Shale Gas and Tight Oil: Boom? Bust? Or Just a Petering Out?

The oil and gas industry promises “a few days of fracking” for “decades of … production.” But is it true?

Believe it or not, some people don’t buy the fracking boom story. Some predict bust. Others, more of a petering out. What gives? Let’s begin with a story about a lunch.

Lunch with a Skeptic

In the spring of 2008, I was anticipating a lunch meeting with Matthew Simmons. In the oil and gas industry Simmons was considered something of a legend or a pariah, depending on one’s point of view. Either way, he was an iconoclast.

Having served as an energy advisor to President George W. Bush, Simmons had become increasingly concerned about Saudi Arabia’s ability to keep its oil spigot flowing indefinitely. In his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” (Wiley, 2005) Simmons predicted that, with Saudi Arabian oil past peak production, hard times would fall on a world disproportionately dependent on Saudi oil to power its cars and stabilize prices.

Was he right? A good deal of debate surrounds the answer; some have said he was off his rocker, others have called him prescient (see here and here).

And while his predictions of $200 per barrel of oil by 2010 never came to fruition (prices peaked at about $145 per barrel in 2008 — click on chart below for history of prices), the financial crisis of 2008 might have had something to do with that.

The left axis/red line represents the weekly West Texas Intermediate spot price per barrel, the main benchmark for North American crude. The right axis/blue bars indicate the U.S. weekly average per-gallon retail price for all grades. (Data sources: Weekly Cushing, Oklahoma WTI Spot Price and Weekly U.S. All Grades All Formulations Retail Gasoline Prices)

Talk of Bluster on a Blustery Day

Anyway, back to the lunch. I remember the day as sunny and blustery. Through the windows the trees swayed to and fro and the flowers on the azaleas held on for dear life. Inside, things were popping too; Simmons was full of energy, warm, forthcoming and absolutely sure of himself.

Eventually the conversation turned to shale gas, a topic whose buzz about the coming shale gas revolution had just begun to reach a fevered pitch. A couple of years later many experts (and some non-experts, such as yours truly in posts like this and this) would hail shale gas as a “game changer.”

But Simmons distanced himself from those “experts.” “It’s all hype,” he told me over lunch that blustery day, a sentiment he later conveyed to energy consultant Steve Andrews (co-founder of the Association for the Study of Peak Oil & Gas USA): “I’ve never seen the industry hype something crazier.”

When I asked him about such characterization, Simmons explained it had to do with the long-term productivity of fracked wells. The industry was claiming (and still is, by the way) that a single fracked well “can be in production for 20 to 40 years.” If it’s true, it’s quite a deal — frack a well, then stand back and pump out energy and profits for decades.

But the unconvinced Simmons argued that he’d seen the data from existing fracked wells and they simply did not support a decades-long production curve. He was convinced that the productivity of fracked wells rapidly declined with time — by 70 percent in the first year and another 20 percent in the second year, leaving only 10 percent for all those supposed decades of production.

That lunch-time discussion was memorable and I was saddened to learn a couple of years later that Simmons had died.

Was He Wrong About Fracking?

Was Simmons just plain wrong about fracking and tight oil and shale gas? One could argue he was. Because of shale gas, natural gas prices are as low as they’ve been in more than a decade, coal usage in the United States is down, and tight oil production in the Bakken and Eagle Ford formations is on the rise. Because of tight oil and shale gas, America’s energy prospects have never been brighter. A recent report by the International Energy Agency predicts that the United Sates will become the world’s largest oil producer by 2020 and a net oil exporter by 2030.

Maybe Not

And yet, while the fracking business is booming, there are some naysayers out there who have argued that this particular king has no clothes. (See here, here, here and here.)

Now add J. David Hughes of the Post Carbon Institute to the naysayer list. Seeming to channel Simmons in the Comment section of last week’s edition of the journal Nature, Hughes claims that “the production of shale gas and oil is overhyped.” As Simmons did, he points to the rapid decline in production rates of fracked wells. Having studied the data from 65,000 U.S. shale wells from 30 shale-gas and 21 tight-oil fields, Hughes concludes that

“Wells decline rapidly within a few years. Those in the top five US plays typically pro­duced 80–95% less gas after three years. In my view, the industry practice of … inferring lifetimes of 40 years or more, is too optimistic.”*

Hughes argues that to keep total production up in the face of declining production from existing wells, the industry will need to continue to drill more and more wells in less productive areas — making the whole enterprise less profitable. Either production will halt or energy prices will head upwards.

Hughes closes out his comment with the following not-so-optimistic assessment of the promise of shale oil and gas:

“Governments and industry must recognize that shale gas and oil are not cheap or inex­haustible: 70% of US shale gas comes from fields that are either flat or in decline. And the sustainability of tight-oil production over the longer term is questionable. … Declaring US energy independence and laying plans to export the shale bounty is unwise.”

Could be that despite fracking and its current bounty, we’re not going to be able to drill our way to energy security after all.

__________________________

End Note

*  New data [pdf] by the U.S. Energy Information Administration shows a similar steep drop-off in well productivity.