The Debate Over Shale Oil Reserve Estimates Suggests EOG Resources Might Be A Good Short

Michael Blair profile picture
Michael Blair


  • EOG is the biggest player in the Eagle Ford shale oil play.
  • A debate has erupted over the methodology for estimating shale oil reserves.
  • If the doubters are correct, shale oil reserves are potentially overstated.
  • EOG could be a casualty of the outcome.

Is the oil industry overstating its reserves in shale oil? This issue surfaced recently in an article in Business Week.

Most oil and gas investors have never heard of Jan Arps or seen his commonly-used formula for calculating the Estimated Ultimate Recovery ("EUR") from an oil well. Arps modeled the behavior of oil wells and created his formula in 1945, and it has enjoyed widespread adoption ever since.

Source: Stockology

SA Author Michael Filloon follows the Bakken and the stocks of companies operating in the Bakken extensively. He published an article on EOG on January 7, 2013, which was the subject of some online debate. Blogger JJ2000426 writing on the blog "Stock Psychology" did an admirable job of analysis of the discrepancy between EUR calculated by the Arps formula and a modified formula he argued more accurately estimated EUR for shale oil.

The Business Week article raises this issue to a higher level and provides some support for the assertion that shale oil reserves may be overstated. If they are, the ramifications are significant for investors.

Bloomberg ran an article on November 12, 2013, with the headline: "U.S. to Be Top Oil Producer by 2015 on Shale, IEA Says." That sort of sentiment is probably playing a role in the Obama administration's foot dragging on a decision for Keystone XL. Regardless, the ebullience for the U.S. outlook on oil production is potentially rooted in sand rather than bedrock, and the sand could shift very quickly.

Shale oil production has high decline rates. Wells put into production achieve very high rates of output early in their lives and then fall off very sharply.

The rapid decline is a "double whammy" if the EUR is a lot less than previously thought. Not only will production fall swiftly after an initial boom, but also it will end

This article was written by

Michael Blair profile picture
I retired as CEO of an Automotive Parts supplier, and manage an investment portfolio for myself and family. I have a BA in History from Royal Military College of Canada and an MBA from the University of Western Ontario. I have a graduate certificate in Advanced Valuation from NYU and graduate Diploma in Mining Law, Finance and Sustainability from Western University. My first career was as a fighter pilot in the RCAF, and, following my MBA I joined McKinsey & Company, Inc. leaving them for Canadian GE. I left CGE as a Vice President in 1984 and founded The Enfield Corporation Limited ("Enfield") which grew from 243 employees in 1984 to over 10,000 in 1989 when Enfield was taken over and I was replaced as CEO. In 1989, I acquired control of Algonquin Mercantile Corporation, renamed Automodular Corporation in the late 1990's when I turned it to focus exclusively on automotive parts sub-assembly. Along the way, Algonquin turned a few ageing drug stores into Pharmx Rexall Drug Stores Ltd., sold to Katz group in 1997 and today a major Canadian drug store chain. I have been a private investor since 1971 both directly and through a private company controlled by myself and members of my family.

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