pull their foot off the accelerator fast enough to avoid a crash in the price of natural gas, which is down more than 60 percent since the summer of 2008.

Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.

I think that your central tenet that this effectively helps delay things is correct but given the combination of financial and physical stresses I suspect that it will be subject to wild oscillation. It would be very hard to manage this system to have a smooth production/consumption pattern. Now gas is ridiculously cheap, about 25% of what it is on the world market. Given the unreal price signals all kinds of industries are switching over to gas. In the mean time those producing the gas are losing money. Once the current contracts expire they are unlikely to renew, never mind exponentially expand unless they can make money. The massive decay rates of the wells means that if the money well goes dry then the production levels will fall off a cliff and prices will skyrocket. Suddenly all of those economic activities from busing to fertilizer creation stop being economically viable. Maybe after a few wild oscillations the system will be better managed but I am dubious. Is there some way out of this conundrum?


  • Wed, Oct 24, 2012 - 06:08am


    Stan Robertson

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    It only delays the inevitable


You are correct that the oil and gas business is subject to wild oscillations. They have been ongoing for a century. The situation you described with gas previously occurred in the late seventies and early eighties. Shortages caused by prices regulated at levels too low for maintenance of supply were followed by partial deregulation and a drilling boom that glutted the gas market. Government attempts to ration the initial shortages led to 30 different controlled prices for a single substance – methane.

I agree with your description of the unreality of the price signals in the current gas market and their effects. However, most gas is sold on short term spot market contracts. When demand catches up with supply, prices will rise automatically, much to the dismay of the buyers who expected cheap gas forever.

The present circumstances with oil are a little bit different. We have been bumping the limits of world crude oil supply for about eight years. Only a severe worldwide recession caused oil prices to drop and they didn’t stay down for long. If some semblance of oil price stability can be maintained for a while, then this game of running as fast as we can to add small amounts of new supply to replace declines elsewhere might continue for a while. What I am seeing in the mid-continent is enough to keep me thinking that we aren’t likely to see real shortages in the U.S. for at least two more years and maybe more, depending on oil on the world market from Iraq, Iran and Russia. Part of the reason for this is that the tight formation oil wells do not decline nearly so rapidly as the shale wells.

But you are correct that if the music stops, the rapid decline rates of the new wells means that oil supplies could drop significantly within a year. Unfortunately, it can’t be restarted in a year, so it will be a bumpy ride when it starts.



  • Thu, Dec 19, 2013 - 09:37pm


    Stan Robertson

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Since peak oil has been one of the main concerns on PP for a good while, an occasional status report might be useful. Gail Tverberg's recent article and the following comments provide a good look at the long term prospects for new oil supplies from shales and tight sands. A good look at the current situation in the U.S. is provided here by Frank Holmes.

Although there are other tight formations, such as the Mississippi lime in Kansas and Oklahoma that will soon be added to the mix, it is likely that collective tight formation production will peak below about 3 million barrels per day. Sustaining that level of production would require that drilling continue at the peak pace indefinitely. The reason for this is that about 90% of the ultimate recovery of a well occurs within two years. At best, the U.S. will be left to import at least half of the oil that it uses.

One of the side effects of the oil production from tight sands and shales has been the production of huge amounts of associated natural gas. This has depressed natural gas prices below the levels required for shale gas wells to be economical. Shale gas production has already peaked, however a huge resource remains and will eventually be recovered when price levels permit.

Tight sands and shales are ubiquitous throughout the world and they will eventually be developed by many other countries besides the U.S. As supplements to the production from older conventional fields, they might sustain world oil production at current levels for decades. But, as Gail Tverberg pointed out, there are both physical and economic reasons why they cannot replace the production from the older fields. With $100 per barrel oil and some additional conventional oil production from Iran and Iraq, we can probably sustain the current level of production for another decade, but don't expect economies to grow without additional new supply.


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