US Vastly Overstates Oil Output Forecasts, MIT Study Suggests

US Vastly Overstates Oil Output Forecasts, MIT Study Suggests
Turns out, America's decade-long shale boom might just end up being a little too good to be true.

As recently as 2015, OPEC tried to pump its U.S. rivals out of business, only to blink after shale drillers adapted by reducing costs. On Thursday, the Organization of Petroleum Exporting Countries and its allies agreed to maintain oil-output cuts through 2018, extending a campaign to wrest back the global market from America’s shale industry.

Power Struggle

President Donald Trump himself has talked up “energy dominance” as a key policy, with U.S. oil and gas helping supply the world’s power needs.

Of course, the MIT researchers aren’t the first to question the projected growth of U.S. shale. Analysts have long debated varying methods used to predict output. And unsurprisingly, the Saudis have cast doubt on how long the shale boom can last. Even billionaire oilman Harold Hamm recently slammed what he considered EIA’s “exaggerated” forecasts, saying they’re depressing U.S. oil prices. (After all, higher prices are better for the bottom line.)

Yet MIT’s findings stand out by providing some evidence that backs those assertions. The problem with the EIA’s numbers, the researchers say, is that they give drillers too much credit for coming up with ways to improve fracking.

While the EIA’s model assumes that technical advances -- such as well length and the amounts of water and sand used in fracking -- increase output at new wells by roughly 10 percent each year, MIT findings from the Bakken region suggest it’s closer to 6.5 percent, according to Montgomery.

Increasing productivity of each new well matters because it’s the only way to boost output. Typically, production drops precipitously soon after a well is tapped. The EIA recently estimated about half of U.S. oil output came from wells two or fewer years old.

Field of Dreams

So even though output in the Bakken more than tripled from 2012 to mid-2015 on a per-well basis, MIT’s research suggests the main reason is that shale companies abandoned iffier fields to drill in the best acreage following the slump in energy prices. The trend is evident in local North Dakota statistics. Output in still-booming McKenzie County has held steady while neighboring Williams and Mountrail counties have experienced declines.

“There certainly could be some validity to getting a rosier forecast because right now, the industry is working sweet spots,” said Dave Yoxtheimer, a hydrogeologist at Penn State University’s Marcellus Center for Outreach and Research. “When that’s all played out, they’re going to have to go to the tier-two acreage, which isn’t going to be as productive.”

Indeed, some signs of a slowdown have started to emerge. Gas output in the Marcellus basin has fallen 10 percent on a per-rig basis since reaching a high in September 2016. In the Permian, per-rig oil production has decreased almost 20 percent over a similar span.

Richard Bereschik knows firsthand that shale isn’t a sure thing.

The bearded, burly superintendent of schools in Wellsville, Ohio -- a small, Rust Belt community located along the western bank of the Ohio River -- recalls the rush he and other townsfolk experienced when Chesapeake Energy Corp. came through some six years ago, leasing out huge tracts of property for development.

Wellsville sits atop the Marcellus and Utica shale formations and is only 20 miles from a concentration of sweet spots, but Bereschik says Chesapeake stopped renewing leases after the bottom fell out in prices.

“Everyone thought we’d found a goose that laid the golden egg,” Bereschik said. But ultimately, “it’s not the boom we all expected.”

With assistance from Ryan Collins.To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Tim Loh in New York at tloh16@bloomberg.net. To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net Michael Tsang, Melinda Grenier.


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Rog Hardy  |  December 04, 2017
I can't vouch for the accuracy of EIA's forecasts or even profess to be an expert on technology trends in 'stubborn rocks' that yield 'unconventional' oil and gas. I have been in exploration globally for over 40 years, and know there are more basins, and, more importantly, more zones, in the 'Lower 48' to be figured out. Take just a couple of examples - California's Antelope Shale and the Gulf Coast's Glen Rose. These haven't panned out like the Bakken and Eagle Ford, but when there's motivation to find the right combination of technologies, they and many others will get a lot more attention, and new sweet spots will emerge. Not saying this will reverse a shortfall to EIA projections, but there are still a lot of poorly looked at nooks and crannies in our big country.
observer  |  December 03, 2017
The Shale Revolution AKA Capital Destruction is realizing that sweet spots in the Permian and Eagleford shale are declining faster than anticipated due to close spacing and frac hits. Many fields are witnessing accelerated production declines that were not forecast in the posted type curves. Many operators have peaked or are on a decline as far as completion efficiency. Doubling the sand and doubling perf intervals resulted in a substantial production and reserve increase. Unless some new tech or process adaptation occurs expect severe legacy production declines... How Sustainable is this? Service companies continue to extend deep discounts while their equipment depreciates: they are enabling their own eventual failure. Have service co leaders modeled what happens when the Permian legacy production declines 250,000bopd month on month...and rigs cant keep up.. What is undeniable is that the top 12 shale execs have earned 2 Billion in the last 4 years while they were unable to achieve any cash flow positive operations... The market still thinks (for the moment) shale is sexy...and rewards cash flow negative nonsense...Once institutional investors come to realize the actual ROI that actually include bloated lease rates, eventual P&A they will run for the exits... Its all hype...case in point Vaca Muerta..google trading economics Argentia oil production and realize that the great mythical Vaca can't even contribute to the countries declining production...smoke and mirrors...


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