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Page added on September 20, 2014
Is the Shale Revolution a ‘Ponzi Scheme’ or the End of Peak Oil?
A lot of folks are fervently forecasting that shale gas and oil production is a bubble about to pop, possibly producing an economic collapse similar to the one in 2008. Earlier this week, the left-leaning Center for Research on Globalization in Montreal dismissed the shale revolution as a “Ponzi scheme” and “this decade’s version of the Dotcom bubble.” In a column last year for The Guardian, Nafeez Ahmed of the Institute for Policy Research and Development cited studies predicting that U.S. shale gas production will likely peak in 2015 and oil production in 2017. In a July 2013 report for the Club of Rome—the same folks who brought us 1972’s doom-mongering classic, The Limits to Growth—the University of Florence chemist Ugo Bardi declared that the “idea that a ‘gas revolution’ that will bring for us an age of abundance is rapidly fading” because “the data show that the gas bubble may be already bursting.” A month later, Richard Heinberg of the Post Carbon Institute said, “It turns out there are only a few ‘plays’ or geological formations in the US from which shale gas is being produced; in virtually all of them, except the Marcellus (in Pennsylvania and West Virginia), production rates are already either in plateau or decline.”
So was President Barack Obama wrong in 2012, when he claimed, “We have a supply of natural gas that can last America nearly 100 years”? Perhaps not.
The renaissance of oil and gas production in the United States has largely been the result of applying the technique of hydraulic fracturing (fracking), which releases vast quantities of hydrocarbons trapped in tight shale formations. The bubble theorists make much of the fact that production tends to drop more rapidly in fracked wells than in conventional ones, forcing the frackers to drill more holes just to keep up. They overlook the fact that drillers are working ever faster and cheaper and that newer wells tend to be more productive than earlier wells. How do we know this? Because the number of drill rigs has not increased in most shale fields, yet production continues to go up.
So what about Heinberg’s claim that “production rates are already either in plateau or decline”? He’s just wrong. The September drilling productivity report from the federal Energy Information Administration (EIA) notes that since 2013, that gas production is up in every one of the “plays” cited by Heinberg. Production in the Bakken region of North Dakota grew 8 percent; the Eagle Ford, Permian, and Haynesville regions in Texas increased 15, 7, and 97 percent, respectively; the Niobrara region in Wyoming and Colorado rose by 29 percent; and the Utica and Marcellus regions in Ohio, Pennsylvania, and West Virginia surged 142 and 47 percent. “We’ve been tracking this for 10 years, and recovery rates have gone up dramatically,” says EIA forecaster Philip Budzik.
Meanwhile, the EIA’s Annual Energy Outlook 2014 shows the potential U.S. oil and gas resource bases are increasing, not decreasing. Bubble forecasters insist those estimates are way off-base. They point to the EIA’s recent big flub when it came to estimating how much petroleum might be pumped from the Monterey shale formations in California. The agency initially prognosticated that as much as 13.7 billion barrels of oil might be produced, but it cut its estimate by 96 percent, to 600 million barrels, once it recognized the extraction challenges posed by the complicated geology of southern California. Whoops!
That’s bad, but in the scope of estimates it’s a blip, not a fatal error.
Back in 2000, the EIA Outlook report estimated that the U.S.’s technically recoverable petroleum resources were 124 billion barrels; it put natural gas resources at 1,111 trillion cubic feet (tcf). (“Technically recoverable” basically means that the resource can be extracted using current technology if the price is right.) Proved oil and natural gas reserves amounted to 22 billion barrels and 176 tcf, respectively. (“Proved” generally means the amount of resources that can be recovered from the deposit with a reasonable level of certainty.) When it came to shale and other tight rock formations, the 2000 report estimated that only 2 billion barrels of oil and 50 tcf of natural gas were technically recoverable. “Basically, in 2000 no one was even thinking that you could produce this stuff,” says Budzik.
How time and technological progress make fools of all prognosticators! The 2014 EIA Outlook estimates that the U.S.’s technically recoverable oil resources are 238 billion barrels and natural gas resources are 2,266 tcf. Proved U.S. petroleum reserves have increased from their 2009 nadir of 19 billion barrels to over 30 billion barrels, and proved natural gas reserves are at 334 tcf now. In other words, estimates of technically recoverable U.S. resources of both oil and gas have nearly doubled in the past 15 years. Proved oil reserves have increased 50 percent, while proved gas reserves have also nearly doubled. Technically recoverable resources from shale and other tight rocks is now estimated to be 59 billion barrels of crude and 903 tcf of gas—a 30-fold and 18-fold increase, respectively, over the 2000 assessments.
Take the figure of 2,266 tcf of natural gas. Last year, Americans burned through 26 tcf of natural gas. At that rate, the estimated resource would last 87 years. Not the 100 years claimed by the president, but close enough for government work.
While EIA reserve and resource estimates have been trending steeply upward over the past decade and half, the agency tries to take into account uncertainties by sketching out scenarios to 2040 in which domestic oil and gas supplies are either 50 percent higher or lower than its reference case. Production of shale gas and oil is the key difference in the scenarios. In the high supply case, technically recoverable crude and gas plus proved reserves amount to 431 billion barrels and 3,683 tcf. Consequently, domestic oil production rises to 13 million barrels per day before 2035 and imports decline to near zero. Tight oil production peaks at 8.5 million barrels per day in 2035 compared to the reference case peak of 4.8 million barrels in 2021. Cumulative tight oil production reaches 75 billion barrels, up from 44 billion in the reference case.
In the low supply scenario, crude oil totals 210 barrels and gas totals 1,814 tcf; oil production reaches 9.1 million barrels per day in 2017 and then slowly falls to 6.6 million barrels per day in 2040. Tight oil production peaks in 2016 at 4.3 million barrels per day with a cumulative production of 34 billion barrels. Interestingly, the difference in price in the high and low supply scenarios is only $20 per barrel—$125 versus $145 (using 2012 dollars) in 2040.
The shale bubble proponents essentially are betting on the EIA low production scenario. They will be proven right if shale oil production does peak in the next year or two. We shall soon see. “The history of the industry is that we are always running out,” says Budzik. “So long as we have a well functioning economic system that allows the price mechanism to adjust and encourages innovation we will see the resource base grow rather than diminish.” Rising prices at the beginning of the 21st century did, in fact, promote more exploration and faster technological progress, resulting in the shale revolution the U.S. is currently enjoying. If this dynamic is not unduly hampered, it’s a good bet that the prophets of bubble-bursting doom are wrong yet again.
74 Comments on "Is the Shale Revolution a ‘Ponzi Scheme’ or the End of Peak Oil?"
marmico on Sun, 21st Sep 2014 7:41 am
You are cognizant that December 2014 monthly U.S. oil production will exceed the 1985 annual “Prudhoe Bay” secondary peak of 8.971 mb/d.
It seems very probable that 2016 U.S. annual oil production will exceed the 1970 peak of 9.637 mb/d.
Crow about your errors for the last 10 years if you are so inclined.
Davy on Sun, 21st Sep 2014 8:20 am
M, no doubt many PO and doomer predictions came and gone as a bust. Still, the burden is on you cornies to make good on predictions that not only have to maintain supplies but grow otherwise a without growing supplies a world economy will never realize more oil supply growth. IOW, the burden is on the corning to paint favorable numbers here on out. Time is on the side of PO advocates and doomers not the cornies. As Short likes to mention it is simply the second law in action. One other point M, you and your brothers in arms on this board never crow about the world situation with regards to the supplies. Is this because there is little to crow about? In fact there is allot to worry about. Last I saw the US is a net importer. Do the math M or do you think the US is on the road to energy independence?
Nony on Sun, 21st Sep 2014 8:27 am
May we frack the ANWAR? 😉
Davy on Sun, 21st Sep 2014 8:32 am
Noo, funny how ANWAR is off the radar screen. I have read that is because ANWAR is probably mostly gas.
marmico on Sun, 21st Sep 2014 8:41 am
D, Global oil production had a secondary peak the year Reagan was elected at 64 mb/d. Production has increased 12 mb/d in the last 35 years, of which an incremental 4 mb/d came online in the last 9 years. What’s your issue?
Nony on Sun, 21st Sep 2014 8:57 am
Marmico:
that paper is a pretty good one. Rock is a nice guy to his fellow posters and has some history. But he can be dated. That paper pretty clearly shows the peak year of AC drilling in the 90s was less than half of either the Eagle Ford OR the Bakken from 2012 on. And those AC laterals were shorter.
Bart on Sun, 21st Sep 2014 8:59 am
has the price of gasoline gone down? this oil boom is not having an effect at the pump, is it because they have to drill so many holes that it isn’t profitable? investors will be the limit switch here. some one is either not making any money, or not sharing their profits with motorists.
marmico on Sun, 21st Sep 2014 9:06 am
Rock is a good guy, nony, and brings a lot to the table. He sometimes gets carried away with his Walter Mitty shadow, though, like his memory of the AC boom.
Davy on Sun, 21st Sep 2014 9:15 am
M, your forecasting but not looking at global results and trends. Take the US supplies out then get back to me.
Noo, like Rock always says have you ever drilled a hole and I don’t mean some whore?
JuanP on Sun, 21st Sep 2014 9:26 am
Davy “The US is the largest net importer so these world numbers matter.”
I read somewhere, sorry don’t remember where, that China became the world’s largest oil importer in the last few weeks, couple of months. This was mostly a consequence of declining imports in the USA because of increasing shale oil production, and a little bit because of still slightly increasing Chinese oil demand and decreasing Chinese production.
This is one first place I am glad to pass on to the Chinese. 😉
Davy on Sun, 21st Sep 2014 9:34 am
Thanks, Juan, slip of the tongue. I knew that but was in the heat of the battle with the evil Cornies. In any case very close race for the top that could easily swing back and forth.
JuanP on Sun, 21st Sep 2014 9:36 am
Nony, I keep an open mind about future shale production because I got it wrong in the past.
My intuition tells me it will last less than five years, probably less than two. My limited capabilities to process all the info I sort through forces me to rely on intuition. I am not a geologist, mathematician, or economist. My ignorance of the subject is many times larger than my knowledge of it, in spite of years of studying it.
I could be wrong again, but I’d rather err on the safe side.
JuanP on Sun, 21st Sep 2014 9:41 am
Davy, Yes, that first place is likely to swing back and forth in completely unpredictable ways in the future.
Nony on Sun, 21st Sep 2014 9:44 am
Davy: no.
marmico on Sun, 21st Sep 2014 9:49 am
Noo, like Rock always says have you ever drilled a hole and I don’t mean some whore?
I never knew that you had to drill an oil well to read a “net export chart.
The U.S. is more “oil independent” in 2014 than when Davy voted for Reagan in 1980.
Davy on Sun, 21st Sep 2014 9:51 am
A few but remember she is getting old
marmico on Sun, 21st Sep 2014 9:53 am
Ooops on the net export chart link
http://www.aei-ideas.org/wp-content/uploads/2014/04/oilimports.jpg
Davy on Sun, 21st Sep 2014 10:00 am
Well put M! All that is needed these days to forecast oil, understand oil geology, and understand oil dynamics is the ability to read charts.
Boat on Sun, 21st Sep 2014 10:07 am
Without a huge war every year that goes by pushes us closer to an electric economy. As a result the shift over the next 2 decades we will see less importance of peak oil whether it has happened or close to happening
Nony on Sun, 21st Sep 2014 10:24 am
Davy:
Undoubtedly many factors help in analyzing oil production (knowledge of economics, geology, etc.). However, none of these can change cold hard number facts. The peak for the early 90s Austin Chalk was less than half of what the EF (or Bakken) has done since 2012 (2011).
Saying the AC was the hottest, biggest boom every is just wrong. EF (or Bakken) beat it in wells per year, rigs in the play, total lateral lengths, peak production, growth in production per year, or even cumulative production.
Davy on Sun, 21st Sep 2014 11:09 am
Noo, your a smart guy on the above. Your way ahead of me. I am just asking you to consider the size and quality of this supply in relation to the rest of the total world supply. In that sense it is not significant enough to crow about. I am impressed with what has been done in your regions of interest. It has made a difference with world numbers but it is nowhere near enough to address the multiple other negatives worldwide. These negatives are overwhelming in size and scope.
Nony on Sun, 21st Sep 2014 12:03 pm
It is what it is. 3 million out of 90. Well under 10%. Well over a percent. Not so tiny you can’t see it. But not enough to crash price (in fact it will turn off with low price…so all it can do is “hold the line”. However this is still better than 150 or more per bbl.
nemteck on Sun, 21st Sep 2014 1:17 pm
Nony produced 16 comments inhere (I read no one) and generated numerous replies, mostly negative because what he says is nonsense or perhaps makes it on purpose so to generate responses. So why do you people invest the time to reply to his uttering? I think he is a lonely fellow that graves for attention, never mind if it is negative.
Nony on Mon, 22nd Sep 2014 7:35 am
http://www.flamewarriorsguide.com/warriorshtm/lonelyguy.htm