Underground Truths: Shale Won't Save Us
On October 16, Foreign Policy published an article written by Ed Morse and Amy Jaffe entitled “The End of OPEC,” in which they argued that emerging technology and American production of tight oil and gas is revolutionizing the energy industry. This transformation, they argue, will allow the United States to “use its influence to democratize global energy markets” and as it does so, “the United States becomes an energy exporter—at competitive prices—[and] that should seal the deal.” The views contained in this article reflect a growing body of published works over the past two years that claims to herald the dawn of “energy independence” for the United States. The fundamentals of global oil supply and demand, however, suggest a very different scenario to us: a supply-constrained future. The consequences of such an occurrence could have severe economic implications for the U.S. and global economies.
America’s view of future world oil supply experienced an abrupt change about two years ago. In this short period of time, the pendulum swung dramatically from a concern over insufficient supplies during the mid-2000s to “energy independence” by early 2011. We believe a hard scrub of the facts shows such optimism was never justified, and combined with an analysis of tight oil production data over the past decade, indicates the potential for near-term supply problems.
The pivot point for the abundance meme probably dates to September 2011, when well-known energy consultant Daniel Yergin published an article in the Wall Street Journal entitled, “There Will be Oil.” In this opinion piece Mr. Yergin denigrated those warning of future imbalance between oil supply and demand as having no credibility and reassured all that to the contrary, “the world has decades of further growth in production before flattening out into a plateau—perhaps sometime around midcentury.” Six months later Ed Morse grabbed headlines around the world with the publication of a Citigroup study which claimed “there is little doubt that the U.S. tight oil play lies at the heart of U.S. energy independence and North America becoming the new Middle East.” The facts about global oil supply we present below, however, suggest claims of “independence” amount to misplaced hype.
According to Forbes, China by itself is expected to increase oil consumption by an additional 4 million barrels of oil per day (mbd) by just 2020. Meanwhile, according to EIA data, during the same time the world as a whole increased its consumption of oil by 13% (2000-2010), OPEC countries as a group increased domestic consumption almost four times faster over the same timeframe (56%): the world’s major oil-exporting countries are consuming ever-increasing amounts of their own oil leaving progressively less available for global export. And given the explosive population growth expected in OPEC countries in the coming decades, this trend is likely to intensify.
Moreover, while countries of the developed world are trending towards lower consumption (owing to a combination of constrained economic activity, conservation and efficiency measures), it will not likely be sufficient to offset the increase in demand from the rapidly industrializing oil-importing Asian giants of China and India and the rising domestic consumption OPEC producers. To compound matters, approximately 80% of the world’s largest conventional oil fields are already in post-peak decline, and as a group suffers between 4.5% to 6% annual production declines—all of which has to be replaced each year just to keep production level.
Further, as a 30-year veteran of the Geological Survey of Canada, geoscientist David Hughes recently confirmed evidence is piling up that American tight oil production is not likely to continue its stratospheric rise for much longer. In a recent interview, Hughes told us that after conducting an analysis of over 65,000 tight oil wells he expected tight-oil production to continue rising until about 2017. However, as the first-drilled “sweet spots”are used up and owing to dramatic field decline rates—currently averaging between 30% and 44% per year—“the higher production grows the more wells you have to drill just to offset decline.”
He estimates at current drilling rates of a 5,500 wells per year, the Bakken and Eagle Ford (the top two tight oil plays which combined generate two-thirds of US tight oil production) will peak in the 2017 timeframe at a combined production of 2.3 mbd. From this zenith, production from these fields will decline to about 1.7 mbd by 2021 and less than 0.5 mbd after 2025. At approximately $8 million per well, these fields will require up to $44 billion per year in capital expenditures to maintain this peak-and-decline production profile. The prognosis for other tight-oil fields is similar owing to the extraordinary field declines that are endemic with tight oil.