Will US Light Tight Oil Save The World?

There has been plenty of hoopla lately concerning the boom in shale (LTO) oil production. From the New York Times: Surge Seen in U.S. Oil Output, Lowering Gasoline Prices

Domestic oil production will continue to soar for years to come, the Energy Department predicted on Monday, scaling to levels not seen in nearly half a century by 2016.

The annual outlook by the department’s Energy Information Administration was cited by experts as confirmation that the United States was well on its way — far faster than anticipated even a year ago — to achieving virtual energy independence.

What the EIA is actually predicting:  AEO2014 EARLY RELEASE OVERVIEW. The data is C+C.

AEO 2014

The first two points were what was actually produced in 2011 and 2012 and the rest of the blue line is what they are predicting for the future. The orange line is what they predicted last year. The predicted numbers this year are a lot higher but the shape of the curve looks the same. They predict US Crude + Condensate will plateau in 2016, actually peak in 2019 and by 2021 be headed for a permanent decline.

Note the difference between AEO 2013 and AEO 2014. The difference rises to just over 2 mb/d and holds that difference util 2030 when it slowly closes down to 1.37 mb/d in 2040. And everything above about 5 mb/d is all Shale, or Light Tight Oil. They expect LTO to rise to about 4.5 mb/d by 2016, hold that level for almost 5 years and for LTO to still be above 2.5 mb/d by 2040. 

Anyway here is what Saudi Arabia thinks about it all. Saudi will not be affected by shale oil output: report:

“Since we doubt that tight oil production will grow as much as most commentators surmise, and since we believe that tight oil production will keep representing only about 3% of total liquids supply, we do not believe that the growth in oil production from tight rock formations in the US, or from shale formations elsewhere, will materially affect Saudi Arabia’s long-term position in the oil industry,” Jadwa said in a study.

And questions are being raised elsewhere: Shale well depletion raises questions over US oil boom

In October, the government began issuing a monthly report on drilling productivity that charted declines in six major U.S. shale plays. The U.S. Energy Information Administration estimates that it takes seven of every 10 new barrels produced in those areas just to replace lost production.

Of course this article is quoting the EIA and their new Drilling Productivity Report.

Speaking of that report, Steve’s blog, SRSrocco Report, has this headline: Eagle Ford Shale Decline Shoots Up A Stunning 10% in One Month!

What Steve is talking about is this. First from last month’s Drilling Productivity Report:

Eagle Ford Dec

And see the difference from the latest report:

Eagle Ford Jan

But getting back to the statement in the “Fuel Fix” article that it takes seven of every 10 new barrels produced in those areas just to replace lost production. If the EIA is correct in their latest report it takes a bit more than 7 of every 10 barrels just to make up for the declines of old wells. If their figures are correct, in Eagle Ford, it takes almost 7.6 barrels of every 10 barrels from new wells just to make up for the decline in production from old wells. And of course that number increases every month.

If the EIA’s decline rates are anywhere close then the Bakken should reach her peak at about 1.25 mb/d and Eagle Ford at about 1.6 mb/d, or at some point very close to those numbers.

Bottom line, all the hype is just hype. The US will likely never reach 4.5 million barrels per day of shale oil, the peak will not be spread out over five years as the EIA believes, and the decline will be a whole lot steeper than the chart above indicates. Shale oil may delay the peak of world oil production for one year, or two at the most.

While it is true that only the Light Tight Oil is keeping Peak Oil from being an obvious fact, that can only last for a year or two, then the US, along with almost every other nation in the world will be in decline.

The EIA’s International Energy Statistics is about a month late already. International oil production data is a really low priority with the EIA. They are much more concerned with the price of kerosene and other such matters than they are with world crude oil, the lifeblood of every economy in the world. So we will have to do without it until they get around to posting that data, if ever. But in the meantime I have constructed the below chart using mostly JODI data, with some EIA data used for countries that do not report to Jodi. I use it just to show what the world oil supply would look like without US Light Tight Oil. The last data point is October 2013.

Jodi World Less USA

According to JODI, the world less USA peaked in January of 2008 and almost reached that point again in July of 2008. In October of 2013 we are down about 2.25 mb/d from that point. Interesting to note also that the world less USA has dropped some 1.5 mb/d since July. July was the last month the EIA’s International Data Statistics has data for.

Euan Mearns, below, asks that this chart be posted. The last data point is October 2013:

World Les US & Canada

It doesn’t look a lot different from the “World Less USA” chart. Down 2.53 Megabytes a day from the peak of July 2006. Keep in mind this is JODI data which differs somewhat from the EIA data. The EIA however only has updates through July 2013. There has been considerable attrition in production since then.

The following charts are based on data from the EIA’s AEO 2014 Early release.

aeo2014uscc1/
aeo2014uslto/

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138 Responses to Will US Light Tight Oil Save The World?

  1. TechGuy says:

    Out of curiosity, I wanted to see how much profit or loss a productive Bakken Well makes over its lifetime. I used these assumptions:
    The cost of drilling and operating a Well over a 6 year period was $15M
    The decline rate is about 38% (Based upon figures I found)
    The Well gets capped after 6 years of production.
    The Initial Well Production is 500 bpd.
    The Average price of a barrel of LTO is $65

    Here is a production decay chart using these parameters
    http://www.wolframalpha.com/input/?i=Plot%5B500*Exp%5B-x%2F%28365*2.09%29%5D%2C+%7Bx%2C+0%2C+6*365%7D%5D

    The total recovery for this well is about 360,000 barrels which works out to be about $23.4M. Subtract the $15M for operation cost, yields about $8.4M in profit or about a 56% return on investment. Of course this does not factor in wells that under perform.

    Assuming the Well initial production is only 400 bpd The Total recovery is only 287K with a net profit of $3.6M and about 24% return on investment.

    For a well to achive a breakeven, the inital well production has to be at least 325 bpd. Any less and the well is a loss unless the price of LTO rises.

    • Here is a production decay chart using these parameters..
      TechGuy’s typical decline curve

      But the typical Bakken production decline curve looks nothing like your example. It looks like this.
       photo BakkenDeclineChart_zpsb12fdc57.png

      And some of them look like this:

       photo BakkenDe_zps6dd7617a.jpg

      • TechGuy says:

        OK,

        I will try to do a better job of curve fitting. I used a single order decline rate of 38%. I’ll work on adjusting using the decline rates you provided. Since the chart you provided is much more steeper, I think it is going to drive down the profit margin to the bare bones.

        I assume I am not wasting time, as no one else has estimated the profit margins for Bakken wells yet?

        • No you are not wasting your time, I would love to see the estimated profit margins for Bakken wells. But with a realistic decline curve of course.

        • Dennis Coyne says:

          I have done this already,
          Use a hyperbolic of the form (excel notation)
          output=q/(POWER((1+b*d*t),(1/b))) where q=13100,b=1,d=0.142 and t is time in months from first output (I use t=.5, 1.5,…).

          Remember there are transport costs of $12/barrel, OPEX=$4/barrel, royalty and taxes of 24.5% of wellhead revenue and typically an annual discount rate of 10 to 15 % is used to find the NPV of output (I use a 12% discount rate). Well costs are probably about 8.5 million according to continental resources.
          I assume a 20 or 30 year well life for my NPV calculations following Rune Likvern’s lead (see his fractional flow blog where he covered this recently. He has a more productive well of 450 kb over 30 years.
          The 30 year EUR of my hyperbolic profile is about 364 kb. At $67/barrel at the refinery gate the well breaks even over 30 years, wellhead price is 67-12 or $55/barrel (refinery gate price minus transport cost) and it is this wellhead price that gets hit with the 24.5% royalty and tax. Hope that helps. You can check my work. Note that the breakeven price is where the NPV of profits over 30 years or 360 months is equal to the CAPEX to initially drill and frack the well (8.5 million dollars). I use solver in excel to fid the price that gets NPV30=well cost=8.5 million.

          DC

  2. Toolpush says:

    http://www.rbnenergy.com/i-m-waiting-for-the-crude-gulf-coast-pricing-scenarios-after-the-flood

    Some interesting scenarios put forward for the opening of extra pipelines from Cushing to the Gulf. I get the feeling no one is real sure what the short term impacts will end being, though downward pressure on WTI seems the most obvious.

    Now if only all this wonderful shale oil, was oil and could be refined into products that are in demand. It appears most of the shale oil is too light to produce diesel or Jet A1 and most of the gulf refineries are set up for heavy crude and not the near condensate that is being produce from the shale.

    Will the US govt allow exports to even out indigestion of the supply bubble?
    Will the US refiners go on a quick building spree to process these very light oil?
    Or can the shale producers keep up the over supply with a falling realized oil price?

    We should find out in 6 to 12 months. It should be an interesting show to watch.

    • aws. says:

      What’s lost on the casual observer is LTO is “barely crude”. That’s the interesting thing about new resource production, it’s either super-light or super heavy. Everything in-between is already being, or been, produced.

      Diesel’s not cheap anymore as a lot is being exported, but I wonder in part if there just isn’t enough of the right kind of crude anymore.

      different grades of crude are not fungible fungible.

    • Dennis Coyne says:

      aws,

      http://www.dakotaoilprocessing.com/usrfiles/TrentonDieselRefineryFactSheet.pdf

      I couldn’t find a great reference for the API of Bakken crude, but at the link above:

      A key driver for the plants development is the rapidly growing availability of the sweet light Bakken crude oil. This crude is sweet, as defined by the industry as crude with less than 5,000 parts per million sulfur. Bakken crude typically has less than 1,500 parts per million. This crude is also light (low in density) at API specific gravity of 41.9, compared to the by API gravity of 39.6 for West Texas Intermediate, the US benchmark crude oil. The laboratory distillation of Bakken crude shows high yields of naphtha and mid‐distillates kerosene and diesel) and low residual fuel oil and asphaltenes. This results in high yields of the target product: diesel engine fuel for the trucks and equipment fueling the development of the Bakken oil field. Cost of Bakken crude feedstock locally has averaged a 10% ‐ 11% discount to WTI, while diesel has remained at a premium.

      If that source is correct (and its a marketing pamphlet so skepticism is warranted), the Bakken Crude is pretty nice stuff, if it were in Lousiana (and thus nearer to greater refining capacity and pipeline capacity) it would command a premium price.

      The super light LTO is mostly from the Eagle Ford where at least 20% of the C+C is condensate and the crude portion may be in the low 50s for API density, maybe Toolpush knows, though I think he works offshore.

      DC

      • Toolpush says:

        DC

        Some of it may be high in distalates, but some may also be lighter, as per the Lac-Megantic derailment.

        http://www.csmonitor.com/World/Latest-News-Wires/2013/0911/Oil-mislabeled-Oil-in-Quebec-train-disaster-mislabeled-as-less-volatile-variety

        “The train’s shipment of North Dakota oil was mislabeled as a “Group 3″ flammable liquid, when it should have been given a more explosive “Group 2″ classification, the Canadian transportation safety board’s chief investigator, Donald Ross, said.”

        “Officials initially said they were surprised by the disaster because they thought the oil being transported was unlikely to ignite. But Ross said the oil was as volatile as gasoline, and tests showed the oil was wrongly documented and should have been classed in the same category as gasoline”

        I feel you are correct in that Bakken is heavier than Eagles Ford, but at least some of the Bakken is very light as per the rail disaster. And yes I do work offshore and outside of the US at that, so no special inside knowledge on the US production apart from what I read.

        As it is Christmas morning where I am, a Merry Christmas to you all.

  3. old farmer mac says:

    This comment refers to Ron P’s comment about scientist being clueless if they are talking about something to far afield from their own specialty.

    A very famous modern astronomer with impeccable credentials in his field says evolution could no more create a human eye than a tornado could blow thru a wrecking yard and create a fully assembled airliner from piles of scrap.

    Now as it happens, this astronomer knows quite a bit of math, including some probability theory, and it’s true that the universe won’t last long enough for a tornado to assemble a jet plane.

    But any capable freshman biology student knows where his argument fails- evolution is incremental, adding one little improvement after another, over huge spans of time- time spans so long as to overlap considerably with the time scales most useful to astronomers.

    Now – for anyone who doesn’t understand about evolution working incrementally, I will offer this inadequate analogy:

    Suppose you are playing a card game that begins with you holding a hand dealt to you, which will never be discarded so long as you remain in the game- if you fold you are out of the game, or at least the current hand, which is equivalent to extinction biologically.

    In this game you cannot fold your hand, because that means you are out of the game, permanently.

    Nor will there never be a redeal- a redeal is outside the rules, you must play the cards in your hand however long you can, and then you fold- in biological terms, you are extinct at that point.

    But if there is no provision for turning in the hand you have, and getting a new hand from a new distribution of the cards, how could the game go on indefinitely- for millions and even billions of years?

    Well, in this game of evolution, you are allowed to discard a card , or several cards, and get new ones in exchange.

    So if the rules are mostly like five card poker and deuces aren’t wild, and you have one lowly deuce, you would discard it- at least in in most cases you would do this to improve your hand but otoh, if your deuce is a spade and you are holding four spades and an ace of clubs, your best move would be too discard the ace and hope for another spade- any spade at all. Five spades are a very good hand, a winning hand.

    An eye doesn’t have to be a very good eye to be useful- simply being able to tell bright light from dark enables a bug to run for shelter if a foraging bear turns over the rock or log it lives under.Every tiny little incremental improvement can be , and is, preserved by evolution, until after enough time has passed, very good eyes, such as our own, can be and are the among the results.

    I can’t remember the astronomers name but unless I’m mistaken this true story is from one of Richard Dawkin’s books.

    (No one should presume evolution has a “desire” to improve the hands of the players; evolution is a process, not a living creature, and incapable of “caring” about improvement, stagnation, extinction, or anything else.)

  4. old farmer mac says:

    A little more- not only are you allowed to discard a card for another, you can do this repeatedly, as often as every generation, and sometimes you are allowed to get a few extra cards too. Further more you can occasionally even swap a few cards with a neighboring player.

    But every generation lives to reproduce successfully or dies without doing so successfully based in the cards it it’s hands while it lives.

    Genomes change dramatically over long enough time spans- think fish to human- but very slowly indeed from generation to generation.

    We human monkeys share well over 98 percent of our genes with chimps- after six or seven million years of divergent evolution.

  5. Tim E. says:

    Here is an interesting take on the plumes Hydrogen Sulfide and Methane that is being released from the Oceans and thawing permafrost. I don’t know enough about it to determine if it has any validity or not – but it’s an interesting theory/read.

    “The seas, lakes and oceans are now pluming deadly hydrogen sulfide and suffocating methane. Hydrogen sulfide is a highly toxic water-soluble heavier-than-air gas and will accumulate in low-lying areas. Methane is slightly more buoyant than normal air and so will be all around, but will tend to contaminate our atmosphere from the top down. These gases are sickening and killing oxygen-using life all around the world, including human life, as our atmosphere is increasingly poisoned. Because both gases are highly flammable and because our entire civilization is built around fire and flammable fuels, this is leading to more fires and explosions. This is an extinction level event and will likely decimate both the biosphere and human population and it is debatable whether humankind can survive this event. ”

    http://jumpingjackflashhypothesis.blogspot.com/

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