The International Energy Agency (IEA), in its 2012 World Energy Outlook, projects that oil supply will continue to rise until 2035 without encountering geological or technical production constraints. The agency reckons that conventional oil production peaked in 2008 and is, thus, relying on the development of unconventional resources to plug the gap between supply and growing demand from the developing world.
Indeed, one of the big energy stories over the last couple of years has been a reversal in the long-term decline of US oil production, mainly as a result of the application of horizontal drilling and fracking technology to previously inaccessible ‘light tight oil’ (LTO) – which includes shale oil – deposits in several American states, notably North Dakota and Texas. US tight oil production rose from practically zero a few years ago to around 1.6-million barrels a day by the end of last year.
The IEA’s ‘Medium-Term Oil Market Report’ (MTOMR), released in May, claims that the development of North American unconventional oil represents a positive supply shock that will transform global oil markets and shift the geopolitical landscape by reducing the power of the Organisation of the Petroleum Exporting Countries cartel. The MTOMR forecasts that US LTO will grow by 2.3-million barrels a day between 2012 and 2018.
The US Energy Information Admini- stration (EIA) is similarly bullish about the prospects for the country’s LTO, projecting that production will rise gradually until 2020 and thereafter remain roughly constant until at least 2035. The EIA assumes that some 26-billion barrels of tight oil will be produced by 2040.
But this is less than four years of total US oil consumption. Moreover, some independent oil analysts are not as sanguine about the prospects for tight oil.
In February, a Canadian geologist, David Hughes, produced a report on unconventional oil and gas based on a detailed assessment of data from thousands of producing wells in North Dakota and Texas. Hughes emphasises that “the world faces not so much a resource problem as a rate of supply problem”, and highlights three major caveats.
Firstly, production decline rates from individual wells tend to be very rapid, falling some 80% to 90% within the first two years. This means that, each year, a greater number of new wells must be drilled, if the rate of production is to increase.
Secondly, oil companies quickly home in on ‘sweet spots’ in the tight oil formations, which means that production rates can climb quickly early on but are soon at risk of stagnation and decline as drillers mop up harder-to-access deposits.
Thirdly, the ultimate output of the Bakken and Eagle Ford plays – currently accounting for 80% of US LTO – is constrained by available drilling locations.
Consequently, Hughes calculates that US tight oil production could reach a maximum of around 2.3-million barrels a day in 2017 and fall steeply thereafter to about 0.7-million barrels a day by 2025.
Another independent assessment of the world’s oil outlook was published in March by the Germany-based Energy Watch Group (EWG), an international network of scientists and Parliamentarians financed by various foundations. Like Hughes, the EWG also based its assessment on historical production figures from hundreds of fields and also forecast a peak in US tight oil production around 2017. Both Hughes and the EWG team suspect that US tight oil will turn out to be a ten-year bubble.
A global assess- ment of tight oil resources published by the EIA in June estimates that there could be 345-billion barrels of ‘technically recoverable resources’ – resources that could be developed with current technology but without regard to economic viability. This assessment – representing 10% of total world oil resources – was based largely on the US experience.
But the EWG points out that US tight oil success has been partly “due to a number of specific conditions, such as a highly developed oil and gas industry and infrastructure, sizeable unconventional oil and gas resources in prospective areas with very low population densities, certain financial incentives for publicly listed companies and exemptions for the oil and gas industry from environmental restrictions”.
It remains to be seen whether such favourable circumstances can be replicated elsewhere. The availability of sufficient drilling rigs and skilled personnel could be limiting factors. Equally important, EIA data shows that the average cost for each well drilled in the US has steepened dramatically since 2000. Combined with the financial problems that plague the developed world, this raises an important question mark about the afford- ability and economic impacts of higher-cost oil.
The stark divergence of analysis and forecasts – together with the newness of tight oil output – suggests the jury is still out concerning how much oil will flow from fracking. But, considering that, every year, about four-million barrels a day of conventional oil production is lost owing to the depletion of mature fields, even the optimistic estimates for tight oil flow rates do not match the hype.