Don't Get Carried Away By The Shale Oil Boom

Tyler Durden's picture

North American crude oil has been in the news on several fronts this week, including some rapid price moves and an unexpected intervention by President Obama. Despite the publication of a new report projecting a much more rapid rate of tight oil supply growth than is generally expected and the entire Buffet-Railroad-Traffic-Pipeline meme relying on increasingly exponential dreams of the Bakken et al. saving us from our excess-energy-consuming selves, Barclays questions just how realistic these forecasts are, noting "it is perhaps wise to exercise a degree of caution over longer-term shale oil forecasts... partly because of the steepness of decline rates for shale oil wells, a lot of the very big productivity gains have already been made, and finally, skepticism around some of the more ambitious projections of US shale output due to the existence of numerous logistical barriers."

Authored by Barclays' Kevin Norrish,


There has been a distinct theme of North American oil running through much of the commodity news flow this week. Weather disruptions to Canadian crude and the return of several US mid-west refineries have helped push WTI prices up relative to Brent, pressuring the front-month spread between the two to its lowest for 18 months. President Obama’s surprise intervention in the Keystone XL pipeline debate has raised fresh concerns about its viability by placing a heavy emphasis on environmental criteria in its approval process. Related to this we also take a look this week at how Canadian oil producers have been rapidly adapting to pipeline capacity shortages by making intensive use of other options such as rail. Finally, the Kennedy School of Government at Harvard has released what appears to be the most bullish shale oil report yet, projecting that US output of shale oil could reach 5mbpd by 2017 making the US the world’s largest oil producer.

But how realistic are forecasts such as these? It is certainly true that the sharp increase in US shale oil production has taken many in the oil market by surprise over the past couple of years and that includes even those oil analysts and forecasters that are watching the sector most closely. Current rates of growth are exceeding expectations and bring in to question some of the more conservative assumptions made by the major oil forecasting groups.

As little as 18 months ago the US Department of Energy was forecasting a flat profile for domestic oil production and that US oil liquids output would grow this year by a very modest net 100k b/d.

Taking the latest figures from the DOE’s Short-Term Energy Outlook, that figure has now risen roughly nine-fold as it has for most other major forecasters (including ourselves). Although big upward revisions to the outlook for US crude oil supply were implemented by the DOE through 2012, the data so far this year suggest that reality is running a long way ahead and that even its latest forecasts are looking far too modest.

Growth in US crude oil production is running at almost 1.2m bpd above year-ago levels, according to weekly oil supply data, exceeding both the DOE and IEA’s latest full-year 2013 growth forecasts by almost 50% and OPEC’s by almost 100%. This rate of growth is almost solely down to shale and has been achieved despite the poor performance of producers in the Gulf of Mexico. Unplanned maintenance and a shut-in currently underway at Shell’s Mars B project where a new platform is being installed have forced some downward revisions to project GOM crude output, which is now expected to decline this year.

There is also an offset to the strong growth in crude oil output from the other components of US liquid fuels output. Natural gas liquids growth in the year to March at just 50k bpd is relatively sluggish at just half the level expected this year by the DOE and ethanol production has actually fallen by 100k bpd. However, these figures are modest alongside the pace of growth in US lower 48 crude oil output, the biggest driver of which is rapid growth in tight oil output.

Although the rate of drilling has slowed in shale plays such as the Bakken and Eagle Ford this year, output is still going up due to ongoing and rapid productivity improvements. Moreover in the Permian, where development started relatively late, drilling is still rising rapidly and increases here are likely to be the big driver of US oil production growth over the next few years. With domestic US oil prices (as represented by WTI) trading at well above $90/barrel and well-head discounts having contracted (eg, the discount that Bakken oil producers have to live with has shrunk to just -$3/barrel from -$28 in early 2012), prices are at a level that will continue to incentivise investments in new output.

The short-term implications of these trends are clear. It is likely that big upward revisions to forecasts of 2013 growth in US output by the major forecasters will need to be implemented soon. For now we are raising our US oil production forecast to 1.1m bpd from the previous level of 710k bpd and expect others to soon follow suit.

But what are the implications of this rapid growth for the longer term? The current EIA forecast from its Short-Term Energy Outlook report is that by December 2014 the US will be producing over 12m bpd of liquid fuels. That figure suggests there may be something of a mis-match opening up between medium- and long-term projections and perhaps not just for the DOE. The DOE’s own long-term reference or base-case forecast as published in its Annual Energy Outlook (May 2013), projects domestic production of liquids topping out at 11.8m bpd in 2019 and declining thereafter, implying growth of around 3m bpd in total domestic liquid fuels output over the 2011-2020 period (Figure 3) with tight oil contributing around half that growth. Both the IEA and ourselves see growth of a similar order of magnitude (apart from the widely circulated forecast made in March 2012 by another investment bank, and which was a “best possible case” scenario).

However, it is perhaps wise to exercise a degree of caution over longer-term shale oil forecasts and for now we are sticking with our 2020 projections which imply a sharp slowdown in tight oil production compared with current levels. This is partly because of the steepness of decline rates for shale oil wells. For example, after two years a typical well in the Bakken-Three Forks drilled in 2012 is likely to be producing at less than 30% of its initial production rate. It also reflects the likelihood that many of the best plays for crude oil extraction are being developed early (recent disappointing performance relative to expectations at the newer Utica shale play in the north-east US and Canada backs this up) and that a lot of the very big productivity gains (shortened well drilling times, increased initial production rates and better rig efficiency) have already been made.

A final very good reason for scepticism around some of the more ambitious projections of US shale output is the existence of numerous logistical barriers. These include a lack of pipeline capacity, which despite recent expansions, is still a major constraint forcing regional producers to accept discounts that can often be wide and volatile in order to get their oil to market. A sustained acceleration in shale output growth would likely stretch the US distribution system for crude oil to breaking point.

The associated uncertainty over price levels and take-away options would create a very difficult climate to invest in the intensive and costly drilling programs necessary to keep shale output growing.

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Squishi's picture

this was supposed to save the dollar?! 

knukles's picture

well to burn the stuff, need a cheap wick from somewhere...

gmrpeabody's picture

Might pick up a few cheap shares of Arch Coal and Peabody..., while they're giving it away.

Flakmeister's picture

They will get cheaper....

SRSrocco's picture

THE SHALE OIL PONZI WOULD MAKE EVEN CHARLES PONZI JEALOUS.   I have to get a good laugh at the Porter Stanberry's of the world who think Shale Energy is going to solve all of our problems.

One very BIG PROBLEM that is left out of the equation is the increased overall decline rate of U.S. Oil production.  In 2008, when the U.S. was producing about 5 million barrels a day we were suffering about a 5% annual decline rate.

Now that the Shale Energy Industry is SLAPPING ITSELF on the BACK all the way to WALL STREET BANK for another dose of borrowed CAPEX to keep the PONZI ALIVE, overall U.S. annual decline rates are now probably more than 10% per year....LOL

So, because Shale oil wells decline like 40-50% per year, the Oil Industy has sold its SOUL to the RABBIT DEVIL and will have to replace 750,000 barrels a day EACH FRICKEN YEAR once the U.S reaches 7.5 mbd.... sometime this year.

Each year this decline rate will INCREASE a TAD and the ROCKET SCIENTISTS who run the Shale Energy Companies are going to have to spend more CAPEX just to keep MOM taking little Johnny to soccer practice in her SUV and of course including a quick stop at STARBUCKS.

This will get really FUN in the next few years when annual decline rates hit 12%+ an UP.


Xibalba's picture

Russians were fracking in the 50's.  They found that the wells leak and are rather unprofitable.  

knukles's picture

They're also big believers in abiotic oil


not that it makes any difference but just want to get shit stirred up today

Almost Solvent's picture

But goD is on our side and hE wouldn't let us run out of neverending cheap oil. How can we run our military without it?

Dapper Dan's picture

Militaries that devour oil and resources in an effort to control oil and resources that they've just devoured, generating larger militaries that devour more of the diminishing resources to control it all along a diminishing return equation.

Spastica Rex's picture

Thou shalt have no other gods before the Invisible Hand.

- St. Ayn

Flakmeister's picture

Based on past offerings, that was positively cheeky of you...

Spitzer's picture

You believe in the dead dinosaur theory ? lol

Production is up because interest rates are down. Thats all there is here to see folks

snblitz's picture

So where did the methane on the asteriods come from?

Luckily the Russians are heading out that way to see if they can find any bones.

Flakmeister's picture

You should write a paper for Nature providing the first evidence for an asteroid having an atmosphere....

You would be famous assuming that you aren't simply making shit up....

JohnF's picture

Ummmm...fracking goes back to the 1920s. They were using dynamite and other explosives to shatter the rock and that always didn't end well, and it was a fairly poor way of doing the fracturing needed. The Soviets started fracking back in the late 1940s and even tried using underground nukes to shatter rock: that was a specatacular failure, as the deep craters either were vitreous (glass-like) and hence impermeable or simply failed to achieve the fracturing levels needed.

The key to fracking is well development, since the first two-three years are the highest yields and then taper off fairly quickly. Prices basically have to support the initial cost of drilling plus extraction costs and industry pricing tends to pay those off with the first year's production: after that, it's all profits, even at lowered extraction rates. It's a fundamentally different game than the old-fashioned bore-wellhead-turn-and-let-the-oil-flow: those days are pretty much gone.

That said, technological productivity gains have just gotten started: robotic drilling heads that drill horizontal tunnels where sensors show tight oil or gas layers, rather than blindly drilling and adjusting according to what comes out; advanced fracturing techniques like liquid nitrogen injection and fracture-bore-fracture-bore cycles; high-speed boring and fracturing; the list goes on. Suffice to say that while fracking isn't a complete panacea, it most certainly is not a mature technology and there's quite a bit of technological development possible. Oh, and 4-d seismic mapping via on-site supercomputing. Fun stuff.

inevitablecollapse's picture

buddy of mine is completely sold on the idea that the bakken formation is what is going to turn the economy around - I begged to differ

DoChenRollingBearing's picture

A friend of mine has a PhD in Geology, and was an "oil finder" for a major.  He has told me "there is plenty of oil." Exploration Geology would be a good field for young 'uns to get into, looks like there will be work for a long time...  They already make a LOT of money if they can find oil.

Hohum's picture

Just check out the stats that the State of North Dakota puts out and you'll see how this is overblown: about 130 barrels/day per well (average of all wells).

Flakmeister's picture

Moreover, Rune Likvern's analyses strongly suggest that average initial flows are decreasing over time. That is what happens when the sweet spots are drilled first...

JLee2027's picture

There aren't any dry wells or sweet spots in the Bakken. It's not like that. Some better than others, but roughly, the same from hundreds to thousands per day. Not like the million barrel per day wonder in S.A.

Yes, they deline, but they can pump for 20-30 years at a low rate per day. It adds up. I think the forecasts are correct. Wells have been "declining" for a decade and the Bakken is still growing. Because they are drilling more. And then are several other shale plays in the US untapped. Texas, Illinois, Penn, Western states, etc.

Flakmeister's picture

Trust me, the oil guys ain;t stupid, They drill the best ones first....

That should tell you where they stand...

natty light's picture

Are there rainbow-colored unicorns in North Dakota?

Notarocketscientist's picture

I have researched this issue and am posting my results everywhere possible - please feel free to do the same.





Elevated levels of methane, ethane and propane gases were found in drinking water wells in Pennsylvania, close to operations that shake natural gas loose from underground shale formations in a process known as fracking, scientists reported on Monday.  Based on analysis of 141 drinking water wells in northern Pennsylvania that sit atop a natural gas-rich underground formation called the Marcellus shale, Mr. Johnson and his colleagues found 82 per cent of drinking water samples contained methane, with concentrations six times higher for homes within 1 kilometre of natural gas wells than for homes farther away.
Ethane concentrations were 23 times higher for homes close to natural gas wells; propane was detected in 10 drinking water wells, also within 1 km of a natural gas well.


Over the past several decades, U.S. industries have injected more than 30 trillion gallons of toxic liquid deep into the earth, using broad expanses of the nation's geology as an invisible dumping ground.  No company would be allowed to pour such dangerous chemicals into the rivers or onto the soil. But until recently, scientists and environmental officials have assumed that deep layers of rock beneath the earth would safely entomb the waste for millennia.
There are growing signs they were mistaken (or lying of course)




Robert Ayres, a scientist and professor at the Paris-based INSEAD business school, wrote recently that a "mini-bubble" is being inflated by shale gas enthusiasts. “Drilling for oil in the U.S. in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled."




Overinflated industry claims could pull the rug out from optimistic growth forecasts within just five years.  A report released in March by the Berlin-based Energy Watch Group (EWG), a group of European scientists, undertook a comprehensive assessment of the availability and production rates for global oil and gas production, concluding that: "... world oil production has not increased anymore but has entered a plateau since about 2005."  Crude oil production was "already in slight decline since about 2008." This is consistent with the EWG's earlier finding that global conventional oil production had peaked in 2006 - as subsequently corroborated by the International Energy Agency (IEA) in 2010

Spitzer's picture

^That is all bullshit

Every last word of it

CrashisOptimistic's picture

You're the only one who read any of it. 

Comments past 3 paras aren't read.

Sparkey's picture

Spitzer is suffering a reality crisis, perhaps he is a believer, believers in the religious sense, believe, belief creates reality, if enough people believed somthing it would be so, you get to Heaven because of what you `Believe`, surely if Belief can usher someone to Paradise, it must also have some effect down here as well, particularly if you have some shares in `Collector` pipelines or even the Grandaddy of them all, Chesapeake! Wow are you waiting for Chesapeake to re-bound?

The good news,, in twenty years, or less, there will be a lot of rural land for sale cheap, you won't be able to drink the water, or use it for crops, but the land will be cheap,

For a growth investment check out bottled water company stocks, they have a real bull market on the horizon, provided they can keep their feed stock clean of course!

Flakmeister's picture

Sparkey, you done gone and peed in Spitzers' pool...

But seriously, to frack within the Cheasapeake Bay watershed, let alone the NYC watershed is the absolute height of stupidity...

Shitting in your crib only begins to describe the process...

PKF's picture

Utica Shale in Ohio...nothing.  Now the companies that bought the land can't sell it or will have to sell at a loss. 

Too bad, oil boyz.

Flakmeister's picture

Re: the Utica, NGL ain't oil and don't ever let anyone convince you otherwise...

Tsar Pointless's picture

We here in Western PA are in the heart of Marcellus Shale Country. We know about its deleterious effects already.

Booms are booms, becuase they all eventually go bust.

Almost Solvent's picture

For as big of a fuckhead Andy is, he's kept fracking out of NY to date. 


Not sure if it's his libtard enviromental roots, or the frackers aren't paying enough to his campaign. (imagine a Fry meme. Shut up and take my $)


Either way, the longer fracking stays out of NY, the better.

otto skorzeny's picture

IL passed the strictest fracking regs in the country- between that and the failures of the Dem gun grabbers maybe things are getting better- or not.

Flakmeister's picture

A greenie for you, bastard.....

Sparkey's picture

No question in my mind, future generations, if there are any future generations, will curse this generation for the way we are poisoning the planet, Fukushima, DU, and now this, we can't seem to poison the World fast enough.

If you believe `Fracking Fluids?` will remain sequestered from the water, all living things require, for ever, you are easily led, to your and yours demise, 3 million gallons of water and `Fracking Fluids?` are often mentioned as the typical ammount of `Fracking Fluid` injected into the rock to release the gas, 3 million gallons doesn't seem so much when you say it quickly, yet how much space does 3 million gallons of water occupy? There are 7.5 Gal, per cubic foot of liquids, this equals 400 thousand cubic feet of non compressable matter injected into the ground at a high enough pressure to move the rocks and create a space large enough for it to fit into, now this is far down under the ground and all the millions of pounds of rock above it are pressing down trying to close the gap and return to normal, liquid will flow towards the surface, towards the surface is the path of least resistance, through every crack and fissure, some day it will reach the Water Table, perhaps some day it will reach the surface, for sure it will never go away and the water will be unusable to people and animals virtually for ever.

How crazy are we really, that we would poison our very sustenence, and poison ourselves, so enthralled are we by the Pied Piper and his song of `Easy wealth`.which always ends with depleted wells and poisoned ground.

How big is 400 thousand cubic feet? Imagine you had a square building 80ft. on a side it would reach to 62.5ft in height to accomodate 3 million gallons of liquid!

An unanswerable question; Why is our species charging to the cliff so anxious for aniliation? Is there nothing good in life that we might want to perserve at least the possibility of existence for our decendents?

GoinFawr's picture

What goes down must come up.

Flakmeister's picture

If its the ex-wife, it was for air....

CrashisOptimistic's picture

Overall that article reads like someone did some deep and thorough research into decline rates and the concept of sweet spots first, and then looked at what he'd written and decided he wanted to keep receiving a paycheck.

So he cut and pasted all his caveats at the end and joined the cheerleaders.  The paychecks may end when they all end, soon.  He decided not to be a pioneer.

disabledvet's picture

the only reason the Gulf is down is because of BP. That "halt" has now ended. the ability to raise prices to infinity is so far gone now only the lunatics believe in it now. i would be clearing out of the space faster than you say "nice ass" to one of the Dallas Cowboy Cheerleaders. we'll see of course but for those that have doubts about the deflation thesis...if they wake up this fall to discovery "gasoline at a buck a gallon and meaningless" then they'll understand.

Flakmeister's picture

Tis' sad to see someone bittterly shouting at the world...

Flakmeister's picture

I have said it once and I will say it again:

After exploiting the truly great oil fields like the Permian Basin and Kern River, the Bakken and Eagle Ford shales are just like cleaning out your hash pipe. The first few scrapes seem great and then you realize that you are doing a helluva lot of work for diminishing returns....

snblitz's picture

So tired.

Yes we had only 10, 20, or 30 years of oil left in 1850, 1890. 1920, 1970, 2011, 2013 ...

It just never ends...


Flakmeister's picture

Do you understand the difference between a finite quantity Q and the derivative of Q with respect to time dQ/dt?  The point at which dQ/dt is maximal typically has very little to do with how big Q is...

Hubbert got the amount of global oil wrong by a factor of ~3, it changed the predicted peak by ~10 years...

Cloud9.5's picture


Individual wells peak and decline to the point that further extraction is no longer feasible. That is fact not fiction.  Take that fact and apply it to the whole industry and you begin to grasp the concept.  Look at the production charts in the United States and you will discover that our production peaked in the 1970’s.   The Alaskan oil play gave us some breathing room but it did not reverse the decline.  Shale oil is giving us another bit of respite but if it follows the trend it too will not reverse the trend of overall decline. 


Exponential drilling and extraction cannot escape the limits of a finite resource.  Study the history of played out fields.