“God” thinks the US shale revolution isn’t all it’s cracked up to be. Andy Hall, an oil trader whose savvy has earned him that divine nickname, is pointing to the tendency of output to decline precipitously over the life of a shale well as a sign that fracking’s capacity to permanently reshape the global energy scene is more hype than substance. The FT reports:
“Shale oil and gas boom has been an incredible phenomenon and it would be ridiculous to argue that it is not having a transformational impact on the oil and gas industry,” Mr Hall said. But he immediately warned: “We feel that some of the wilder claims regarding its future prospects need to be tempered.” […]Mr Hall said that makes it “impossible to maintain production . . . without constant new wells being drilled [which would] require high oil prices”.
Hall’s concern over the high decline rates of shale wells is legitimate. But in his new book, The Power Surge: Energy, Opportunity, and the Battle for America’s Future, Michael Levi describes why this fear might be overblown:
When skeptics estimate the impact of weaker well performance on shale gas economics, they typically treat drillers’ costs as fixed; as a result, slightly lower performance can all too easily destroy the economic prospects of a given well. In practice, one of the biggest costs of production—the cost of leasing gas-rich territory from landowners—isn’t fixed at all. If the value of the gas falls because it turns out to be less economical to extract it, lease prices will drop too, blunting the ultimate impact on production. Moreover, as drillers gain experience and innovate, their other costs fall too.
Quick note: if you’re at all interested in the shale boom, read Levi’s book. It finds the middle ground between green and brown zealotry and gives some great in-depth analysis.In that passage, Levi partly addresses Hall’s concerns. As time goes on, the industry is going to continue to innovate, especially as larger companies start throwing more money at fracking research and development. Predicting the future based on the technology of today is never a good idea.It would be a mistake to discount the wisdom of a deified oil trader entirely, but there are still many promising signs that shale is the real deal. So let’s temper our enthusiasm for America’s energy future, but not extinguish it.[Oil rig image courtesy of Shutterstock]