Joao Peixe  

There was an important study released by the Post Carbon Institute last week that gives us an insight into how long our great shale oil bonanza — or more likely, bubble — is going to last. As you might suspect, the thrust of the new report is bad news so we are unlikely to ever read much about it in the mainstream media, which continues to tell us about the bright energy-rich future ahead.

 
By now we should all know about the technological wonder of “fracking” that has raised America’s oil production by more than 2 million barrels per day (b/d) in the last few years and has reversed the decline of our natural gas production. The speed with which this has happened has been amazing and shows that if oil prices get high enough (oil has risen from $20 to $100+ per barrel in the last decade), then we can have all the oil we will ever want.

Rapid increases in production, however, mean that the faster we use up something, the sooner will come the day when production starts to decline — and that day may not be very far away. In the case of North Dakota, new drilling seems to be concentrating in four counties, known as sweet spots, which may be the only places where it is profitable to drill at today’s prices. With new drilling concentrated in a small geographical area, it may soon be the case that there are no new places to drill — but since this is probably at least a couple of years off, there is no sense in worrying about it.

While areas in Texas and North Dakota are where spectacular increases in oil production have taken place, less well known is that our energy future really is supposed to rest in California, where the government says some two-thirds of America’s shale oil will be found. Should North Dakota and south Texas ever start running dry, all we will need to do is move the drilling rigs to California and there will be enough new oil to last for many years. Energy independence, millions of jobs, and a bonanza of tax revenue will come when California’s oil production revives.

To make sure there was no mistake about the good times ahead, the U.S. Department of Energy hired a contractor to examine America’s shale oil reserves to confirm there really was a bonanza of oil and gas out there that could be accessed by horizontal drilling and fracking. To no one’s surprise, the contractor came back and said yes, America, there are 24 billion barrels of oil there for the taking.

As the U.S. burns about 7 billion barrels of oil a year, we therefore have at least a three-year supply of shale oil — if we can get it out of the ground. Interestingly, the government’s contractor reported that some 15.4 billion barrels of this shale oil were buried under California, while only 3.6 billion was in North Dakota and 3.4 billion in south Texas. The rest was sort of scattered around. The report also talked about 750 trillion cubic feet of natural gas buried in the shale, but that is a story for another day.

As we are already extracting roughly a million barrels of shale oil a day from both North Dakota and Texas, the future of the industry was thought to be in California. Of course, anybody with the most rudimentary knowledge of geology should know that the earth under California and under the American Midwest are very different places. Remember the San Francisco earthquake, the San Andreas Fault, and that giant tectonic plate that disappears under California.

To the U.S. Energy Information Administration’s credit, it did caveat the introduction to the report, noting: “Because most shale gas and oil wells are only a few years old, their long-term productivity is untested. Consequently, the long-term production profiles of shale wells and their estimated ultimate recovery of oil and natural gas are uncertain.” But, of course, nobody reads caveats. For most, California has 15 billion barrels of oil just waiting to be extracted after North Dakota and Texas start running short, so the great shale bonanza can go right on into the future.

We now have a second look at the Monterey shale and things don’t look so rosy. First, the geology of California is similar to a bowl of spaghetti, with the earth squeezed into folds and steep inclines, not the 20,000 square miles of flat-laying shale deposits found in North Dakota. The Monterey shales are thick and complex, and do not lend themselves to drilling the long horizontal wells that can be fracked so productively in other places. Much of the shale oil in California appears to have drained over the years into conventional oil reservoirs and has already been extracted by many of the 238,000 oil wells that have been drilled in the state during the last century.

The Post Carbon Institute’s new study by an experienced Canadian geologist, who has already examined the productivity of other shale oil formations in the U.S., concludes that the government and its contractor’s study is absurdly optimistic about the prospects for shale oil production in California. Despite the use of all the latest drilling and production techniques, oil production in California has fallen from 1.1 million b/d 30 years ago to 500,000 b/d today. It is highly unlikely that this will be turned around given the geology of the region.

The Department of Energy’s report starts with the assumption that California’s shale is much like that in Texas and North Dakota. It posits that the oil industry will only have to drill 28,000 new wells — each yielding ridiculously large amounts of oil (550,000 barrels) — to extract California’s shale oil. This is simply not supported by the recent history of drilling in the state and is unlikely to happen. We will be lucky if California’s oil production does not continue to decline, for its geology is simply not the same.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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