A recent pronouncement by a noted analyst says that America’s "tight oil" (shale oil) production could reach 3 million barrels a day (b/d) by 2020 which will again put us among the top few global oil producers. On digging a little deeper into the issue, however, many have a problem with all the optimism.

 

In January 2012, oil production in North Dakota hit 546,000 b/d, up from 342,000 b/d in January 2011, 253,000 b/d in 2010, and 187,000 b/d in 2009. With more drilling crews on the way, it is easy to see why optimists are projecting that millions of barrels per day will come from the various US shale deposits by the end of the decade. If we were talking about conventional oil coming from conventional oil fields, the optimists would probably be right — but we aren’t.

 

It took the production from 6,617 wells to produce North Dakota’s 546,000 b/d in January. Divide the daily production by the number of wells and you get an astoundingly low 82 b/d from each well. I say "astounding" because a good new offshore well can do 50,000 b/d. BP’s Macondo well which exploded in the Gulf a couple of years ago was pumping out an estimated 53,000 b/d before it was capped.

 

Now a North Dakota shale oil well is not in the cost class of a deepwater offshore platform which can run into the billions, but they do cost about three times as much as a classic onshore oil well as they first must be drilled down 11,000 feet and then 10,000 horizontally through the oil bearing layer before the fracturing of the rock can take place. The "fracking" involves at least 15 massive pumps that inject water and other chemicals into the well. Take a Google Earth flight over northwestern North Dakota. The fracked wells are hard to miss as there are now about 9,000 of them and they are each the size of a football field.

 

There is still more — fracked wells don’t keep producing very long. Although a few newly fracked wells may start out producing in the vicinity of 1,000 barrels a day, this rate usually falls by 65 percent the first year; 35 percent the second; and another 15 percent the third. Within a few years most wells are producing in the vicinity of 100 b/d or less which is why the state average for January is only 82 b/d despite the addition of 1300 new wells in 2011.

From here on the path ahead seems clear. We seem on course to drill another 2,000 or so in 2012. As long as the price of crude stays up, this pace can continue for a while. The drilling can spread into Montana and Canada until diminishing returns set in. While recently drilled wells may be producing well, the vast bulk of the wells will be close to depletion. While some predict that the Bakken will be producing a million b/d within a few years, it will not stay there long as depletion rates are simply too high.

 

There is a lot more to the U.S. shale oil story, however, than simply the Bakken shales in the upper Midwest. The Eagle Ford shale in southwestern Texas has been drawing considerable attention as a major source of oil and natural gas. However, it is the Monterey shale in southern California that is likely to become the biggest shale oil resource of all. Whereas the Bakken and Eagle Ford shales are estimated to contain about 3.5 million barrels each of recoverable oil, the Monterey shale with 15 billion barrels is 64 percent of the 24 billion barrels estimated to be trapped in U.S. shale formations.

 

While this 24 billion barrel figure sounds impressive to politicians looking for a talking point, it really is only about 9 months’ worth of current global oil consumption.

As we have seen with the Bakken and the various natural gas bearing shales we have been drilling of late, it takes an awful lot of expensive wells and environmental disruption to get the oil out. One estimate of the Energy Returned on Energy Investment (EROEI) for the Bakken shale suggests that the EROEI is six. This means that it may take one oil barrel’s worth of energy to produce six barrels of Bakken shale oil. This is getting very close to the theoretical point at which it really is not worth the effort and all the economic disruption.

 

The aspect of this "energy independence" story that the optimists continue to ignore is that, while oil production from shale may be climbing, depletion of our other sources of oil continues apace. Alaskan oil production is falling rapidly as is shallow offshore production in the Gulf and at least some of the offshore platforms are not turning out to be anywhere near as productive as planned. For its part, the EIA forecasts that U.S. shale oil production will reach a peak of about 1 million b/d around 2020, and deepwater production will increase by about another 500,000 b/d before peaking. This would put total US oil production in 2020 around 6.5 million b/d, far below the current demand of 18 million b/d.

 

A lot of what happens from here on out depends on the direction of oil prices during the rest of the decade. If prices climb substantially above current levels for whatever reason, there will obviously be a major economic contraction followed by a drop in prices. As we saw in 2008, if prices get below cost of production which in the case of shale oil is very high, the industry contracts in the same manner as we are witnessing with shale gas.

 

Shale oil is clearly nothing to bet our future on.