The Questionable Staying Power of the U.S. Shale Boom
Between 2008 and 2013, U.S. oil production surged by 64 percent. U.S. natural gas production increased by 42 percent between 2005 and 2013. Both increases were driven by the boom in shale oil and gas production.
The boom has led BP (NYSE:BP) and Exxon Mobil (NYSE:XOM) executives to claim that the U.S. will be self-sufficient in energy within two decades. Energy economist Philip K. Verleger, Jr. argues that American energy independence will allow the country to become a net exporter of oil and gas and to enjoy a cost advantage in energy supplies over the rest of the world that will translate into serious economic benefits.
However, there are three major red flags that should curb this unconstrained enthusiasm: shale depletion rates, decreased oil and gas prices due to the glut, and the extent to which upstream oil and gas companies in the shale space are overleveraged.
Shale oil and gas wells have rapid decline and depletion rates. According to Pete Stark, a geologist and analyst at IHS, Inc., production from the average shale oil well declines by 50 to 78 percent after its first year, and by 50 to 75 percent after the first year for shale gas wells. The Serenity 1-3H oil well in Oklahoma, owned by Chesapeake Energy (NYSE:CHK), produced over 1,200 b/d in 2009; in 2013, it produced less than 100 b/d. Continental Resources’ Robert Heuer 1-17R well in the Bakken fields saw production plunge 69 percent in its first year. In order to maintain the same level of output in the face of such drastic decline rates, upstream companies must constantly drill new wells.
For natural gas, increased supply has exerted downward pressure on prices. Lower prices have given the U.S. a cost advantage over other countries and allowed for decreased imports since 2007, but they also cut into the profit margins of upstream natural gas companies. This may push these companies to cut back on drilling, as in 2009.
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