Shale Oil: Not what it’s “fracked” up to be…

Feb 17, 2014

The Bakken oil field will soon reach an important milestone as it produces one million barrels of oil per day. Coupled with increased shale oil production in Texas, the financial media will have a field day hyping up America’s new-found "energy independence".

To be sure, technological advances such as horizontal and multi-pad drilling, fracking and enhanced oil recovery techniques have opened up new and existing fields once considered financially unviable. Great news but not all that it is fracked up to be. Over time, geology will always trump technology and therein lies the problem.    

The shale oil “bubble” has given us a reprieve to get our energy house in order, but we are squandering the opportunity. Rather than use the time wisely to develop alternative energy systems to reduce our oil addiction, it has created a false sense of security that all is well if we’ll only “drill baby, drill.” The clamor to lift our ban on exporting crude oil – though we still import almost 40% of the 19 million barrels of oil we consume daily – is indicative of this trend.

As the financial media goes into high gear touting the panacea offered by the shale oil "revolution," it would be wise to consider three important points:

1) Decline rates: The geology of shale oil is such that after an initial surge of oil production from a newly fracked well, the production from that well rapidly declines, on average, about 40% in each successive year. For example, a well producing 500 barrels of oil a day in year one will produce about 300 barrels in year two, and so forth.

2) The treadmill effect: With these rapid decline rates, it will take massive new drilling just to make good the declining oil production from existing wells. The full impact of these startling decline rates has not yet been felt because the drilling surge – and its commensurate ramp up of shale oil production – is all so new. But, over time, the aggregated decline rates from existing wells will all but offset production from new wells. 

Here’s the rub: A significant percentage of America’s finite drilling capacity is already tied up in shale oil; the more we produce the more rigs it will take to make good depleted oil losses. The pace cannot be sustained indefinitely. The bubble will burst when the economics are no longer supportable or when decline rates exceed the drilling capacity to make good these losses – events that may not be that far off. Little is said about this decline rate factor in the financial media, and the illusion of unlimited growth is perpetuated.

3)  Costs of Drilling: Fracked wells, on average, cost about $7-9 million dollars – about eight or more times that of conventionally drilled vertical wells. In addition, each well requires about 3-7 million gallons of water, loads of fracking sand and non-ecofriendly elements to stimulate production. In the drought-stricken areas of Texas and arid regions of North Dakota, water is no small matter. Political, economic and resource constraints will also become more problematic as production intensifies. Worse, the newer drilling sites are not producing as much oil as previous sites – suggesting, perhaps, that the geologic “sweet spots” have already been tapped. Hardly grounds, it would seem, for wild eyed optimism.

Weathering the Storm viewpoint: We are not opposed to shale oil, per se. Our concern is with the media hype and hubris that is drowning out the imperatives for developing alternative energy systems to meet our long term challenges. (See “Transforming our Energy Systems”) As part of that, let’s forget about exporting crude oil and, perhaps, replenish our Strategic Petroleum Reserve instead. (After all, the current SPR level of 690 million barrels – about the amount of oil we consume in five weeks – is not much of a “rainy day” reserve in this volatile world)

It’s inconceivable that the United States has no national energy policy. Until we get one, we will be torn by a hodge-podge of panaceas that benefit special interests and ignore long term realities. The shale oil hype, for instance, may well be perpetuating the greatest bubble of all times. The deeper we get into it, the harder the fall. 

Our suggestion: Get informed. Ask your elected representatives where they stand on these issues and start a dialog with them. For more information, visit our website at: 

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