Shale oil exploitation has given the U.S. oil and gas industry a boom in the past few years. However, in the eyes of some market participants, the boom brought about by shale oil may soon come to an end.
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Nick Cunningham, columnist of Oil Price, a website that focuses on oil and gas market information in the United States, argues that over-exploitation by oil and gas companies accelerates the cycle of shale oil industry from prosperity to depression. Cunningham said that over the years, oil and gas companies have improved their technology to get more oil and gas. These companies have improved technology in all aspects of mining, but these technologies have pushed the productivity of every drill to its limit. He believes that today’s high production of shale oil has led many people to overlook that this may be an increase in production from the increase in the number of drilling wells, rather than an increase in production per well.
In fact, according to a new report by Post Carbon Institute, the average lateral length of each well has increased by 44% since 2012, by more than 7,000 feet, and by more than 250% in drilling water consumption. Overall, longer horizontal and greater use of water and sand means that the number of wells drilled in 2018 will be 2.6 times the number drilled in 2012, the report said.
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In this report, geoscientist J. David Hughes warned that innovations in drilling technology have reduced costs and allowed resources to be extracted from fewer wells, but did not significantly increase the ultimate recoverable resources. Technological improvements will not change the basic characteristics of shale production, they will only accelerate the life cycle of prosperity to depression.
Once, there were enough shale fields in the United States to achieve rapid production growth, but the boom will eventually end. Cunningham observed that in shale oil and gas producing areas, there has been a trend of improvement in drilling technology but diminishing returns. Nowadays, the distance between drilling wells is getting closer and closer, and the drilling wells will interfere with each other, even the total production will be reduced.
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In addition, technological improvements have ceiling limitations. Last year, EQT, the major shale gas producer, drilled a mining section of more than 18,000 feet. The company boasts that it will continue to increase its length to 20,000 feet. But EQT soon found that when the mining section exceeded 15,000 feet, it would face difficult problems to solve. The Wall Street Journal earlier this year called EQT a “huge mistake costing hundreds of millions of dollars”.
Ultimately, the steeply declining production rate means that oil and gas companies need a lot of capital expenditure to maintain production. According to Hughes, the industry spent $70 billion on 9,975 wells in 2018, of which $54 billion was for oil drilling, 70% of which was for maintaining existing production and only 30% for increasing production.
Today, oil wells that are easy to exploit and have high production have basically been exploited, and the whole industry has to face the problems of production decline and rising costs. Hughes said: It is wrong to think that shale oil production will always rise with technological improvements. Shale oil production ultimately depends on its reserves and geological conditions.