American Oil In 2015: Less Production, More Dependence, Higher Gas Prices

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Includes: BNO, CRUD, OIL, SCO, UCO, USO
by: Ronald R. Cooke

Memo: To all those who claim shale oil has the potential to eliminate America’s dependence on foreign oil. Don’t forget reality.

Read the USGS Report

The physical laws of shale oil exploration and production have not been repealed. We need to understand what the USGS has been telling us. (The italics are mine.)

The assessment of the Bakken Formation indi­cates that most of the undiscovered oil resides within a continuous composite reservoir that is distributed across the entire area of the oil generation window.

The forma­tion consists of three members: (1) lower shale member, (2) middle sandstone member, and (3) upper shale member. Each succeed­ing member is of greater geographic extent than the underlying member. Both the upper and lower shale members are organic-rich marine shale of fairly consistent lithology; they are the petroleum source rocks and part of the continuous reservoir for hydrocarbons produced from the Bakken Formation. The middle sandstone member varies in thickness, lithology, and petrophysical properties, and local development of matrix porosity enhances oil production in both continuous and conventional Bakken reservoirs.

There is no certain method to determine the exact volume of oil that is contained in the Bakken Formation or any formation. The Bakken Formation oil resource is much different than the oil resources of Saudi Arabia. The Bakken oil resource is what we refer to as a "continuous" or unconventional resource; whereas the oil resources being produced in Saudi Arabia and other Middle Eastern countries are conventional resources. Continuous or unconventional resources require more technical drilling and recovery methods that are much more costly and the oil recoveries per well are commonly much lower than in a conventional resource accumulation.

Oil is produced from the Bakken Formation shale in a manner that is a refinement of traditional oil field practice. Traditional oil fields produce from rocks with relatively high porosity and permeability, so oil flows out fairly easily. In contrast, the Bakken Formation is a relatively tight formation consisting of low porosity and permeability rock, from which oil flows only with difficulty. To overcome this problem, wells are drilled horizontally, at depth, into the Bakken and then water and other materials (like sand) are pumped downhole at high pressure (called hydro fracturing) to create open fractures, creating artificial permeability in these tight rocks. The oil can then flow more easily out of these fractures and tight pores.

The USGS reassessed the Bakken formation in 2013. It concluded the combined mean total oil resource of the Bakken and Three Forks formations is 7.38 billion Bbl of oil, with 3.65 billion Bbl of oil attributed to the Bakken formation and 3.73 billion Bbl of oil attributed to the Three Forks formation. The Eagle Ford Shale and Austin Chalk in the Western Gulf basin included approximately 1.7 Bbl of oil. According to BP data, shale structures have thus far added approximately 14 Bbl of oil to America’s potential oil resource base.

But:

  • This does NOT tell us how much of the estimated oil will be found.
  • This does NOT mean all of the found oil is economically recoverable.
  • It does NOT mean there will be a net yield of energy (EROEI) from all possible wells.
  • And finally, these numbers do NOT tell us how much of this oil is accessible oil. (Note 1)

The conventional oil component of this assessment is a negligible ~ 1 percent of the estimated technically recoverable oil resource base. That means oil companies had to develop (and continue to develop) increasingly sophisticated methods of exploration, assessment, and production.

Economics

As an economist, I am interested in oil that can be found, produced, transported, refined, and distributed at a price the consumer can afford to pay. In my opinion, a high percentage of this potential oil resource, perhaps 25 to 35 percent, may be technically recoverable, but is not economically viable. Shale resource development, like almost all oil exploration and production, involves substantial financial risks. Of lesser concern, but also important, is the EROEI of found oil which must be greater than 1. (Note 2)

Another issue which has been obfuscated by the media is whether or not shale oil production will enable America to eliminate its dependence on foreign oil. That is highly unlikely. Although American oil consumption has recently declined, and American oil production has increased, both conditions are temporary. Lower gasoline prices will encourage greater consumption, and existing oil company debt loads will limit new exploration and production until the price of the WTI oil index exceeds $90 - $100 per barrel.

America currently consumes ~19 million barrels of oil a day (over 6.9 Bbl per year). Absent an economic recession, consumption should hold at 19 – 20 million barrels a day into 2015. In my opinion, production is likely to decline to less than 9 million barrels a day (3.3 Bbl per year) in 2015, forcing America to import over 10 million barrels a day (3.6 Bbl per year). If OPEC continues to provide oil to world markets at less than $80 a barrel through mid-2015, than the spread between production and consumption will be higher.

On the other hand, I fully expect the American economy to decline in 2015. If this does occur, American oil demand will decrease. But world oil prices could still rebound. Although this may appear to be counter-intuitive, it is highly likely we shall see a sharp increase in world oil prices by the second half of 2015 or early 2016 if world oil production continues to decline as suppliers decrease capital investments and withhold product from the market.

The economic laws of supply and demand have not been repealed.

But I could be wrong. Do your own homework and then judge for yourself. As usual, any text published on my blog is subject to the Legal Information found here.

Notes

Note 1: Accessible reserves. It is important to understand the definition of “accessible” reserves: "Accessible reserves are those reserves of oil, coal or natural gas that can actually be found, produced, transported, refined, and distributed without disruption at a price the consumer can afford to pay." Our fossil fuel resources are useful only if they can be produced and consumed, without disruption, at a price the consumer can afford to pay.

Note 2: EROEI. Energy Returned On Energy Invested means that the energy derived from exploration, production, refining, and transportation exceeds the energy consumed for these activities. We tend to forget. If the EROEI of any energy resource is 1 or less, then doing that activity no longer provides a net addition to our stockpile of energy.

The average EROEI of world oil production has been declining. I read somewhere that before 1950 the EROEI for oil was more than 100:1. By the 1970s it had dropped to 30:1, and by 2005 the average EROEI on new production had fallen to 10:1. As we go for oil in increasingly difficult environments (deep under the ocean, open pit mining, fracking, etc.) the EROEI will decline further. We have to face the facts. Just because there is oil in the ground does not mean it is practical to extract. Every well has its cost in money AND energy. At some point the EROEI for every well will fall to less than 1, making oil from that well an impractical resource for energy.