Frack Baby Frack
How Far Can American Shale Go?

America’s latest peak in oil production occurred in June of 2015 at around 9.6 million barrels per day (bpd), and it was driven by companies fracking shale formations to release “tight” oil. Since then, U.S. oil output is down about 1 million bpd as the shale industry, whose operations are relatively expensive as compared to those of conventional oil producers, has struggled to adapt to collapsing oil prices.

But the shale boom is still far from going bust, and in fact now appears to be once again recapturing the momentum that propelled the United States to a major global producer over this past decade. The WSJ reports:

Devon Energy Corp., Pioneer Natural Resources Co. and other prolific shale producers are telling investors that this fall they will pour more money into drilling new wells. The burst of activity shows the resilience of American energy companies that managed to survive oil’s plunge from over $100 a barrel in June 2014 to less than $30 earlier this year. But the burgeoning ramp-up threatens to cut the recent rally to $50 off at its knees. […]

Many have cut costs so deeply that they can turn a profit when oil trades around $50. That’s why a contingent of investors and analysts now see that price as a ceiling for the market.

This entire energy revolution occurred because companies innovated, employing horizontal well drilling and hydraulic fracturing in novel ways to unlock reserves of oil and gas that were previously thought to be inaccessible. That same spirit is driving the industry to adapt to today’s new market conditions, and as a result many shale firms have now figured out how to turn a profit at current prices.

$50 oil prices are beginning to look high enough to sustain U.S. shale projects, and as these companies get their feet underneath them once again, we can’t help but wonder: how high can American oil production go? The EIA reports:

Production from tight oil in 2015 was 4.89 million barrels per day, or 52% of total U.S. crude oil production. From 2015 to 2017, tight oil production is projected to decrease by 700,000 barrels per day in the Reference case, mainly attributed to low oil prices and the resulting cuts in investment. However, production declines will continue to be mitigated by reductions in cost and improvements in drilling techniques. The use of more efficient hydraulic fracturing techniques and the application of multiwell-pad drilling, as well as changes in well completion designs, will allow producers to recover greater volumes from a single well. […]

Based on projections in the U.S. Energy Information Administration’s Annual Energy Outlook 2016 (AEO2016), U.S. tight oil production is expected to reach 7.08 million barrels per day (b/d), and shale gas production is expected to reach 79 billion cubic feet per day (Bcf/d) in 2040.

Any attempt to predict the future necessarily opens oneself open to looking foolish in hindsight, but the EIA is hedging its projections with ranges and delineating the different assumptions it’s making. As best the agency can tell, oil production from American shale stands to increase another 45 percent in the coming years. Market forces have conspired to temporarily setback the shale boom, but it’s by no means over.

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