US Shale Gas to North Dakota – Is it the beginning of a New Era for US Oil?

This post was written by Dr. Salman Ghouri, Senior Economist at Qatar Petroleum in Doha, Qatar.  The views, findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of Qatar Petroleum.

US Shale Gas

The past decade has yielded dramatic changes in the natural gas industry landscape. Rapid advancement of state-of-the-art-technology has helped the natural gas industry to move to a new height. Horizontal drilling, 3-D and hydraulic fracturing have allowed for the recovery of natural gas from unconventional resources (shale, coal bed methane, and tight formations) which otherwise was not economical. The recent successful production of ‘unconventional’ gas in the US has also sparked major interest around the globe, particularly in some parts of Europe, China, Indonesia, and Australia. Figure 1 demonstrates the US natural gas success story during the last 5-6 years. US natural gas reserves since 2000 have gradually increased; however, since 2005, they have increased quite rapidly from 193 tcf in 2005 to 273 tcf at the end of 2009 – thanks to an unprecedented increase in shale gas reserves. Both production and consumption also recorded upward trend, but the growth in production in particular has been quite phenomenal. It increased from 18.05 tcf in 2005 to over 21.5 tcf in 2010. As a result, Energy Information Administration (EIA) data show a decline in imports of pipe gas and LNG during the same period.

Figure 1: United States Natural Gas Profile

Shale Oil

Like unconventional shale gas, unconventional shale oil is now becoming more and more conventional. The question is, can we anticipate that such technological innovation successfully used for shale gas be replicated for enhancement of shale oil production? If yes, what would be the future of OPEC and how would it affect the “Call on OPEC”? How is the expected increase in shale oil production likely to impair the progress of renewable energy development? Contrary, how is the development of shale oil likely to be affected if oil prices collapse close to $60/bbl or below?

US oil reserves, after years of a generally declining trend recorded a substantial increase in 2009 (see Figure 2). US oil production, also after years of gradual decline, changed its course and has increased quite rapidly the last three years.

Figure 2: United States Oil Profile

As a result of the increase in domestic oil production, US oil import dependency in 2010 improved as compared to 2007 (see Figure 3).

Figure 3: US Historical Oil Production and Oil Import Trends

Shale oil has historically been difficult and costly to produce because it is found in formations characterized by both low porosity and low permeability. The technology used first to extract natural gas from shale rock in the Marcellus and other shale gas plays has been fine-tuned and modified to extract oil from shale formations across the country, such as the Monterey play in California, the Eagle Ford in Texas, and most notably the Bakken in North Dakota. Through the use of technology, US oil and natural gas operators are converting previously uneconomic oil and natural gas resources into proved reserves and production.

At the Barnett in Texas, overall liquids production more than doubled (and production from horizontal wells swelled roughly six-fold) from 2005 to 2010. Production from the Woodford in Oklahoma surpassed 2,750 b/d in 2009, up 83 percent as compared with 2008. In the Eagle Ford, where the first well was drilled only three years ago, liquids production in 2009 grew more than five-fold over the previous year, produced more than five million barrels in 2010 and is projected to produce over 400,000 b/d to 1 million b/d in the coming years. Liquids production from Appalachia’s Marcellus shale nearly quadrupled in 2009 and is expected to continue to increase. As the number of oil rigs drilling horizontal wells increased during 2010, oil production from shale oil reserves is likely to further increase in the coming years (Figure 4). The increase in the horizontal rig count, an effective gauge of unconventional drilling in liquids-rich portions of several of the US’s shale formations, has been even more pronounced. After declining by nearly two-thirds from November 2008 to May 2009, the number of horizontally-directed oil rigs has grown nearly ten-fold (Figure 5).

Figure 4: Historical Trends of Number of Rigs Operating for Oil and Gas Drilling

Figure 5: Monthly Average Oil Rig Counts by Orientation – Active Oil Rigs

North Dakota has been an oil producing state for the last 60 years. However, the Bakken oil boom in the last three years made North Dakota the fourth largest oil producing state in the country and one of the largest onshore plays in the United States. The Bakken extends beyond North Dakota into Eastern Montana and neighboring territories of Saskatchewan and Manitoba in Canada. While its success has been largely attributed to advances in oil field technology, primarily horizontal drilling and hydraulic fracturing, a number of circumstances have come together to make the Bakken a successful oil play, including high oil prices, widespread and ready access to privately held prospects, and low natural gas prices. Figure 6 depicts North Dakota’s oil production trends since 2000. For example, total oil production has approximately tripled since 2005 due largely to development of the Bakken. Operators increased North Dakota’s production from 98,000 b/d in 2005 to over 307,000 b/d in 2010 (and close to 400,000 in 2011), and most experts anticipate that the field could produce a million barrels daily by the end of 2020. According to US Geological Survey there are at least 4 billion barrels of recoverable oil in North Dakota; other estimates indicate 4-5 times more.

Figure 6: North Dakota Historical Oil Production Trend

Based on projections from IHS CERA that take into account the industry’s plans, production from shale and other “tight rock” fields that are  presently producing about half a million barrels of oil a day will likely produce up to three million barrels daily by 2020. As per the senior director at PFC Energy, oil companies are investing an estimated $25 billion this year to drill 5,000 new oil wells in tight rock fields. Meanwhile Daniel Yergin, the chairman of IHS CERA, says, “This is like adding another Venezuela or Kuwait by 2020, except these tight oil fields are in the United States.”

Implications

What will happen to the oil market if shale oil production also increases substantially and reduces US oil imports dependency? And what if the success of the shale oil story is repeated in China, India, and other high import-dependent countries? How will it affect the call on OPEC oil? How will it affect the global oil demand/supply balances and oil prices? How will it affect the progress of renewable energy development?  Is it in the interest of OPEC to increase its production now and allow oil prices to decline to below $60/bbl to counter and to discourage further developments of shale oil, at least in other countries?  Besides shale oil penetration, recently Venezuela’s oil reserves increased from 87 billion in 2007 to 211 billion barrels in 2010 – an increase of over 142 percent in just three years! Should Venezuela decide to exploit its newly discovered oil reserves – how will it affect production quotas and international oil prices?

The potential of shale oil in the US is quite significant and one could expect that within years if backed by sound policies US oil import dependency would be reduced. This means that oil supplies that were meant for US markets will look for other markets (like what happened for LNG recently). It would be also interesting to see how the global oil demand/supply balance will be affected if China and India also successfully exploit their shale oil resources. That means that these emerging economies would expect to meet at least incremental oil demand by their indigenous resources – leaving substantial non-OPEC supplies available for the rest of the world.

Such a scenario could boost non-OPEC supplies and weaken “Call on OPEC” oil – putting considerable downward pressure on oil prices. Under such scenario, is OPEC prepared to sacrifice its market share by cutting production to maintain reasonable prices? The experience in the past showed that OPEC members will not be prepared to lose their market share, but at the same time they are not prepared to see oil prices collapsing. The lower the oil prices – the lesser would be the export revenues, which may jeopardize their development plans and may have economic hardship for people at large. Besides, lower oil prices will discourage investment in exploration and enhancement of production capacity that in turn will have long-term negative implications to both the producers and consumers.

Sources

Energy Information Administration

Energy Policy Research Foundation, Inc. 2011. “The Bakken Boom – An Introduction to North Dakota’s Shale Oil,” August 3. http://www.eprinc.org/pdf/EPRINC-BakkenBoom.pdf.

Krauss, Clifford. 2011. “Shale Boom in Texas Could Increase U.S. Oil Output.” New York Times, May 27.

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