I recently wrote an article dealing with global conventional reserves and production outlook, given the fact that we have seemingly reached the halfway point of ultimate production, given available resources and current recovery rates from existing fields. Those resources are, of course, subject to economic and technological factors, as I pointed out. By my estimate, currently, industry is able to extract about 50% of the oil in place, as long as the price is right. Total conventional oil in place that has been discovered so far is about 5.4 trillion barrels, while somewhere between 1.2 trillion and 1.3 trillion barrels have been produced. With new discoveries becoming increasingly insignificant, it is now up to economic and technological factors to help prevent a peak and decline in production. We need to see an average improvement in ultimate recovery of at least 1% every two years in order to avoid the decline scenario from this point on, given that reserve replacement from new conventional oil discoveries has been running at about 10-20% in the past few years. Given the situation with conventional oil, which I think needs to be taken seriously, I think it is important to also contemplate the relationship of unconventional resources such as shale with the Hubert curve model because we need to know what to expect in this regard as well.
Shale Production Model Is Different From Conventional Model
The Hubert model theory suggests that when half of all recoverable reserves have been produced from an individual field, a region or worldwide resources, a peak in production occurs, followed by an inevitable permanent decline.
Personally, I don't believe that this is a perfect model because there are plenty of factors which can change its shapes, such as price, field production management, geopolitical events, and many other circumstances. It is nevertheless a useful tool, which can provide us with an approximate reference in regards to where things stand. While I do believe that the shape of the curve can be distorted by a number of factors, I don't think it is by much, which is why I believe we need to talk about this, given that basic arithmetic suggests that we are at that halfway point right now, in the absence of further gains in ultimate field recovery.
There are many people out there who tend to assume that this same curve can be applied to shale fields, after all, it is oil. I personally think that this assumption is wrong, for a number of simple reasons. For instance, let us assume for argument's sake that the extraction of half the oil that can be technically extracted from the Bakken field will happen when two-thirds of all viable wells have been drilled. That means that one-third of potential well locations are left to be drilled. As we also know from the EIA monthly drilling productivity report, it takes a certain amount of new production each month that needs to be added just to keep production flat. Everything above that level leads to an increase in production.
As we can see, Bakken's production is currently forecast to increase because production from new wells is higher than the legacy production decline rate. Going back to the hypothetical scenario where half of all technically recoverable reserves will be produced by the time two-thirds of all wells have been drilled, there is nothing stopping producers from drilling more wells than are needed to stem a decline in production, with a third of well locations yet to be drilled. At the same time, there is no reason to expect producers will keep drilling enough wells to at least keep production flat as we approach that halfway point in total ultimate production from the field. In other words, the halfway point in ultimate reserve extraction from the Bakken, or any other shale field will not play a significant role in deciding peak and permanent decline in these fields.
Looking At Available Viable Acreage Is A Far More Relevant Measure
The best way by far to evaluate where shale production is headed in any particular field or for the industry as a whole is to look at economically and technically viable acreage. With about a decade of drilling behind us, it is no longer hard to figure out where that viable acreage is to be found as well as the magnitude of it.
As we can see, certain areas will yield better expected ultimate production results compared with others. In other words, the economically viable part of the field will roughly correspond with the regular occurrence of wells that are estimated to ultimately produce more than 250,000 barrels. Drillers agree, which is proven by their tendency to concentrate their drilling in those areas. By my rough estimate, the Bakken field's viable surface area is about 3,000 square miles, mostly concentrated in four counties. Assuming that ultimately about 10 wells on average will be drilled on each square mile, we are looking at about 30,000 wells being drilled in the Bakken core before any further drilling will become almost inconsequential, therefore, a steep decline in production will most likely occur thereafter. Based on North Dakota's government data, at least 12,000 wells have been drilled so far, with the overwhelming majority of them in the four county core area. What this means is that if we are to assume the average well saturation per square mile to be about 10, we are most likely about one-third of the way towards total saturation. Whether this will turn out to be a realistic estimate in hindsight will depend to a great degree on whether the ultimate well saturation estimate is close to reality or not.
Regardless when the core area will become saturated, once it does, chances are that the field will be in irreversible decline. Those who believe otherwise and expect the peripheral part of the field to take over, thanks to technological advances and so on, tend to hold on to a well-disseminated misconception in regards to the rise of the shale industry. To this day, the shale revolution is heralded as being a technical innovation. Fact is that it was nothing of the sorts. Horizontal drilling and hydraulic fracturing, both of which were already existing practices were combined, with higher oil and gas prices being the catalyst that made it all happen. The practice was improved over the years, with drillers finding the optimal approach. The interesting part, however, is that if we look at new permits, the optimized drilling, combined with recovering oil prices since early 2016 did not lead to drilling going into the peripheral areas. If anything, it seems even more concentrated on the core than before.
While I have no doubt that given more favorable oil prices, drilling will happen more intensely outside the core area. Over-saturation within the core area will take place as well, with wells being drilled, even though well interference issues will become more acute. But the most likely point of permanent, irreversible field decline is likely to happen when proper or optimal saturation of the core area that the industry itself has already identified for us through its drilling patterns and results will be close to completion. While it is possible that this point might more or less coincide with the halfway point in ultimate recovery in at least some of the fields, chances are that it will be a coincidence, nothing more.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.