The Oil and the Glory

The age of irrational petro-exuberance

The age of irrational petro-exuberance

In our now half-decade-old era of regularized black swans, a few energy thinkers are cautioning against a bubble of wishful enthusiasm with regard to U.S. oil — a widely embraced paradigm shift that, if true, would disrupt geopolitics from here to the Middle East and beyond. A shift is afoot, but not a new world, says Dan Pickering, co-president of Tudor, Pickering, Holt, a Houston-based energy investment firm.

The new abundance model goes like this: Americans currently consume about 18.5 million barrels of oil a day, of which about 8.5 million barrels are imported. But in coming years, the U.S. will have access to another 10 million to 12 million barrels a day of supply collectively from U.S. shale oil, Canadian oil sands, deepwater Gulf of Mexico, and offshore Brazil. Add all that up, and account for dropping U.S. consumption, and not only do you get hemispheric self-sufficiency, but the U.S. overtaking Saudi Arabia and Russia as the biggest oil producer on the planet.

Pickering calls this calculus "a pipedream" founded on the extrapolation of data. Excluding Brazil, whose numbers he finds difficult to nail down, he is forecasting a lift in North American production of around 2.5 million barrels a day — up to 1.5 million barrels a day from shale oil, and another 1 million barrels a day from Canada. In 2020 and beyond, he says, the U.S. will still be importing some 6 million barrels a day from outside North America.

Technically, that does not make Pickering an outlier: The official U.S. Energy Information Administration also says the U.S. will remain a big importer into the next decade; the EIA import number overshadows Pickering’s — 7.5 million barrels of oil a day in 2020, or 40 percent of U.S. supply (see here, page 11).

Yet in practice Pickering morphs into a contrarian because, according to cacophonous oil CEOs and industry analysts, the trouble with the EIA is that it is sluggish: The EIA shale oil numbers are far too conservative, assert these folks, just as the agency — like many others — underestimated the U.S. shale gas boom that has glutted the market and changed part of the global energy calculus.

An oil executive recommended Pickering to me as a sensible voice on oilfield data. Among the underestimated data points, Pickering told me, is how hydrocarbon molecules move through shale, the deeply embedded rock underneath Texas, North Dakota and elsewhere that drillers tap using hydraulic fracturing, or fracking.

A new sea of oil rigs has arisen in the Bakken oilfields of North Dakota and the Eagle Ford in Texas. From about 340,000 barrels a day last year in North Dakota, production from such wells is currently at about 550,000 barrels a day. Broadly accepted forecasts are for U.S. shale oil production as a whole to rise to 5 million barrels a day by the early 2020s.

The problem, says Pickering, is that oil does not behave like gas at the molecular level. When you shatter shale, gas escapes much more easily than oil through the fractures. As a result, a good shale gas well produces the equivalent of 6,800 barrels of oil a day, he says, while a good shale oil well puts out 1,300 barrels a day. "You are pushing out smaller gas molecules; oil molecules are bigger, so they don’t move as easily," he said.

Hence Pickering’s estimate of a maximum of 1.5 million barrels of oil a day from the shale. Pickering:

Any time you change a 20-year trend, people get excited, and the 20-year trend in U.S. production has been down. And all of a sudden we now have meaningful production. So that is an exciting change in trend to start with. [But] when you listen to all of these companies talk of how many wells they are going to drill and how much production they can generate, they tend to take the forecasts, and add them together. They forget about natural [production] decline rates, and extrapolate the rise of U.S. rig counts from 400 rigs to 1,200 rigs, and they say, ‘Oh, we’ll just keep adding oil rigs and keep drilling oil wells.’ That extrapolation is a little dangerous.

It is excitement at a change in the trend, which is very valid; a new play is being developed, which is very valid. And then people’s tendency to extrapolate, which is not. So the enthusiasm is correct and we are going to grow a lot. … But I think to assume that we are going to be energy self-sufficient is a pipedream without even more changes like using natural gas for vehicle transportation.