Shale Boom, or Shale Rush?

Michael Teague  |

The Nov. 12 International Energy Agency report indicating that the US will become the world’s top producer of both petroleum and natural gas by 2015 is just one of the more recent triumphant statements in an ongoing narrative about America’s “energy renaissance”.

Indeed, all year long the financial community and the broader American public have been treated to a continuous refrain about the US entering a new and unprecedented era of energy independence thanks to the “shale boom.” And with new and ever-larger shale plays turning up on a regular basis, the implication would seem to be that we are only in the incipient stages of one of the most significant developments of our times.


Not so Fast!

But the IEA report also included a realistic outlook for the long-term. US Oil production will increase from last year’s 9.2 million barrels per day to a plateau of around 11.6 million per day in 2020, but will level off from there, and the nation will no longer occupy the top-producer spot by 2030. While this may bring the US close to meeting its energy needs purely from domestic production by 2035, the IEA said that “this does not mean that the world is on the cusp of a new era of oil abundance. Light, tight oil shakes the next 10 years, but leaves the longer term unstirred. The Middle East, the only large source of low-cost oil, remains at the center of the longer-term outlook.”

When it comes to the shale boom, however, the profit-taking may end much sooner, and for a number of reasons.


Prohibitive Geology

While there has been much celebration of the technological developments such as hydraulic fracturing and horizontal drilling that have allowed oil producers greater access to unconventional reserves, the daunting geology of shale formations has been discussed less frequently. All the same, it remains the case that, unlike their conventional counterparts, the oil and gas locked within shale formations is unevenly distributed. This means that after the sweet spots in a given shale play have been depleted, producers are essentially forced to do more drilling for less yield.

These geological preconditions are important because they have economic consequences. A shale well produces on average about 600 barrels of oil and gas equivalents per day during its first year of existence. But the average decline rate on those wells is much higher, at 40 percent, than it is with conventional drilling operations. It is much more expensive to keep production rates up after the first year, and thus much harder for companies to make money.

The smaller independent producers who have so far reaped the most from the shale boom often end up using most of the cash generated from the first year of a well just to break even.


Global Energy Markets and the Shale Booms of the Other

And then there is the issue of foreign competition. While there has been some talk about how the OPEC countries are petrified of the rise of shale oil and gas in the US, these claims have been overstated.

Most of the plucky independents who are drilling into US shale are far more exposed to the global energy economy than is often pointed out. For instance, if OPEC decided to up its production and flood global energy supply enough to cause even a 10 percent drop in prices, the much heralded small and independent shale producers could find themselves in a situation where it is simply too expensive to operate. And if prices were to remain depressed long enough, many of these small firms could simply be wiped out.

Furthermore, there are several countries though to be sitting on as much if not more shale reserves than the US. Russia, China, and Argentina may be dealing with even more prohibitive geological barriers to accessing their oil and gas, but the super-majors have both the cash and the expertise to help them out. It may take a while, but there is a strong likelihood that other countries will eventually enjoy their own shale booms, perhaps even just as ours enters its waning years.

None of this is to suggest that the shale boom in the US is going away any time soon. Companies will continue to profit, and US production will, for the foreseeable future, continue to eclipse that of other nations. But the good times will eventually have to come to an end, and energy independence will not be the simple, clearly-defined matter that we have been lead to believe it is.

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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