Despite turning the U.S. into the world’s largest producer of natural gas and driving a 3 million barrel per day surge in U.S. oil production in just the last three years, the shale revolution still has its doubters. They couldn’t be more wrong.
The Montreal-based Centre for Research on Globalization recently dismissed shale fracking as a “Ponzi scheme” and “this decade’s version of the dot-com bub ble” that’s about to burst. But time and again over decades, the naysayers and “peak oil” advocates have grossly underestimated the energy industry’s ability to innovate and beat production forecasts. Today’s shale pessimists continue to do so.
Shale pessimism is constructed on the theory that U.S. development has so far largely centered on sweet spots — the most resource-rich areas of geologic formations. As drilling continues and moves further from these sweet spots, productivity of newly drilled wells will allegedly fall. Shale development is already a complex and highly capital-intensive process. The profit margins between an economic well and an uncompetitive well can be razor-thin. In theory, less productive wells, drilled in the margins of shale plays, will quickly become uneconomic and put producers in the red.
Shale pessimists also point to the sharp decline curves of shale wells to support their bubble theory. While newly drilled and producing wells may be highly productive initially, their output falls sharply over time — nearly 50% a year. Continuing to increase overall production, much less just maintain it, supposedly takes constant drilling.
Theory Vs. Data
The sharp decline curves and the movement of drilling into the margins of shale plays seem like a recipe for production to peak and then fall, according to the “peak oil” advocates. But even as producers have moved away from sweet spots, and even as the rig count in many plays has either stayed flat or fallen, production of shale oil and gas continues to grow significantly. If you’re a “peak oil” shale contrarian, the data unfortunately just aren’t on your side.
There are two important reasons why the shale pessimists are wrong: innovation and expertise. The shale revolution was launched because of breakthroughs in a range of technologies, most notably advances in horizontal drilling paired with advanced hydraulic fracturing.
Competition and innovation drive the oil and gas industry, particularly in the U.S. The innovation that unlocked the nation’s oceans of shale resources hasn’t stopped but instead has actually intensified. New ideas, technologies and ways of cracking the shale code emerge daily. And America’s amazing “petropreneurs” have obviously gotten very good at what they do.