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Not Everyone Sold on US Shale Boom


“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]

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  • BrianFrankie

    This is an immensley complex subject, one that cannot be addressed in the cmments section. However, Via Meadia also needs to be aware that there are different decline models. The exponential models used by Mr. Hall are actually not very good at predicting shale well declines, which follow harmonic decline rates. Some background on different decline models can be found here:

    The upshot is that shale wells decline precipitously at first, but have a much longer tail, producing at low rates considerably longer than conventional wells. Most of the Barnett shale wells are still producing at econmic rates two+ decades after drilling. This will indeed have massive impacts on the economics of hydrocarbon production, but the impacts will be much more along the lines of building a constant rate of baseline production, with new wells drilled only for increasing demand. Mr. Hall has his economics wrong on this question.

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