"The Shale Oil Boom: A U.S. Phenomenon"

Study Forecasts Tripling of U.S. Shale Oil Output

Discussion Paper 2013-05, Belfer Center for Science and International Affairs, Harvard Kennedy School

June 2013

Author: Leonardo Maugeri, Associate, Environment and Natural Resources Program/Geopolitics of Energy Project 

Belfer Center Programs or Projects: Environment and Natural Resources; The Geopolitics of Energy Project 

Introduction 

There are several issues in the current debate on the so-called U.S. tight and shale oil ... revolution that contribute to reinforce extreme and seemingly irreconcilable attitudes. One of the central questions revolves around the real potential of this revolution and can be formulated simply as follows: Is oil production from shale formations just a temporary bubble or is it an event capable of significantly altering the U.S.—and possibly global—energy outlook? 

This study addresses such questions on the basis of a general analysis of more than 4,000 shale wells and a much more focused analysis of 2,000 of these wells along with the activities of about one hundred oil companies involved in shale oil exploitation. The main results of such analysis are multifaceted. 

On one hand, the large resource size – and the ability of the industry to develop it through steady improvements in technology and cost – dwarf earlier forecasts, suggesting the possibility that the United States may become the largest global oil producer in just a few years. On the other hand, the unique characteristics of shale oil – the drilling intensity in particular – make it extremely vulnerable to both price drops and environmental opposition in new and populated areas. 

Drilling intensity is a key point in order to understand the real evolution of shale oil (as well as shale gas) activity in the United States and its flexibility – e.g. the possibility to rapidly adapt to shifting circumstances. 

Given the early state of knowledge and technology, the U.S. shale oil boom is mostly a function of bringing as many wells as possible on line, due to the dramatic decline in production that follows the early months of activity with each new well. For example, by December 2012 it took about 90 new producing wells per month just to maintain North Dakota’s Bakken-Three Forks (the largest shale oil play so far in the United States) oil production of 770,000 barrels per day. 

Drilling intensity in U.S. shale oil plays skyrocketed from a few hundred wells brought online (e.g., becoming productive) before 2011 to more than 4,000 in 2012 – a figure that outpaces the total number of oil and gas wells (both conventional and unconventional) brought online in the same year in the rest of the world (except Canada). 

In the short- to medium-term (3 to 5 years), the correlation between drilling intensity and shale oil production will shape the evolution of U.S. oil production more than any other factor. And because drilling intensity is largely a function of the oil price, a significant dip in oil price may trigger a rapid twist in the shale oil boom. 

The central role played by drilling intensity in this early stage of shale oil and gas development has a crucial but almost unnoticed implication for the possibility of replicating the success of the American experience in other parts of the world. The United States concentrates in its territory 60 percent of the global availability of drilling rigs; moreover, 95 percent of U.S. drilling rigs can perform horizontal drilling that together with hydraulic fracturing or “fracking” is required to liberate shale resources. 

Combined with a relatively low population density in several shale areas, this vast supply is a key factor that allows the United States to achieve a drilling intensity level that is impossible for other countries to achieve. No other country in the world has ever experienced even a fraction of the overall U.S. drilling intensity, a common feature of the U.S. oil and gas industry since its inception. In 2012, for example, the United States completed 45,468 oil and gas wells (and brought online 28,354 of them) as against 3,921 wells completed in the rest of the world, except Canada.1 

The drilling-intense nature of the shale business is a factor that will make the expansion of the shale phenomenon in other parts of the world improbable – at least in this decade. But there are other factors that will make the global replication of a U.S. style shale boom difficult, including an absence of private mineral rights in most countries, as well as the absence of the U.S. independent companies whose guerilla-style operational mindset has proven essential to the exploitation of shale formations that (unlike conventional oil and gas fields) require companies to move on a micro-scale, on multiple micro-objectives, and flexibly leverage short-term opportunities. 

Although highly difficult to replicate, the U.S. shale experience may have a dramatic impact on the hydrocarbon sector by gradually introducing hydraulic fracturing as a means to recover more oil from conventional, mature, and declining oilfields worldwide.To view the Policy Brief (summary version), click here

Download full discussion paper: 

"The Shale Oil Boom: A U.S. Phenomenon" (2.2 MB PDF)