Published on October 30 2013

Peak “Cheap” Oil: Shale Oil Proves Peak Oil Is Indeed Upon Us

Ever the contrarian, I have been quite skeptical of the many breathless claims being made by wide swaths of the media about how a new energy bonanza is going to overtake the U.S. and eventually the world. The subject, of course, is the new shale plays in both natural gas and oil.

While these plays are in special cases quite extraordinary, and the technology is just brilliant, many of the more exuberant claims made in the past about the potential contributions of these plays are now being dialed back.

The reason? Just like any other resource, the shale plays were “high graded,” meaning the best ones were drilled first. (As they say in Texas: We drill the best spots first.)

The reason I say in the title that shale oil proves that Peak Oil is upon us is that we would not be drilling them if there were anything better left to drill. The simple yet profound reason that we're going after this more difficult and expensive oil is—drum roll, please—the easy and cheap stuff is all gone.

Rather than proving that Peak Oil is dead, as many have claimed, the new focus on shale plays indicates to me that we've indeed moved down the resource ladder to the next best (i.e., less good) options because the better ones are all gone.

Again, I think the technology and ingenuity on display in the shale plays is extraordinary. And I think, in the end, we're going to drill all of these plays upnot just here, but elsewhere in the world. These are legitimate wells.

But they are not the same as the old conventional plays. Not by a long shot.

They are expensive. And they consume a lot of water and a lot of land. A typical shale play involves tens of thousands of wells with drill pads all over the placesomething that will pretty much prevent their widespread adoption in more populated areas of the world.

A Peak Oil Mistake

A big mistake of the Peak Oil community (of which I am a self-described member) was in not qualifying statements about oil reserves and production in terms of price. Obviously, the higher the price goes, the more exuberant and elaborate will be the attempts to get more oil from harder, deeper, and more expensive places.

That is, up to a point, the amount of oil that we will drill for will depend on price.

If, for example, oil were to suddenly fall to $50 per barrel or less and stay there, then there would be no more drilling in the shale plays, because the all-in cost of those plays is higher than that. In many plays, a lot higher than that.

Conversely, if the price of oil were to rocket up to $300 a barrel, then you'd see all kinds of marginal oil plays around the world suddenly begin to get tapped.

So the amount of oil we'll ultimately get is a tricky function of price, actual reserves, technological developments, and geopolitical realities.

The actual argument that makes the most sense is to call for Peak Cheap Oil, which is something that we can quite confidently argue is now safely in the rear-view mirror.

And someday, no matter how much the shale oil plays ultimately contribute to the story, those, too, shall have their days of ascendancy followed by a terminal decline.

Oil “Peak” Delayed

It seems shale oil has pushed back the date of the arrival of the true worldwide “peak” in oil, possibly by as much as five to ten years.

This is new information that changes things some. But, unfortunately for a world still addicted to oil, not nearly as much as many had originally hypeder, hoped.

Back in 2009 and 2010, I calculated that somewhere around 2013-2014, the world would have to come to terms with the reality of peak oil production. I rather doubt that's the case now.

Back then, I underestimated the impact that the 2008 global recession would have on demand, as well as the contributions that would come from shale. Together, these have served to lessen the global demand for oil to the extent that a (barely) tolerable price of ~$100 per barrel is balancing supply and demand (for now), which is allowing Peak Oil to shift off into the distance for a few more years.

The way that global oil supply and demand have balanced has involved both increased U.S. production and reduced U.S. demand, which has dramatically reduced U.S. demand from elsewhere on the globe. This has then allowed the rest of the world to compete for non-U.S. oil with relative ease.

If we look at U.S. production, nearly 2 million barrels per day (mbd) of increased domestic production over the past two years simply meant 2 mbd that the U.S. did not have to import:

So that helped. And it was a good thing, too, because if we look at global production of crude oil with the U.S. removed from the equation, we see this:

Virtually zero growth in oil production across the globedespite a full doubling of expenditures by the oil companies on exploration and production and a near tripling of the price of oil.

If you want to understand why oil prices tripled, the above chart is really all you need to look at. It's just basic economics. Supply and demand are matched by price. If demand was rising (and it was) and supplies were stagnant (and they were), then price balances the equation.

To know when Peak Oil will finally be recognized across the world's stage, I would need to know by just how much global economic growth is going to advance, what new discoveries will arrive, the price of oil, and whether or not the Middle East will stabilize or destabilize.

In short, I can't predict any of these things with any sort of statistical accuracy. But I can know that every oil find eventually depletes and that the new ones are less spectacular than prior ones. And that we've drilled out the best plays first, so the future ones are likely to be underwhelming.

The Best Plays First

It's important to note that the recent U.S. experience in drilling the Bakken, Eagle Ford, and Permian Basin plays cannot and should not be linearly extrapolated across the 20 total U.S. shale basins known to exist.

The reason is that the remaining plays are certain to be of lesser quality, more difficult/expensive to access, and/or lower yielding.

This has certainly proven to be true, at least judging by these news releases:

Shale formation in Montana frustrates oil drillers

Mar 15, 2013

The pessimists are right for now: The Heath oil play cutting a swath across Central Montana is no match for the Bakken.

In fact, a handful of companies drilling in this shale formation in Central Montana have all pulled out.

And Montana’s other big energy hope—using CO2 to coax oil out of the old Bell Creek field in southeastern Montana—has been delayed.

“The last wells are coming in at 15 or 20 barrels a day. At $4 million to $6 million a well, that doesn’t cost out,” said independent oil man Tom Hauptman of Billings.

Production of shale wells decline rapidly after a year or two. So the Heath wells would have to produce 30 times what they are now to be economical, Hauptman said.

Two years ago, the petroleum industry veteran was touting the Heath as a potential mini-Bakken.

(Source)

So the Heath play, recently touted as the next big thing, turns out to be no real thing at all. At least not until oil goes up in price by a factor of thirty.

Another one of the larger hopes was the Utica Shale, which underlies much of Ohio and western New York. Many companies rushed in and spent a lot on acreage, and now we have the drill results, and the verdict is… not good:

Ohio’s $500 Billion Oil Dream Fades as Drillers Misjudge

April 16 (Bloomberg)—U.S. drillers that set up rigs amid the rolling farmland of eastern Ohio on projections underground shale held $500 billion of oil are packing up.

Four of the biggest stakeholders in untapped deposits known as the Utica Shale have put up all or part of their acreage for sale, as prices fall by a third in some cases. Chesapeake Energy Corp. of Oklahoma City, the biggest U.S. shale lease owner, last week offered up 94,200 acres (38,121 hectares). EnerVest Ltd. and Devon Energy Corp. are selling as early results show lower production than their predictions.

“The results were somewhat disappointing,” said Philip Weiss, an analyst with Argus Research in New York. Early data show “it’s not as good as we thought it was going to be.”

The flip-flop underscores the difficulties faced by even experienced drillers around the world in tapping the sedimentary rock.

In California, Occidental Petroleum Corp. was stymied by the Monterey Shale’s fault-riddled terrain. In Poland, Exxon Mobil Corp. stopped drilling because shale output was minimal.China’s failures with shale gas drove producers Cnooc Ltd. and China Petrochemical Corp. to seek expertise in North America.

In Ohio’s Utica formation, which runs eastward as far as New York, drillers frequently found the rock too dense and underground pressures insufficient to produce oil.

The rush to buy acreage has reversed.

The Utica grabbed the U.S. shale spotlight in 2011 when the Ohio Department of Natural Resources estimated it held 5.5 billion barrels of recoverable oil reserves—equivalent to more than twice Yemen’s proven resource and valued at about $488 billion at yesterday’s $88.71-a-barrel U.S. oil price.

Chesapeake had boasted Utica would outperform the Eagle Ford. EnerVest, the biggest gas producer in Ohio, had said the Utica would bring jobs and new industry to the state. EnerVest in the past year has tried to sell acreage there and no buyers have emerged.

(Source)

I remember reading all the hype surrounding the Utica Shale a couple of years back and noted that journalists were invariably quoting the oil men and company spokespeoplei.e, those with the most to gain from big claims.

However, all the petroleum engineers I talked with said, you cannot know anything until you sink a well and see what happens.

The geology might be unfavorable, or the oil may not be there, or it might not flow, or it might be lousy quality, etc. and so on.

And the verdict is now in: The Utica Shale is not worth pursuing. At least not at this time (or more accurately, this price).

Moving along… we just received this news about the Mississippian Formation that underlies Kansas. Verdict? Not good:

Shell Oil pulling out of Kansas

Sep 19, 2013

Shell Oil has confirmed what it had hinted earlier: that it is pulling out of Kansas completely, selling off 45 producing wells and 600,000 acres of leases in Barber, Harper, Kingman, Pratt, McPherson, Sedgwick, Sumner, Rice and Reno counties.

It’s the most dramatic in a series of high-profile departures of major exploration companies that have given up on the Mississippian formation, or at least the Kansas side of it.

Shell stopped drilling in June and reviewed results for what it has said all along are exploratory wells, said company spokesman Scott Scheffler.

“As part of that process, in some cases—as in this review—assets are identified that do not meet our targets and the best value option for Shell is to divest. Therefore, Shell has completed its appraisal of its exploration holdings in the Mississippi Lime play and has elected to market these assets for sale and redeploy resources elsewhere in our global portfolio.”

(Source)

While Shell is trying to spin this as nothing more than closing a few test wells and making a strategic realignment to its portfolio, it bears noting that it held 600,000 acres and sold off 45 producing wells.

By the time a producing well is not even worth holding onto for whatever cash stream it can generate, you know the play is simply not a good one.

So we can scratch off the Mississippian Formation, too.

Moving along further… on to the big kahuna, the biggest prize on the table: the much heralded Monterey Formation in California, upon which much hope and even more hype have been lavished.

The verdict? Um…at best, we can say: It's complicated.

Oil Firms Seek to Unlock Big California Field

Sep 22, 2013

California's Monterey Shale formation is estimated to hold as much as two-thirds of the recoverable onshore shale-oil reserves in the U.S.'s lower 48 states, but there's a catch: It is proving very hard to get.

Formed by upheaval of the earth, the Monterey holds an estimated 15.4 billion barrels of recoverable shale oil, or as much as five times the amount in North Dakota's booming Bakken Field, according to 2011 estimates by the Department of Energy.

The problem is, the same forces that helped stockpile the oil have tucked it into layers of rock seemingly as impenetrable as another limiting factor: California's famously rigid regulatory climate.

So far, there have been no production breakthroughs.

(Source)

The summary here is no surprise to me. Whereas the Bakken is a big, flat expanse, unsullied by geological forces over time, the Monterey is in seismically active California and has been stressed and bent and folded and heaved over millions and millions of years.

When you are trying to frack oil and gas out of the earth, every fault works against you by bleeding your pressure away. Worse, some fractures connect to other features, complicating the practice of keeping fracking fluids away from water tables.

So, for now, the best we can do is place the Monterey on the “maybe” list. But note that it's certainly no slam-dunk, simple-as-plumbing operation like the earlier storied shale plays.

Conclusion

As far as I am concerned, the shale plays prove that Peak Oil is real, rather than invalidating the theory.

We can certainly say two things about shale oil: 1) It's more expensive than oil finds of the past, and 2) we've already drilled the best plays first.

This means we cannot ever expect to see Cheap Oil again, at least not in a meaningful way (although perhaps a global economic slump could temporarily drive prices lower). So we should be acting as if fossil energy is rare, limited, and exceptionally valuable.

The best shale plays in the U.S. are already in the rear-view mirror, and all of the most recent plays have been something of a disappointment. There will probably be a couple more that prove promising (the Cline Shale play in TX may be one of them), but there certainly isn't anything like 20 Bakkens kicking around, as some desperately want to believe.

Meanwhile, oil production from the rest of the world continues to chug along in a virtually flat line. And the U.S., even with its recent production gains, still imports roughly a third of its daily petroleum needs, which means the U.S. is just as dependent on the global oil situation as any other country. Possibly even more.

I remain convinced that a prime reason the world economy is not doing well, and why marginal states and countries are struggling, is that oil is no longer cheap and easy to find and produce.

In short, there's nothing yet in the data that makes me think that Peak Oil is dead or that we can breathe a collective sigh of relief that we've bought ourselves a few more easy decades of abundant fossil energy via shale.

Again, the shale plays are magnificent in many respects, but they are not permanent game-changers that afford us the choice of neither examining our beliefs nor changing our behaviors. Indeed, they are a reinforcing indicator that we now live in the age of Peak Cheap Oil.

For more of Chris Martenson's analysis, visit PeakProsperity.com.