Can shale oil and gas carry the U.S. to energy independence?
The short answer is no, says Credit Suisse (CS) in a September 7 report, but North America as a whole could be energy self-sufficient.
CS hangs their thesis on 4 key pegs:
1. Flow rates from oil wells about 25% higher than now, based on future technology advances
2. More wells that are on average 39% closer together than they are now (the industry calls this "downspacing")
3. $95/barrel Brent pricing
4. Increased use of natural gas in the economy
The barriers to continental self-sufficiency are:
1. Fast declining production in shale wells
2. Oil below $75/barrel
3. Enough money to build pipelines and refineries
CS says U.S. oil production will peak out at 10 million barrels of oil per day (bopd) by around 2022-a double from 2008's 5 million. 2011 oil production in the U.S. was 5.7 million bopd.
EIA stats show petroleum consumption has fallen steadily for seven years, and in 2011 was 18.8 million bopd-the same as 1997 and 2 million bopd below the peak in 2005.
Once you include 3 million barrels of U.S. liquids production (natural gas liquids like propane, butane, condensate and biofuels), overall production was still less than 9 million boepd-not even half of the country's total demand of 19.2 million barrels of oil equivalent per day (boepd).
Canada and Mexico are comparatively small consumers, using only 4.4 million bopd, with combined overall oil and liquids production of 6.6 million boepd of oil and NGLs.
All these numbers show that overall, the U.S. is falling short by 10.7 million boepd itself, and North America as a whole comes up around 8.8 million boepd shy of total demand.
That means energy independence would have the U.S. producing and refining 10.7 million boepd more than it does now. That's a (very) tall order.
CS expects U.S. oil and liquids production to rise from the current 8.7 million boepd to around 15 million boepd by 2022, while demand will slump closer to 18 million boepd. A modest jump in Canadian output paired with continuing low demand will help bridge the shrinking supply gap, moving North America closer to energy independence. And that assumes a steady decline from Mexico.
The crux of the report's predictions lies in the Americans' ability to tap their massive unconventional oil resources.
The first key to this prospective boom is the initial production (IP) rates for the country's major shale oil fields - the amount produced at each well over the first 30 days. (The industry shows this number in print as the "IP30" rate.)
These numbers are often the most important, since the greatest output comes in the first few months before declining rapidly. CS estimates IP30 rates for each of the major shale plays using production numbers at the end of the fourth quarter of 2011.
Some of these assumptions are set far above what actual production numbers are today. For example, actual output in the Utica shale and Mississipian formation was close to nil-so almost no data on which to guesstimate the future. But CS expects wells to eventually reach around 600 and 400 boepd, respectively, as the plays mature.
Other young plays that lack any production data like the Brown Dense limestone and the Woodford shale are projected to top 300 boepd based on the limited data of those regions.
The biggest producers - the Granite Wash and Eagle Ford shale - are already close to their CS assumptions.
On the whole, CS estimates average a 21%-25% bump over actual output numbers from last year. Only the Granite Wash and Cana Woodford oil plays are projected above the CS exploration and production team's numbers.
The report backs up its optimistic IP30 rates with strong early numbers in some of the developing unconventional plays. Over three years, IP30 rates in the well-developed Barnett formation more than doubled.
But in the Bakken and Marcellus shale plays, IP rates tripled in 13 months and nine months, respectively. The Eagle Ford is the only exception, and those numbers are skewed somewhat by an early focus on natural gas over liquids.
A large part of rising IP rates is the assumption that oil and gas companies will eventually learn the nuances of each region. But CS also notes the increased use of pad drilling-where four wells can be drilled from one, two-acre pad-should keep more oil rigs online for longer during the first 30 days, as they don't need to be moved around as much from well to well.
Pad drilling will also play a role in lowering the spacing between unconventional oil wells.
CS projects the U.S. will need to increase its total oil wells by 27% in order to prevent a decline within the next four years. In order to meet the report's production numbers, the country would have to increase the number of new wells being drilled each year by 39% through 2022.
These estimates are all a bit voodoo-they depend on tight spacing and a lot higher flow rates than now. However, CS says recent experiments in downspacing in the Eagle Ford shale play should help boost production.
The big question when you downsize your wells is-are you just cannibalizing existing production from existing wells or are you able to recover more oil overall (the Recovery Factor) by draining parts of the reservoir that you wouldn't have gotten otherwise.
If it's the former, the impacts on the US production outlook would be dramatic.
The biggest question mark for me, however, is what will the decline rates on shale oil be long term? Right now CS suggests average decline rates in the Bakken and Eagle Ford-the two largest shale oil plays right now-are 60% in Year 1, 30% in Year 2 and falling close to 15% in Year 5. CS puts its estimate for the average terminal decline rate - beyond 20 years - of unconventional US oil resources at 8%.
But the Bakken and Eagle Ford shale plays have only been drilled hard for the past 3-4 years. So long term decline rates-which CS thinks will average out at 4% for the Bakken and 6% for Eagle Ford over the life of the well-is an educated guess.
CS estimates expected ultimate recovery per well for the Bakken of nearly 900,000 boepd and 600,000 boepd for the Eagle Ford shale. Less developed projects like the Permian Horizontal, Woodford shale and Granite Wash are all expected to reach near 500,000 boepd, despite a small sample size.
If declines are steeper than they project, then these wells will get shut-in sooner and produce less than CS suggests. Though they didn't talk about waterflooding, which will likely GREATLY increase overall reserves in US tight oil plays. Read all about that here in my story on waterfloods.
CS estimates that the oil industry will need Brent prices of at least $95 per barrel to justify investment through 2014. After that, investment costs will drop low enough that shale fields would eventually draw interest even at benchmark prices of almost $75 per barrel.
The CS analysis is most sensitive to a change in rig counts. A drop to $80 per barrel within the next year would result in 180 fewer rigs operating within the country and $60 billion less in total investments by 2014. Oil production in this scenario would reach only 8 million bopd.
The report says that massive infrastructure spending (pipelines, refineries, etc.) is a key to energy independence-and notes that oil companies have already proven unwilling to invest in new infrastructure at prices as high as $90 per barrel, despite most wells remaining profitable.
A lack of infrastructure spending-specifically pipelines to take crude oil out of the Cushing Oklahoma hub, and to get Bakken and Canadian oil to the east and west coasts-have caused a $15/barrel discount in North American crude prices to the rest of the world.
This is huge lost revenue for U.S. and Canadian oil producers.
Pipelines such as the Seaway pipeline and the proposed Keystone XL should add between 950,000 and 1.25 million bopd of capacity away from Cushing OK, to the Gulf Coast. But Bakken oil will continue to rely on rail and barge transportation, and both the Keystone XL and the Flanagan South pipelines that would service the region are yet to be approved.
CS also gives some consideration to possible regulatory restrictions, primarily in terms of water restrictions. Several states have already considered limiting water use in the energy sector to prevent the decline of local agriculture industries, while concerns about water safety have spurred most of the objections to the use of fracking in the U.S.
U.S. energy independence is a hot topic spurred by the rapid rise in shale oil production-The Shale Revolution.
While it's hard for anybody to guesstimate what such a dynamic industry will be doing 10 years from now, Credit Suisse data suggests that will remain an elusive goal.