The introduction of shale oil and shale gas into the US energy mix is turning an energy-starved nation that was headed towards total import dependence into one of the strongest oil and gas producers in the world (see previous MEES Op-Ed – MEES 5 July). Net gas imports (by pipeline) were transformed into net gas exports between 2007 and 2012. LNG import terminals are being reconfigured as export outlets, while crude oil import dependence has dropped from a peak of 10.1mn b/d in 2005 to 7.7mn b/d by May 2013, a 24% reduction in just over seven years.
CRUDE: US RESERVES AND PRODUCTION SOAR…
The long-awaited annual publication of the 2011 proved US reserve data and the latest production data (May 2013) by the US government’s Energy Information Administration (EIA) seems to reinforce initial excitement among industry representatives and investors. Oil reserves rose by 1.6bn barrels in 2009, and by another 2.6bn in 2010. In 2011, the latest reserve-data point, they set a new record, rising by 3.3bn barrels: 2011 year-end reserves hit 26.5bn barrels. With the exception of Alaska’s giant Prudhoe Bay reserves that were booked all at once in 1970, this has not happened in the history of US oil reserve accounting. Other than Prudhoe Bay, one would have to go back to 1937 (well before most MEES readers were born and 23 years prior to the creation of OPEC) to find another reserve addition that remotely approaches the 2011 record. What is even more astonishing is that the 7.5bn barrel reserve addition of the last 3 years follows on the heels of a nearly unbroken 38-year string of declines that had reduced US reserves by some 10 bn barrels.
The update in US crude oil production shows a similar pattern. Production rose 126,000 b/d in 2010, by 173,000 b/d in 2011 and a massive 840,000 b/d in 2012. Another 227,000 b/d increase was achieved in the first five months of 2013 taking US crude oil production to 7.3 mn b/d. This makes the United States the third largest oil producer in the world, after Russia and Saudi Arabia, and the fastest growing producer of all. The turn-around in US oil production follows a 23-year slide from 9mn b/d to 5mn b/d: a period during which production fell every single year.
…AS DOES GAS
US gas reserves rose by 27.9 tcf in 2009, 32.1 tcf in 2010, and a further 29.4 tcf in 2011, reaching an all-time high of 334 tcf, beating 1967’s ‘pre-shale era’ record by 41 tcf.
Prior to this US gas reserves plunged by 44% in a nearly unbroken succession of annual declines over a period of some three decades: for gas, unlike for oil, there was no ‘Prudhoe Bay relief’ to delay the reserve draw-down. The amazing turn-around in natural gas reserves began in 1998, when reserves started to grow, gingerly at first and ramping up to explosive speed by 2008. During its 15 years of uninterrupted growth, US reserves more than doubled, rising by 170 tcf to reach the current historical peak.
US natural gas production rose 690 bn cu ft in 2010, by 1.59 tcf in 2011, 1.16 tcf in 2012 and by a more modest 0.02 tcf (annualized basis) by May 2013. Early gains were mostly thanks to Texas’ Barnett shale gas play and, since about 2005, by the addition of the Marcellus and Haynesville plays and some ten others later on. By 2012, US natural gas production had reached an all-time high of 24.1 tcf/year, exceeding the previous 1973 record of 21.7 tcf by 2.4 tcf. That puts the United States in first or second place after Russia, depending on whom you ask.
The EIA’s 2013 Annual Energy Outlook projects, in its reference case, that US natural gas independence is likely to be reached by 2020. The Paris-based International Energy Agency agrees in its 2012 World Energy Outlook. If these estimates turn out to be in error, the current growth rates suggest that the error will more likely be on the conservative side rather than the other way around, and that gas import independence may be reached earlier. As to oil independence, the EIA reference projection may also turn out to have been conservative. Nevertheless, all energy analysts dealing in shale oil and shale gas are navigating in uncharted waters that may well contain unexpected, and unpleasant, surprises. More about that later.
My MEES article of 5 July and this update only deal with past production and proved reserves of total US oil and gas. Missing in that discussion is a focused review of the evolution of the two components, shale oil and shale gas, that were and continue to be the principal drivers of the unparalleled energy explosion in the United States.
THE EVOLUTION OF SHALE OIL AND SHALE GAS
EIA presentations from earlier this year show just how rapidly US oil production from unconventional formations has grown (see Graph 1). To be noted is the fact that the EIA uses the term “Tight Oil” whilst my MEES articles refer to “Shale Oil”.
Here is how EIA explains the difference in terminology:
“Although the terms shale oil and tight oil are often used interchangeably in public discourse, shale formations are only a subset of all low permeability tight formations, which include sandstones and carbonates, as well as shales, as sources of tight oil production. Within the United States, the oil and natural gas industry typically refers to tight oil production rather than shale oil production, because it is a more encompassing and accurate term with respect to the geologic formations producing oil at any particular well. EIA has adopted this convention, and develops estimates of tight oil production and resources in the United States that include, but are not limited to, production from shale formations.”
Either of the two nomenclatures, shale oil or tight oil, has its use. For international assessments, as in the widely acknowledged EIA/ARI report that was produced jointly by EIA and Advanced Resources International, and published in June of 2013, shale oil is the more convenient term, since shale formations are known around the world, thanks in part to the US Geologic Survey (USGS) which has researched and mapped them world-wide for decades (eg MEES, 14 June). The initial EIA adoption of the term shale oil reflects the fact that the US oil (and gas) revolution started in shale formations, which have dominated the trend early on. In fact, in practical terms the phraseology makes little difference since most tight oil formations now under development or on production are shale formations. For example, the only non-shale oil formation shown in Graph 1 is the Austin Chalk, which consists mostly of interbedded chalks and marls. While the Austin Chalk has potential, it ranks second from the bottom in Graph 1 and has not shown much growth to date.
TIGHT OIL TAKE OFF
As depicted in Graph 1, one problem in discussing the evolution of tight oil production is to assign a starting date. We arbitrarily assigned the year when total US dry oil production began its rise, 2008, as our point of departure.
From 2008 to May 2013, tight oil production grew by about 1.9mn b/d (or 435%, from 430,000 b/d to 2.3mn b/d) compared to the non-tight oil component that rose by ‘only’ 500,000 b/d, or 10%. To put this into perspective, if tight oil were the only source of supply in the United States, the country would rank 14th among world producers, behind Nigeria and ahead of Brazil. However, the US tight oil production rate was probably higher than shown, and the corresponding non-tight portion lower, since late recognition of the significance of tight oil production delayed precise accounting by the original data providers (individual oil companies and State Regulatory Authorities), meaning that the crude-oil-only segment shown in Graph 1 probably missed some quantities of tight oil that were mislabeled conventional oil at the time. One way or the other, the increase in overall US oil production by 1.9 mn b/d in 4 ½ years is nothing short of phenomenal, and it is primarily (and perhaps exclusively) due to the development of tight oil production.
STRATOSPHERIC SHALE GAS
The earlier tight oil success story is very much replicated in shale gas, except that the growth rates and actual contributions to production volumes appear to be considerably higher in the gas case (see Graph 2). As was pointed out in my earlier MEES article, this is not surprising, 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 a millionth 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. Since the production of shale gas started to rise earlier than oil, this article picks up the gas story in 2005, the year when horizontal drilling and multi-stage fracking began to be used extensively in shale gas fields. From 2005 to May 2013, the production of shale gas rose from 1.9 to 27.5bn cfd (ie a 14-fold increase). As a result, the total US gas volume (dry gas) was pushed far above its 1973 historic peak of 21.7bn cfd, which puts the United States in global second place behind Russia. As in tight oil, there is a distinct possibility that the shale gas’ contribution to total US production was actually greater than was thought during the uncertain transition from the pre to the post-tight oil/gas era.
This concludes the update on reserve additions incorporating 2011 data from the latest EIA reserve report (published on 1 August, 2013) and US production increases through May 2013 that were brought on by the shale oil/gas revolution, as well as a detailed discussion of the production to date of the two principal drivers of the revolution, shale oil and shale gas. What is missing is an examination of the technical evolution that gave birth to the production of shale oil and shale gas, the obstacles that stood in the way, and how these were overcome. This will be the subject of my article in next week’s MEES that will also look in some detail at the US gas market, stressing breakeven prices and drilling and completion costs, both of which are dominant forces affecting the sustainability of the revolution.
*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 the 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]