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The Problematic Truth About U.S. Shale Oil Production

By Ellen R. Wald, Ph.D.CommoditiesJan 10, 2018 04:57AM ET
www.investing.com/analysis/the-truth-about-american-shale-oil-production-200279008
The Problematic Truth About U.S. Shale Oil Production
By Ellen R. Wald, Ph.D.   |  Jan 10, 2018 04:57AM ET
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The EIA’s newly released Short Term Energy Outlook is making headlines this week. The agency is forecasting higher U.S. oil production growth in 2018 and 2019. Specifically, the EIA forecasts U.S. oil production to average 10.3 million bpd in 2018 (an increase of 1 million bpd from 2017) and 10.8 million bpd in 2019. This is an upward revision from previous forecasts.

The EIA expects the majority of this growth to come from “tight rock” (shale) regions in the Permian and in New Mexico. A lower amount is expected to come from the Gulf of Mexico. These growth predictions are even fueling speculation that OPEC may decide to end its production cuts sooner rather than later in order to scuttle this American growth.

There is reason, however, to be skeptical of these growth forecasts. Much of the skepticism was explained in a discussion I recently had with geologist Art Berman as part of a podcast that I cohost with Ryan Ray of Global Energy Media. Berman is a 40-year industry veteran who looks at the fracking industry with a critical eye.

One of the key issues that could impact U.S. fracking growth is the size of the reserves in various shale plays. Based on recent information submitted to the SEC by companies with holdings in the Permian, Eagle Ford and Bakken regions, Berman estimates that the Permian Basin—currently the “hottest” of the plays—may only contain 3.8 billion barrels of oil. Nearby Eagle Ford and the Bakken region in North Dakota might contain about 5 billion barrels each.

This might seem like a large amount, but compared to projects that have recently come online in other parts of the world, it is fairly minimal. For example, Kazakhstan’s Kashagan project, which recently started production, is estimated to hold about 35 billion barrels. One of Brazil’s offshore subsalt areas is estimated to hold between 8 and 12 billion barrels of recoverable oil. Berman warns against using current growth trends to extrapolate into the far future when looking at areas like the Permian, Eagle Ford and Bakken. He says the reserve numbers are questionable and the recoverable oil may be even less than expected.

Continued growth also depends on the financial situation of the companies that make up the shale oil industry. Berman cautions those looking at the situation to be wary of the much-touted “break even” price. According to his assessment of the non-major companies involved in shale oil production, fewer than 5 can afford to fund their operations with their projected cash flow. This means that the majority of companies still need a constant influx of capital from investors to continue production.

In addition, shale operations are not obtaining the same high prices for their crude that we see on the exchanges. Companies rarely sell their oil for the price of WTI that traders see on the NYMEX. In the Bakken region, for example, companies must sell their oil at a $5.50 or $6.00 discount per barrel. This is due to the remoteness of the region and the difficulty of transporting Bakken oil to refineries or export hubs. This means that when WTI is trading at $63 per barrel, oil companies in the Bakken are selling their oil for only $57 per barrel, or less.

When oil prices dropped in 2015, there was a great deal of excitement about the use of new technology by fracking companies to cut costs and continue production at lower margins. Berman argues that technology and other cost-cutting measures taken by companies only accounted for about 10% of the decline in cost of production. He said that about 90% of the drop in production costs actually came from an overall depression in the industry that caused vendors—from equipment suppliers to oil services companies—to cut their prices. Therefore, as the price of oil rises, so too do the costs associated with production, making it even more difficult for these companies to breakeven, let alone profit.

Berman is not the only one raising flags about the shale oil industry. Some recent reports in the Wall Street Journal, FUSE and Forbes have called into question the profitability and growth rate potential for shale oil companies. Berman says that he looks at the fracking industry with a skeptical eye but that he is not a detractor. Rather, he cautions against accepting forecasts of higher and higher growth from this industry at face value.

Author's Note: The entire discussion can be found on the Energy Week podcast, here, or on iTunes

The Problematic Truth About U.S. Shale Oil Production
 

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The Problematic Truth About U.S. Shale Oil Production

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Jay Epp
Jay Epp Jan 11, 2018 9:57AM GMT
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I think the real issue with tight oil is that it shouldn't even be considered crude oil.  Most is similar to gas condensate nearing 50 API, especially the Eagleford.
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Jay Epp
Jay Epp Jan 11, 2018 9:44AM GMT
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"Recent geological surveys have further explored the resources contained in the Permian Basin. In November 2016, the U.S. Geological Survey (USGS) estimated that technically recoverable tight oil and shale gas resources in the Midland Basin portion of Texas’ Permian Basin (specifically the Wolfcamp shale formation) could exceed 20 billion barrels of oil, 16 trillion cubic feet of natural gas, and 1.6 billion barrels of hydrocarbon gas liquids. The technically recoverable resource estimate for tight oil in the Midland is higher than any previous USGS assessment of tight oil resources in any domestic resource basin."..20 billion barrels technically recoverable from just one part of the Permian.  I realize economic and technical are not the same but based on this years production increase and past performance one should not doubt these estimates.
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Cornelis Hordijk
Cornelis Hordijk Jan 10, 2018 6:22PM GMT
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What has happened in the north of The Netherlands by extracting LNG for nearly 40/50 years is that earth quakes upto 3,5 on Richter scale are now frequently noticed and houses getting cracked /damaged in the areas, where never earth quakes were experienced earlier..What about fracking?.Are experts not concerned that by extracting huge volumes of shale oil/gas similar effects may happpen in those areas ?????.Cornelis Hordijk/ Portugal.
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tony ooh
tony ooh Jan 10, 2018 6:31PM GMT
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keep watching television cornelis
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george mc
george mc Jan 10, 2018 9:16PM GMT
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thanks for bringing something of worth to the discussion ...truly deep thinkin’ there.
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george mc
george mc Jan 10, 2018 9:17PM GMT
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tony
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tony ooh
tony ooh Jan 10, 2018 9:37PM GMT
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george mc no george, you're the deep thinker indeed. not me. i'm shallow. you're following the quakes and water problems in fracking areas. imagine everywhere we had an earthquake yesterday we have water issues and other problems. gotta stop those quakes. get out of the basement george and get some air. you know, mow your lawn. does your apartment complex have a lawn?
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Jay Epp
Jay Epp Jan 11, 2018 9:52AM GMT
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I would suggest that in the Netherlands where many houses are built on reclaimed land that subsidence could be the major factor in cracks appearing.  Unlikely that an earthquake under 3.5 would do any damage.
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Do Deikins
DoRight Jan 10, 2018 5:21PM GMT
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Saudis push prices up for IPO, then crash it so they can buy it back at a discount.  Texans bathing in other people's money (Whee-hah, keep it coming, Pardners.)  Centroamericanos would like someone to find some oil off their coasts and thankful no tsunami from the earthquake.  And Venezolanos would like a «little» more Orinoco to go along with their pabellón criollo.
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tony ooh
tony ooh Jan 10, 2018 5:39PM GMT
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yawn
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tony ooh
tony ooh Jan 10, 2018 5:11PM GMT
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cushing is full and berman is a cricket in making an energy market. if you're trading energy do it with some error insurance in your portfolio at all times. if you're just reading for energy entertainment, this is the place it would appear.
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Raymond Chan
Raymond Chan Jan 10, 2018 4:59PM GMT
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Is it a sort of Winner Curse?
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The Truth
The Truth Jan 10, 2018 3:14PM GMT
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Berman's been way off before.
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tony ooh
tony ooh Jan 10, 2018 9:39PM GMT
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he's of no import. if the phd author thinks he does, and she pens the column, it's her call.
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Paul Fillion
Paul Fillion Jan 10, 2018 2:38PM GMT
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Actually, I believe they get even less, much less, for their oil than the author discusses, as in general, it must be mixed with heavier oil before refining, and does not contribute a weight/yield distribution consistent with demand (i.e. too much of the light products, not enough of the heavier ones.).
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Johny Macaronny
Johny Macaronny Jan 10, 2018 2:34PM GMT
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at $45 per barrel everyone was screaming about sweet spot and almost break even prices. Now at $60+ everybody is saying we are not even close to break even and life is hard for shale. Experts.. :D
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Ahamed Shareef
Ahamed Shareef Jan 10, 2018 2:33PM GMT
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so author looks to be in ling side and so the report........
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