Shale Reality Check - Outlook not as rosy as projected by government


Below is the executive summary of an extensive 150+ page report on shale gas and tight oil production and permeability reservoir projections; "Drilling into the US government's rosy projections for shale gas & tight oil production through 2050". It concludes that EIA projections of production through 2050 at the play-level are highly to extremely optimistic, and are therefore very unlikely to be realized.

The report is researched and written by David Hughes, an earth scientist with 4 decades of experience in studying the energy resources of Canada.

Shale Reality Check

Executive Summary

Shale gas and tight oil from low permeability reservoirs have provided a new lease on life for U.S. oil and gas production. Tight oil has allowed U.S. oil production to double from its 2005 lows, and shale gas has similarly allowed a major increase in U.S. gas production. However, the nature of these reservoirs is that they decline quickly, such that production from individual wells falls 7090% in the first three years, and field declines without new drilling typically range 2040% per year.

Continual investment in new drilling is therefore required to avoid steep production declines. Older fields like the Barnett, where drilling has nearly ceased, are in terminal decline. Shale plays also exhibit variable reservoir quality, with sweet spots or core areas containing the highest quality reservoir rock typically comprising 20% or less of overall play area. In the post-2014 era of low oil prices drilling has focused on sweet spots which provide the most economically viable wells.

How sustainable is shale production in the long term given optimistic government and industry forecasts of robust production through 2050 and beyond? This report endeavors to answer that question by assessing the viability of the projections of the U.S. Energy Information Administration (EIA), which are widely used by policymakers, industry, and investors to make long-term plans.

The report is based on an analysis of well production data for all major shale gas and tight oil plays in the U.S. These plays make up 88% of the EIAs Annual Energy Outlook 2017 (AEO2017) reference case cumulative production forecast for shale gas and tight oil for the period 20152050. The data source is Drillinginfo, a commercial database of well-level production data which is utilized by the EIA and most major oil and gas companies.

For each play, this report assesses:

  • Current and historical production.
  • Total- and producing-well count by county, well type and vintage.
  • Well- and field-declines by county, well type and vintage.
  • Distribution of wells in terms of quality, as defined by production of oil or gas in the highest month (initial productivity), in order to delineate sweet spots.
  • Density of wells in sweet spots.
  • Cumulative oil and gas production by county.
  • Average productivity of all wells drilled in each year from 2012 to 2017 by county, well type and play average, in order to determine the impact of enhanced technology.
  • Production history in sweet spot counties and in the remainder of the play area.
  • Prospective drilled area to determine the area which might reasonably contribute to future production.
  • The optimism bias for the EIA AEO2017 play-level forecast based on play fundamentals determined from the assessment

This analysis finds that EIA projections of production through 2050 at the play-level are highly to extremely optimistic, and are therefore very unlikely to be realized. EIA play forecasts count on recovering all proven reserves plus a high percentage of unproven resourcesin some cases over 100%by 2050. (Proven reserves have been demonstrated by drilling to be technically and economically recoverable. Unproven resources are thought to be technically recoverable but have not been demonstrated to be economically viable; as such they are much less certain than proven reserves.) Furthermore, most of these play-level projections assume that production will exit 2050 at high levels compared to current rates, implying that there are vast additional resources to be recovered beyond 2050.

Key findings:

Well productivity

  • Better technologyincluding longer horizontal laterals, a tripling of water and proppant injection since 2012, and more fracking stageshas resulted in increased average well productivity in most plays.
  • A significant portion of the increased average well productivity is a result of high-grading sweet spots: focusing drilling on the highest quality reservoir rocks (which form a relatively small portion of most plays).
  • Average well productivity in some counties and plays has declined in 2017, indicating technology there has reached the point of diminishing returns. This is a result of drilling outside of sweet spots and/or drilling wells too close together, resulting in frac hits and well interference which compromises individual well production.

Tight oil plays

  • The Permian Basin plays are the main driver for tight oil production growth. In Permian plays such as the Wolfcamp and Spraberry production is increasing rapidly, although Bone Spring production has flat-lined recently. EIA estimates for production through 2050 for these plays are rated as highly to extremely optimistic.
  • Production in older tight oil plays like the Bakken and Eagle Ford, which were among the first tight oil plays developed, is down substantially from peak. EIA projections for these and other tight oil plays, including the Niobrara and Austin Chalk, are rated as highly to extremely optimistic.

Shale gas plays

  • The Appalachian plays are the main driver for shale gas production growth - the Marcellus and Utica now account for 48% of U.S. shale gas production. EIA forecasts for the Marcellus and Utica, which project these will provide 52% of cumulative production of U.S. shale gas through 2050, are rated as extremely optimistic.
  • Production in older shale gas playsincluding the Barnett, Haynesville, and Fayetteville, which were among the first to be developedis now down more than 40% from peak. EIA projections for these playsalong with the Woodford, which is down 25% from peakare rated as highly to extremely optimistic.

All plays

  • The EIA AEO2017 reference case projects that 1.29 million wells will be drilled to recover oil and gas from both conventional and unconventional reservoirs in the period 20152050. At $6 million per well, this amounts to $7.7 trillion. Shale plays reviewed herein, which account for 88% of the EIAs estimated shale oil and gas production through 2050, would require 1.04 million wells using EIA assumptionsat an estimated cost of $5.7 trillion. Recovering the remaining 12% of shale resources would require an additional .68 million wells at a cost of $4.1 trillion. Given the EIAs overestimates of future shale production and recoverable resources, it is unlikely that all of these wells will be drilled.

There is no doubt that the U.S. can produce substantial amounts of shale gas and tight oil over the short- and medium-term. Unrealistic long-term forecasts, however, are a disservice to planning a viable long-term energy strategy. The very high to extremely optimistic EIA AEO2017 projections impart an unjustified level of comfort for long-term energy sustainability. As sweet spots are exhausted, the reality is likely to be much higher costs and higher drilling rates to maintain production and/or stem declines. The shale revolution has provided a reprieve from what just 13 years ago was thought to be a terminal decline in oil and gas production in the U.S. It has sparked calls for American energy dominance despite the fact that the U.S. is projected to be a net oil importer through 2050, even given EIA forecasts. This reprieve is temporary, and the U.S. would be well advised to plan for much-reduced shale oil and gas production in the long term based on this analysis of play fundamentals.

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