The U.S. now takes 40 percent of its natural gas from shale while 20 percent of its oil comes from tight oil as a result of the shale boom in the country. However, this markedly growing rate of production faced a 50 percent plunge in oil prices in the middle of 2014. The drop in the price of crude oil poses significant challenges for the producers of shale oil and gas. A drop off in shale production itself presents a major internal challenge for the U.S. fracking industry.
As a result of the plummeting oil prices, nearly half of the drilling rigs for crude oil production have gone offline. By March 20, 2015, total oil crude production reached its highest level since 1983 at 9.42 million barrel per day (mbd). Since that peak period, shale producers in the U.S. seem to have been the first to respond to the tumbling crude oil prices by shutting down oil rigs. Industry watchers have started to express concern about the future of the shale boom, asking whether it is a sustainable form of energy for the U.S. or whether ‘the boom is about to go bust’ sooner than expected.
Shale gas wells production rates fell by at least 50 percent in the first year of production and from that point have continued to decline. Another challenge for the producers is sustained production. According to U.S. Energy Information Administration (EIA), by the year 2030 all the ‘technically recoverable resources’ that have been determined will be depleted at least by half.
With even bleaker predictions, David Hughes, who works for the Post Carbon Institute, thoroughly analyzed the data of 65 thousand shale gas and tight oil wells and found that “in the first year, there may be a 70 percent decline. In the second year, maybe 40 percent; and the third year, 30 percent.”
He concludes the overall decline by claiming, “by the time you get to three years, you’re talking about 80 or 85 percent decline for most of these wells.”
Typically, an unconventional oilfield has a limited lifetime of seven or eight years whereas conventional oil fields lifetime can vary from 20 years up to 50 years. For instance, the Saudi Arabian giant oilfield, Ghawar, has been operating since 1951and is still pumping out 5 million barrels of oil a day. According to the IEA, the shale industry in the U.S. has to drill around 2,500 wells annually in order to keep up with the current output level.
As the Hughes’ study reminds us, after three years, the total output falls downs at a staggering rate. Therefore, continuous drilling will be required in order for the shale producers to maintain the current level of production because as soon as drilling activity slows down, the decline in overall production will follow.
Emphasizing the necessity for continuous drilling activity, OPEC’s report in 2015 forecasted that, “American output would flatten out and decline over time if new wells are not brought online to offset steep decline.”
To better grasp the effects of the current oil prices on shale production in the U.S., a recent study published in 2015 by Rice University’s Baker Institute presents conclusive data on current production levels in major shale formations. According to the study, the biggest drop off in oil wells took place in North Dakota’s Bakken formation, where the number of oil wells declined from 1,967 to 1,338 as of January 2015, representing a decline of 24 percent. In particular, formations such as Eaglebine in East Texas, Mississippian Lime in Kansas and Oklahoma’s Granite Wash have been hit hard with current oil prices. Overall production declined by 33 percent from 108 thousand wells to 77 thousand wells. Clearly, the collapse of oil prices has been the major factor for the reduction in the number of oil rigs.
According to the Morgan Stanley Commodity research, the average cost for tight oil production in the U.S. is about US$65 per barrel. The important point here is what the lowest price per barrel would be for producers to contemplate while being able to maintain production levels. Harold Hamm, the head of Continental Resources claims “he can cope as long as the oil price is above $50.” By contrast, Stephen Chazen – the head of Occidental Petroleum - noted “the industry is not healthy below $70.”
This discrepancy of opinion can be linked to the fact that transportation costs of shale oil and gas varies from one field to another. It is much cheaper to transport tight oil from Eagle Ford shale play through pipelines than to transport shale gas and tight oil from North Dakota’s Bakken formation to its demand centers.
As long as oil prices do not go below $50 and oil rigs continue to be drilled, the production of tight oil and shale gas is likely to remain a major source of hydrocarbons for the energy needs of the U.S. Furthermore, the current drop in oil prices, which plummetted as low as $30 per barrel in February 2016, does not give much hope for the U.S. shale industry to continue drilling more wells.