In my four and a half years at the helm of the US Energy Information Administration (EIA) from 1985 to 1990, I monitored the seemingly unstoppable decline in US oil and gas reserves. Ever since the Arab oil embargo, and less emphatically before then, presidents and presidential candidates had promised to secure energy independence in the US.
Years before my government appointment, I held and publicly voiced the view that the decline was irreversible and that rising imports were inevitable. In 1974, I commented in print on the by now infamous Project Independence Report (issued by the Federal Energy Administration, EIA’s predecessor) which promised energy independence and projected that, at assumed but unlikely high oil prices of $11/B, US crude oil production could reach 17mn b/d by 1985, i.e. within 10 years, under an accelerated domestic supply scenario, although it claimed that “less is needed to achieve zero imports.”
That was nearly 40 years ago. To put this in perspective, 17mn b/d was roughly double US production at the time of publication (8.8mn b/d), and the average crude oil price in 1974 was $6.87/B. By the end of 2012, instead of rising as predicted, production had continued to decline, plunging to 6.5mn b/d, and the price of the US West Texas Intermediate crude benchmark had risen far beyond expectations, running at a nervous $90-$100/B, with spot prices for Brent some $10 above that.
Even more incredible, the Project Independence Report ventured into a highly speculative shale oil assessment. It suggested that the projected increase in domestic oil supply would include 1mn b/d of shale oil to be produced through room-and-pillar mining and surface retorting or through direct in-situ retorting, the only recovery mechanisms known at the time. The Project Independence Report was so far-fetched, on shale oil and elsewhere, I renamed it “Project Incompetence” in World Oil Magazine as soon as it had been released. It was that article that eventually caught the attention of the White House, which lead to my appointment under President Reagan.
Of course, the existence of shale oil in the United States had been known for a very long time; the first attempt at commercial extraction dates back to 1857. These and other forays into shale oil that followed used surface retorting. They were generally abandoned in short order. That changed in 1980, six years after the Arab oil embargo, when US energy vulnerability had been demonstrated and the decline in oil and gas production had become a matter of public concern. Exxon bought a 60% stake in a floundering shale oil mining project, the Colony Project, in late 1980 and proceeded to breathe new life into it. Two years later, having spent $2bn in developing a no-holds-barred pilot operation, unacceptable cost overruns and disastrous environmental consequences forced the oil giant to abandon it. In the process, the company laid off some 2,000 workers in Parachute Creek, Colorado, not counting job losses for thousands of support workers, which was a devastating blow to the small community and its environs. Known locally as “Black Sunday,” this event forever spelled the end of retort-driven shale oil and shale gas operations in the United States.
All this changed with the development of new drilling and completion techniques, especially horizontal drilling and multi-stage fracture treatments (“fracking”), which have made heretofore inaccessible resources economically attractive. Shale oil and shale gas are located in what the US Geologic Service calls continuous shale plays, meaning huge shale deposits that can stretch over hundreds of miles without interruption. For example, the Marcellus shale, currently under active development, is roughly 600 miles in length and 200 miles in width, stretching in a northeastern-southwestern orientation from southern New York State through Pennsylvania and deep into West Virginia. Its estimated surface area of 95,000 square miles is roughly equal to that of the United Kingdom. That, in itself, is a huge continuous area for oil and gas bearing formations, but it is only part of the story. Partially underlying the Marcellus shale by a few thousand feet is another shale formation, the Utica Formation, that has nearly twice the areal extent of the Marcellus and is three to four times as thick. And that’s not all: there are some 30-plus hydrocarbon-bearing shale formations in the United States at least 15 of which are now under production or active development or exploration (see map).
There is absolutely no longer any question about the existence of vast oil and gas resources in shale formations, in the United States and worldwide, and about their new-found accessibility (MEES, 14 June). The new shale-gas phenomenon has been called a game-changer, and the statistical evidence to date gives credence to that label. To appreciate how critical the oil and gas supply situation had become and to comprehend the enormity of that change, one has to look at the historical rise and fall of US oil and gas reserves and of their rates of production during the pre-shale era. Having understood the inevitability of rapidly declining conventional resources, the full extent of adding shale oil and shale gas into the new energy mix comes into sharper focus. The unprecedented surge in both oil and gas production and in reserve development rates in the last five or so years have given rise to dramatic changes within the US oil and gas upstream and downstream sectors and, beyond that, in the US economy at large. Whether this surge can be sustained in the long run is less clear-cut. That topic will be briefly raised at the end of this article.
THE HISTORICAL RECORD
Conventional US Oil reserves had seen a practically uninterrupted and spectacular rise throughout the better part of the 20th century. Time and time again during those prosperous years, naysayers had predicted the decline and eventual demise of US oil production, but year after year the industry pushed on, developing new technologies and breaking old frontiers. Those were the years when the US oil industry dominated throughout the world.
That trend stopped in 1961, when US reserves reached a first peak of 31.8 bn barrels. Thereafter, reserves started on a slow but accelerating downward trend, plunging by 1.8bn barrels to a low of 29.6bn in 1969. This rapid decline would have continued had it not been for the one-off addition of some 10bn barrels of Prudhoe Bay oil that was officially recognized as, and booked into, the US reserve base in 1970.
That year marked the all-time high for US oil reserves at 39bn barrels. From there, US reserves resumed their unrelenting downward trend with a vengeance. In the relatively short span of 38 years, US oil reserves shrank by more than half, 51% to be precise, to plummet to 19.1bn barrels by 2008, taking the industry back to 1940, except that reserves had been rising back then whereas they were declining in 2008. Had it not been for Prudhoe Bay, US oil reserves would instead have slid to a mere 11bn barrels by 2008 (see graph 1 - orange line).
2008 was the year when the successful use of horizontal drilling and multistage fracking put a stop to the decline in oil reserves. A mere two years later, by the end of 2010 (the latest official data point available), US proved reserves had recovered 21% of the earlier losses, rising from 19.1 to 23.3bn barrels. In contrast to Prudhoe Bay, the shale oil additions came from multiple sources all over the US, and they just kept coming. Essentially all of the recent reserve increases are due to the addition of shale oil.
Oil production has seen a similar development. By 1970, US crude oil production had reached an all-time high of 9.6mn b/d. From there it declined rapidly to 8.1mn b/d in the short space of six years, at the rate of a quarter million barrels per day per year. From the time the Prudhoe Bay reserves were added to the US reserve base, it took four years to complete the remaining permitting work for the Alyeska pipeline and three more to build and complete it in 1977, the year when the first Prudhoe Bay oil reached the market.
This one-time addition of North Slope oil bought about 9 years of relief, temporarily reversing the steep decline in US oil production and raising it from 8.1mn b/d in 1976 to 9mn b/d in 1985. At that point, the one-time Prudhoe Bay boost had been exhausted and the oil decline resumed with output falling to a low of 5mn b/d in the space of 23 years. Had it not been for the addition of North Slope reserves, US domestic crude oil production would have plunged to somewhere in the neighborhood of 3mn b/d at that time (see graph 2 - blue line), which demonstrates the short-term nature of reserve additions that cannot be sustained in the long run. Whether that is the case for shale oil remains to be seen, but the odds are that shale oil will be around for a very long time.
The introduction of shale oil turned the production decline around from is historic 2008 low of 5mn b/d, raising output to 6.5mn b/d by the end of 2012 and on to 7.1mn b/d in February of 2013, and restoring more than half of its post-1985 losses (53% to be exact) in the incredibly short space of only four years. Without the shale oil boost, production today would stand at around 4.6mn b/d and declining (yellow line), instead of where it is now, at 7.1mn b/d and rising.
Natural dry gas reserves and production went through a similar cycle of pre-shale peaks and troughs. Given the extreme tightness of shale formations, which is measured in nanodarcies as opposed to the tightness measure of millidarcies that is generally used in conventional reservoirs (one nanodarcy is equal to one thousands of a millidarcy), gas travels more easily through shale than does the more viscous crude oil and, therefore, responds more readily to horizontal drilling and fracking. While the declines in crude oil reserves and production were sharply turned around by the introduction of shale oil, they have yet to reach, let alone exceed, earlier conventional highs. Gas, by contrast, reached and exceeded earlier pre-shale peaks as shown below.
The conventional peak in US dry gas reserves was reached in 1967 at 293 trillion cubic feet (tcf). By 1993, reserves had declined to a low of 162 tcf, i.e., by 44% from their historic high. From that date on, US gas reserves started to climb at an accelerating pace, as shale gas was increasingly fed into the US gas mix, reaching 211 tcf by 2006. At that point, the use of hydraulic fracturing in lateral well bores had been perfected and began to be routinely used in shale gas operations, driving up reserves at an unprecedented pace. Between 2006 and 2010, the last official data point, US gas reserves rose by 94 tcf, to 305 tcf. That increase alone is roughly the equivalent of all of Texas’ onshore and offshore gas reserves combined (including federally owned far offshore reserves). At that point US gas reserves had exceeded the previous all-time high of 293 tcf by 12 tcf. The US had become an international gas giant, ranking fifth in the world in proved reserves and first in production.
The full impact of the contribution of shale gas becomes clear when one compares the actual change in reserves to what would have happened without the addition of shale gas. A rough estimate shows that US conventional gas reserves would have continued to decline and would have been around 124 tcf in 2010, some 181 tcf (or 67%) below current levels (see graph 3 - orange line).
Dry natural gas production also substantially outperformed the crude oil sector. From its 1973 pre-shale-gas high of 21.7 tcf per year, US gas production dropped to an absolute low of 16.1 tcf/y in 13 years (1986). From that point on, the decline was turned around to begin its slow upward march, mostly through field extensions in early shale gas fields, especially Barnett, that had been developed through conventional vertical drilling and single stage completion methods. It was not until 2005 that horizontal drilling and multi-stage fracking turned the hesitant rise into an explosive ascent, aided by the arrival of other shale gas plays and the dramatic increase in the deployment of drilling rigs, pushing production from 18.1 tcf to 24.1 tcf by the end of 2012, and on to 25.5 tcf by March 2013. That placed the current rate some 3.8 tcf above the 1973 conventional gas high and roughly, very roughly, 15.6 tcf above the point where it would have been without the addition of shale gas (see graph 4 - blue line).
US OIL AND GAS EXPORTS/IMPORTS AND OTHER ISSUES
With roughly 40% of the US natural gas mix now consisting of rapidly rising shale gas, and a similar but less pronounced development in crude oil, it would be of interest for oil and gas exporting countries to note how much this has affected US exports and imports to date, and whether this development constitutes a threat to them. The short answer is that, yes, it does present a threat. If the shale oil and shale gas development continues at the current pace in the US, and if it spreads to other importing countries, the world energy market is in for fundamental changes, and the losers in this game change will be exporting countries.
In addition, potential oil and gas price movements with or without exports from the US, individual well decline rates, current and future costs of drilling and completing straight and horizontal wells and the cost of follow-up frack jobs in declining wells, all affect the long-term viability of the current shale boom. Moreover, the role played by federal and individual state regulations and by conflicting corporate and political interests will shape the evolving post shale environment, such as the conflict between the chemical industry and oil and gas producers on the corporate level, and the internal conflict within the federal government that wants to promote growth and create jobs that come with the current oil and gas boom versus its apprehensions regarding environmental degradation. President Obama’s June 24 pledge to cut greenhouse gas emissions by 17% from the 2005 level by 2020 is the most recent, and potent, example of policy actions that cut across conflicting boundaries. These and similar issues that carry significant interest for oil and gas exporting countries as well as for private and government shale oil and shale gas investors will be discussed in a forthcoming article.
The discussion until now has been in terms of proved oil and gas reserves. Reserves are the well that production springs from. But where do reserves come from? Technically recoverable resources have gone from practically nowhere to 5-10 times current proved reserves in the US and that addition is essentially coming from shale formations. This is the new-found source that has created hopes and dismay throughout the world, depending on the observer’s stance on economic growth and on the environment. Welcomed or feared, technically recoverable resource additions from shale formations will dominate energy supply discussion for the foreseeable future. They, too, will be discussed in a forthcoming MEES OP-ED.
*Dr Merklein is a consultant in oil and gas policies. He was Assistant Secretary of International Affairs and Energy Security at the US Department of Energy and Administrator of the Energy Information Administration (EIA) from 1984 to 1990. As head of EIA, Dr. Merklein was in effect the government’s chief energy analyst. Prior to joining the Reagan administration, he was Professor of Petroleum Engineering at Texas A&M University and Dean of the Graduate School of Management of the University of Dallas. He can be reached at [email protected], Tel: 1-202-484-7477