I continue to await lower oil prices. It's been a long wait. But I've enjoyed following the innovation in shale oil and gas drilling, and fast expanding oil production, especially in Texas.

Maybe the notes below will be of interest to Daily Speculations readers.


The Short Shale Oil Investment Horizon

Shale oil production is booming across Eagle Ford and Permian Basin in Texas. Lower taxes and regulations, and quick drilling permit approvals speed the process. In a recent post Riding Down the Cost Curve: Shale and Oil Sands Extraction, I noted Eagle Ford production continues to exceeded projected production.

A Motley Fool post dated May 2014, noted that Eagle Ford production started with just 358 barrels of oil equivalent a day in 2008 and: "Today, Eagle Ford output now tops one million boepd." The author further tells readers: "And based on projections by Benteck Energy, production is expected to surpass 1.5 million boepd by 2018."

Well, welcome to 2018! Eagle Ford production is now projected by Energy Information Agency to hit 1.5 million a day this month. Horizontal drilling and hydraulic fracturing has brought the nearby Permian Basin field back as well, with production rising through 1.7 million barrels a day.

U.S. shale oil production that the Energy Information Administration had predicted just a month ago would slow by 800,000 barrels a day in 2015, it now predicts will rise 1 million a day, to reach a total of 9.53 million (though being off by 1.8 million barrels a day in just a month suggests at least the second decimal point in EIA's prediction is optimistic).

Shale oil skeptics claim the shale oil boom is unsustainable, and maybe these skeptics influenced EIA projections. Shale skeptics note that new fields play out quickly and many are barely profitable. Shale pessimists think investors are being taken for a ride.

Shale oil enthusiasts argue that this same short life of shale oil wells allows shorter time horizons for investors, making shale plays uniquely sustainable and predictable. The billions invested to reach down to massive deep water reservoirs require many years to break even and turn profitable. Success with deep water investments off the coast of Brazil, Ghana, or Nigeria turn on continued high oil prices a decade into the future, and just as important, depend upon stable governments a decade into Brazil's, Ghana's, and Nigeria's future.

Shale oil operations are much less expensive, requiring just millions and paying off costs then returning profits to investors in just a few years. If oil prices fall off a cliff next year, shale oil drilling will quickly slow or stop until prices recover.

Smaller initial investments allow hundreds more small firms to launch shale oil operations, plus encourages a range of experimental innovations to improve yield, lower costs, and speed production. With shorter investment horizons and less uncertainly, shale oil drilling draws in more marginal operators. The most efficient producers are making lots of money, but less efficient producers keep operating. Marginal shale oil operations that require, say, $90 a barrel oil to survive, can keep drilling with oil prices at $95, since short-term hedging can lock in a similar price for a few years.

So the race is on for shale oil operators to ramp up across the many U.S. shale oil fields, applying newly advanced expertise to yet unexplored fields. Last Tuesday at the Kansas State Fair I talked with a farmer from Salina who from time to time over the years had earned $4 or $5 an acre for oil and gas leases. No firms had yet drilled, but he enjoyed the extra cash. After some years with no leases, a small firm recently offered to lease his land, but this time at $185 an acre.





Speak your mind

2 Comments so far

  1. Gregory Rehmke on September 16, 2014 1:42 pm

    Also, this WSJ article makes similar points on fast advancing shale oil and gas technologies: “Fracking Gives U.S. Energy Boom Plenty of Room to Run: Current Top Gas Well Produces Five Times as Much as Record Setter a Decade Ago”

    (Title in print edition, 9/15/2014, B1 “U.S. Energy Boom Has Room to Run”)

  2. Mary Kirby on October 15, 2014 5:26 pm

    Hi Greg Rehmke

    Thank you for this most interesting post. I read the two Preston Tucker posts on your blogspot.

    My Dad was Preston Tucker’s attorney, William Kirby. I am do research on the Tucker Trial, and the SEC secret report was central to the destruction of the brilliant Mr Tucker. Your post mentioned that Harry McDonald of the SEC testified to a, I believe, Senate committee, that it was he who gave the reported from the Detroit News the “secret report”.

    I would be most grateful if you could let me know if his testimony was before a Senate committee, and what committee was it, and when was this testimony.

    We were very young when the Tucker Trial took place but I did get to know Tucker, a bit, because he stayed the weekends at our home in Waukegan, IL. He & Dad would drive up from Chicago in Tucker’s Blue Tucker. And dozens of cars would follow them just to get a chance to see the car, and maybe talk with Tucker.

    Thank you for any help you maybe able to give me.

    Mary Kirby


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