Sunday, March 22, 2015

Shale Oil - Production Numbers.

The main reason I characterize shale oil production as a Ponzi scheme is because of the fast decay of shale oil wells as compared to virtually all other oil production. One chart is enough to give a good indication of the progress and problems of oil from shale:

Here we have a compilation by the EIA for production of the average well in the Eagle Ford shale, but it serves well as a model for shale oil in general. Two very interesting points should be immediately clear:

1. The rate at which oil comes out of freshly drilled wells has greatly improved in the last five years since 2009.

2. The amount of oil that shale wells deliver is substantially front-loaded. More than 50% of all the oil you will see from a shale well is recovered in the first two years and the greatest proportion of that will appear in the first six months.

Ultimately, and far sooner than most analysts believe, U.S. shale production will consist of ever-less productive wells that cost more to drill, take longer to pay for themselves and generate less oil. The EIA believes that nothing like that will occur for at least the next 25 years. I think that the peak of U.S. shale potential will be reached in the next 10 years, if it hasn't been already -- and that is when the pyramid will begin to fall apart.

Meanwhile, oil companies have to scramble to generate ever more investment to drill ever less productive wells, just to keep up with production targets. That ever ramping chase of capital just to stay even sounds more than a bit familiar. Shale oil does share many of the characteristics of a Ponzi scheme.