By John Kemp
LONDON, April 11 (Reuters) - Exponential growth in shale oil production must slow because output from fractured wells declines much more rapidly than conventional ones, and because the most productive areas have been drilled first, according to shale sceptics.
Shale production has been likened to Lewis Carroll’s Red Queen Race, in which more and more new wells will need to be drilled just to offset rapidly declining output from existing holes, according to one analyst at The Oil Drum (“Is shale oil production from Bakken headed for a run with the Red Queen?” Sep 25, 2012).
“It takes all the running you can do to keep in the same place,” the Red Queen warned Alice in “Through the Looking Glass”.
But this problem is not new and not unique to shale wells. High initial output followed by a rapid decline and a long taper with many years of low production are a common feature of all oil and gas wells, whether they are drilled vertically or horizontally, conventional or fracked.
Rapid decline rates and the exhaustion of the most productive sweet spots will not constrain shale output any more than they have limited production from conventional oil fields.
Shale sceptics have focused on decline rates, when they should be focusing on the amount of oil and gas ultimately recovered from each well.
Even so, beating the Red Queen is likely to require both continuous efficiency improvements and a substantial increase in the size of the total drilling and fracturing fleet, as well as associated equipment and crews.
Geologist Carl Beal identified the problem in a celebrated monograph for the U.S. Bureau of Mines published in 1919: “The limit of production in this country is being approached ... and although new fields undoubtedly await discovery, the yearly output must inevitably decline, because the maintenance of a given output each year necessitates the drilling of an increasing number of wells.” (“The Decline and Ultimate Production of Oil Wells”)
“Such an increase becomes impossible after a certain point is reached, not only because of a lack of (new) acreage to be drilled, but because of the great number of wells that will ultimately have to be drilled,” Beal warned.
“Daily production per well each year has increased during the last few years ... However this increase is abnormal ... the average production per well will finally begin to decrease on account of the lack of new pools to make up for the normal decline in production of the old ones.”
Beal was writing when the United States had already produced around 4 billion barrels, and it was estimated the country would ultimately produce 11 billion, so there were thought to be only a little more than 7 billion barrels left.
“The country is facing a serious shortage of petroleum,” which constituted “an emergency,” Beal wrote. The Bureau expected domestic oil production to run out within a decade.
Of course, the United States did not run out of oil. The country has since produced another 201 billion barrels. Production rose from 1 million barrels per day in 1919 to a peak at 9.6 million barrels per day in 1970. Output is still running at 6.5 million barrels per day and rising again, thanks to shale.
By the end of 2010, the United States still had 7 billion barrels of proved but not yet producing reserves, oil that has already been found and can be produced by current technology at current prices, according to the U.S. Energy Information Administration (EIA).
Proved reserves have doubled since 1996. The volume of probable and possible reserves, let alone resources that might become available in future as a result of changes in technology, is even larger by several orders of magnitude.
Beal warned his readers “estimates for large areas if made during early drilling have proved considerably above what the district finally produced.” In fact, the opposite has proved true. Most oil fields in the United States have been far more productive than originally predicted as extraction methods have improved.
Shale sceptics point to the rapid declines in output from fracked oil and gas wells after the initial surge, faster than for conventional wells.
The average oil well drilled in the Bakken yields around 85,000 barrels during the first 12 months of production and then experiences a year-over-year decline of about 40 percent, according to an analysis of well data in the Oil Drum article.
Other analysts have pointed to the unusually high initial productivity followed by rapid declines at both fracked oil and gas wells in other shale formations (for example the gas-bearing Barnett shale in Texas).
High initial output followed by rapid decline is one reason that many analysts and forecasters have been surprised by how quickly shale output has risen.
But it also explains why they predict output must soon taper and why shale production is unusually sensitive to changes in oil and gas prices, since anything that causes the rate of new drilling to slow must soon translate into a drop in output as old wells decline.
While all of this is true, it is important not to overstate differences between shale wells and conventional ones.
In the same monograph, Beal presented the first systematic study of the rate of decline rates from conventional oil wells in Oklahoma, Kansas, Texas, Louisiana, Illinois and California in the second decade of the 20th century.
Output at Oklahoma’s prodigious Cushing field declined to just 25-40 percent of the first year’s production by the second year. Drops at some fields, such as Bartlesville, were 30 percent after the first year.
But at other fields, the decline was far worse. Decline curves for the Nowata field look like a jump off a cliff: average production per well fell from 110 barrels per day in the first year to 10 in the second.
Beal explained the clear connection between the initial output and decline rates. Wells that have the greatest initial output because of the easy flow of oil and the tremendous pressure the formations are under show the steepest declines in the second and subsequent years. Wells with a lower initial output decline more gradually.
Overall, however, wells with a large initial output will produce more oil (or gas) over their lifetimes, even though they decline more rapidly.
Oil and gas producers prefer wells with a large initial production and then a sharp decline rate, because the ultimate amount of oil and gas recovered is likely to be larger, and because a higher proportion will be recovered in the early years, when the revenue is more valuable under a discounted cash flow model.
Shale sceptics have confused decline rates with ultimate production. Shale wells are so attractive precisely because they yield very large amounts of initial production that can be sold immediately and because the total amount of petroleum recovered tends to be high.
Initial production from wells drilled into the sweet spot of shale fields is far higher than in other areas. In North Dakota, the most productive parts of the Bakken have all been found in a fairly small area covering just four counties (Mountrail, Dunn, McKenzie and Williams) in the northeast corner of the state.
This has led some analysts to predict production will plateau or even fall once drillers are forced to move into less bountiful parts of the play. But again there is nothing new about big variations in the output of individual wells or areas across an oil field.
“The Bartlesville sand on the crest of one of the domes in the northern part of the field furnished many wells of an initial daily production between 5,000 and 10,000 barrels, but in the southern part of the field few of the wells drilled into this sand produced more than 3,000 barrels in the first 24 hours,” Beal wrote, adding that some produced as little as 500 barrels the first day.
The Energy Information Administration presented a careful analysis of the shale phenomenon recently, warning, “diminishing returns to scale and the depletion of high productivity sweet spots are expected to eventually slow the rate of growth in tight oil production”.
It added, “It is difficult to predict when that inflection point will be reached, because it can be pushed farther into the future by increases in the number of drilling rigs and further technological change.”
Sustainable production will be determined by the size of the drilling fleet (and associated crews) as well as the efficiency with which it is used.
EIA highlighted changes made to increase efficiency and fleet utilisation. Multiple wells are being drilled from a single location (“pad”), and the horizontal sections (“laterals”) of each well are being made longer. Production companies are trading leases to amass larger contiguous sections, so they spend less time moving rigs (“Key drivers for EIA’s short-term U.S. crude oil production outlook” Feb 14, 2013).
“Efficiency gains that have been achieved over the last few years not only improve the well profitability of the tight formation sweet spots but also turn portions of the formation that were not previously profitable to produce into profitable acreage. So the net effect of all these efficiency gains is to increase the size of the economically recoverable tight resource base,” EIA explained.
The rate of efficiency improvements will nevertheless slow, according to the EIA, and as the sweet spots are depleted drilling will have to focus on less productive areas. “A slower future rate of technological improvements, combined with drilling activity that moves into less productive areas, will require the dedication of more drilling rigs either to increase or maintain tight oil production.”
Hire rates for rigs and pressure pumping equipment have softened recently in North America as the region copes with a temporary oversupply of gas. But as gas drilling picks up and the shale revolution goes international, demand for rigs, completion equipment and other oil field services is set to remain strong.
The rig and other equipment fleet will have to grow. In a recent vote of confidence the sector will continue to grow, General Electric announced this week it would acquire pump maker Lufkin Industries as it seeks to bulk up its oilfield-related businesses.
It is almost a century since Beal predicted U.S. oil production would soon peak and then run out. Experience since then strongly suggests the industry will continue to win the Red Queen’s Race, provided only that prices remain just high enough to keep capital moving into the sector.