The United States is not going to become energy independent because of tight oil. Period. Reports to the contrary are an illusion of U.S. energy independence based on unrealistic assumptions and projections about the long-term potential of oil production from tight formations like the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas. There are several compelling reasons for this [as outlined below]. Words: 575
So writes Arthur Berman*, Labyrinth Consulting Services, in a guest editorial for The Economic Straight Talk Newsletter – Insights for Serious Traders and Investors, entitled The Illusion of U.S. Energy Independence.
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Below are Berman’s 3 reasons why the U.S. is not going to become energy independent because of tight oil:
1. These new plays have extremely high decline rates.
The aggregate decline rate of producing Bakken and Eagle Ford wells is 38% and 42% per year, respectively. Conventional oilfield decline rates average 4-5% per year. This means that the only way that production can continue to grow is by constantly drilling new wells. At roughly $10 million per well, that requires access to vast amounts of capital. Rig counts in these plays are now below the peaks. This implies that there are either capital or well performance constraints.
I estimate that 1,500 new wells must be drilled in the Bakken ($17 billion) and 800 new wells in the Eagle Ford ($8 billion) this year just to keep production from declining. Almost 70% of Bakken and almost 90% of Eagle Ford production in the first half o 2012 is form wells that began production in the last 18 months.
2. These tight oil plays require $80-90 per barrel oil prices to break even.
None of the exuberant reports about U.S. energy independence discuss cost, price or profit margins — they only focus on volumes. The truth is that oil prices have been in the $87-$95 range for the last quarter which means that profits are marginal in these plays. In fields or “sweet spots” operators are making money but the average well in the play loses money.
3. The biggest and most productive discoveries are made early and, for the most part, subsequent discoveries are smaller and well performance is poorer.
Predictions that the U.S. will surpass Saudi Arabia and Russia in oil production must assume that current discovery and production rates in the Bakken and Eagle Ford will continue, except that they never do. The fallacy of this assumption is noted in a January 15, 2013 report by Bernstein Research: “Analysis of well results in the Eagle Ford (horizontal), Bakken (horizontal), and Permian (both vertical and horizontal)suggest average per-well oil IP [initial production] rates have peaked and are currently below 2010-11 highs.”
The United States consumes approximately 15 million barrels of crude oil per day and produces about 6.5 million barrels per day including the Bakken and Eagle Ford additions to date. That means that 8.5 million barrels per day must be imported.
The U.S. Energy Information Administration (Department of Energy) estimates that U.S. crude oil production will increase to nearly eight million barrels per day by 2020 and then decline. If the EIA is correct, the United States will still have to import about seven million barrels per day allowing for demand decline, and that does not look like energy independence to me.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*About Arthur Berman (http://host.trustab.org/labyrinthconsultingservicesinc): Mr. Berman is a petroleum geologist with 34 years of oil & gas industry experience – 20 years working with Amoco (now BP) and 14 years as a consulting geologist – a Director of The Association for the Study of Peak Oil, and a past Director of The Houston Geological Society and The Society of Independent Professional Earth Scientists.)
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