By John Kemp
LONDON Oct 16 North Dakota's rapidly rising oil
output continues to defy the sceptics, who have predicted that
production would stop growing as declining output from existing
wells offsets extra production from new drilling.
Oil production soared to 911,000 barrels per day in August,
up more than 200,000 bpd compared with the same month last year,
the state's Department of Mineral Resources (DMR) said this
Production is on course to hit 1 million bpd by the end of
the year or early 2014, according to the DMR.
By the end of August, 9,452 wells were in production. But
another 450 had been drilled and were awaiting fracturing and
Completions are running at about 1.5 times the threshold
needed to maintain production, the DMR wrote in its monthly
statement, which implies output will continue rising in the next
few months as crews work through the backlog (Charts 1 and 2).
Shale sceptics have been confidently predicting since at
least 2010, when output was below 300,000 bpd, that production
Only the DMR has struck a defiant and lonely optimistic
note. In 2012 DMR projected output would plateau somewhere
between 700,000 and 1.2 million bpd between 2015 and 2025, based
on a total of up to 40,000 wells in the thermally mature part of
the shale play.
Many out-of-state analysts, including leading energy
consultancies, criticised those projections as overly positive.
Now they appear conservative. So why did the sceptics get it so
OUTRUNNING THE RED QUEEN
Sceptics based their argument on the unusually rapid output
decline from wells bored into shale formations compared with
more conventional oil fields.
More and more holes would have to be drilled just to offset
dwindling production from the existing stock of wells. More
wells would require more drilling rigs and fracturing crews,
which could not be increased indefinitely.
Eventually, production would reach an equilibrium based on
some maximum feasible number of drilling rigs and crews.
"Yearly output must inevitably decline because the
maintenance of a given output each year necessitates the
drilling of an increasing number of wells," U.S. government
geologist Carl Beal wrote in 1919, during an earlier panic about
peaking domestic oil production.
More recently, The Oil Drum blog likened shale production to
the Red Queen's Race in Lewis Carroll's book "Through the
"Here, you see, it takes all the running you can do, to keep
in the same place," the Red Queen told Alice. "If you want to
get somewhere else, you must run twice as fast."
Shale sceptics pointed to the tremendous variability in
output from wells drilled into the most productive core areas of
the Bakken compared with the less-prodigious outlying areas.
The core would be fully exploited quite quickly, they
suggested, leaving only the less productive periphery,
necessitating drilling even more wells with lower output.
WHY SCEPTICS WERE WRONG
In practice, the shale sceptics have proved wrong on every
point, revealing a fundamental lack of understanding about the
geology, economics and technology of shale production.
With more experience of horizontal drilling and fracturing
and more knowledge about the play, drilling and pumping crews
have been able to drill deeper wells and longer laterals,
reaching total depth more quickly and applying more fracturing
treatments per well as well as learning to target only the most
productive parts of the formation.
"In 2007, the average treatment number, or stage count, in
Bakken wells was three. By the end of 2011, that number was
nearly 30, and some wells had more than 40 stages in a single
lateral," according to oilfield-services specialist
Schlumberger. ("Multistage Stimulation in Liquid-Rich
Unconventional Formations" 2013)
Rather than increasing relentlessly, the number of drilling
rigs operating in the Bakken has fallen from over 200 in early
2012 to just over 180 in October 2013.
Bakken accounts for just 10 percent of the rigs drilling for
oil and gas in the United States, according to basin-by-basin
data published by another oilfield services company, Baker
Hughes. Rising Bakken output is not putting pressure on the
domestic rig market. Rig rates remain soft.
More output with fewer rigs is a classic application of the
learning curve effect, something shale sceptics overlooked.
Sceptics also drew the wrong conclusions about high decline
rates. All oil and gas wells exhibit a sharp drop in output
after the initial high rate of production in the first few
months, as the natural pressure in the oil or gas field drops.
In general, the higher the initial output, the faster it
will subsequently decline. Rapid decline rates are associated
with unusually productive wells. Rapid declines also tend to be
associated with high ultimate production over the lifetime of
the well, as Beal demonstrated nearly a century ago. ("Decline
and ultimate production of oil wells" 1919)
Sceptics often imply rapid decline rates are an unattractive
feature of shale wells, ignoring the fact that production is
declining from an unusually high initial rate.
The big upfront yield is what makes shale wells so
economically attractive, resulting in a fast payback on
investment and high rates of return. While sceptics worry about
how much wells will be producing after 10 or 15 years, producers
are more interested in how much they will produce within the
first year or two.
The rates of return on shale wells are phenomenal.
Continental Resources, the leading Bakken oil producer,
claims it can achieve a 20 to 25 percent rate of return on shale
wells even at oil prices as low as $60 per barrel, rising to 50
to 65 percent returns when oil prices are $100.
MANUFACTURING OIL AND GAS
It is easy to overstate differences between conventional and
unconventional production. Environmentalists hostile to shale
oil and gas production highlight fears about groundwater
contamination, seismicity, fugitive methane emissions and the
chemicals used in fracking, without realising the same issues
apply to oil and gas produced from conventional fields as well.
How many realise that many conventional wells are also
fracked, sometimes with acid rather than water, or that wells
were being fractured in the 1950s and 1960s with diesel fuel and
In many ways, the differences between conventional and
unconventional production are matters of degree rather than
kind. But in one respect, the difference is profound and often
Conventional producers focus on finding highly concentrated
accumulations of oil and gas and drilling a small number of
highly productive holes. The process is akin to finding a needle
in a haystack. It requires enormous investment in seismic and
other surveys to try to improve the odds of drilling a
successful hole, "de-risking" the process.
Producing shale oil and gas is much more like a
manufacturing process. While some parts of the play will be more
productive than others, the outcomes are far more predictable
and less variable. The focus is on improving returns by reducing
Standardisation, assembly line techniques, reducing drilling
and fracking time, and cutting the number of skilled workers
needed while boosting the number of wells drilled and stages
fracked lie at the heart of the business.
The differences between shale and conventional oil and gas
plays help explain why shale specialists such as Continental and
oilfield services companies such as Schlumberger,
Halliburton and Baker Hughes have big winners in
the Bakken and other shales, while oil majors such as Shell
The manufacturing approach needed to succeed in shale is
fundamentally different from the advanced engineering needed in
deepwater exploration and on other complex megaprojects.
Shale's doubters failed to understand these differences. As
a result, they treated shale plays as just another oilfield,
rather than understanding the distinctive characteristics of the