The Shocking Data Proving Shale Oil Is Massively Over-hyped

News & Current Events Public News & Current Events
,
1

Hooray, oil is suddenly much cheaper than it used to be. That's great news, right?

Not so fast. For certain it's not good news for those counting on a continued rise in US oil production from the "shale miracle". Many drillers were challenged to operate profitably when oil was above $70 per barrel. Very few will remain solvent with oil in the $50s (as it is as of this writing).

So, expect US oil production to suffer from these lower prices if they persist. But even if oil prices rise and rise soon, there's new data that indicates the total amount of extractable oil from America's shale plays is less -- much less -- than what we're being told (or better put, "sold").

On today's podcast, Chris talks with oil analyst David Hughes, who has analyzed the major shale plays utilizing a massive database of well production results from America's shale basins. The data show that declines tend to be hyperbolic in all shale fields. The average first-year decline is 70%; down to 85% by year three. And we're drilling the best parts of these plays first: meaning that future wells will yield less even under the best results.

We're pinning our hopes of "oil independence" on faulty assumptions. Worse, we're using it to dismiss the Peak Oil theme at exactly the time we should be using this extra oil to construct the infrastructure for our next energy age (whatever that may look like), while we still have the net energy available to us:

Let’s just take a play like the Bakken.: 45% annual field decline, sweet spots are getting to be drilled out. We know that they need to drill 1,500 wells a year just to keep production flat. But as you go into lower quality rock, the well quality in most of the play's extent is only about half of what it is in the sweet spot. If you have to rely on the lower quality part of the play you need 3,000 wells per year instead of 1,500 to offset the field decline. But the wells aren’t any cheaper. They cost the same amount to drill. To be profitable for producers, it's going to take a lot higher prices in order to make that happen. And you can go through play after play and see the same thing. We are drilling the best parts of the plays now and it is just going to get worse down the road. We are going to need higher and higher prices.

The EIA has not only made what I consider really optimistic estimates on production, they have also made optimistic estimates on price. A lot of the infrastructure that is being built today is based on the assumption of cheap prices for the foreseeable future. That is not in the cards. With these recent cheap prices we are going to see production go down a lot faster than my estimates. My estimates are best case: I assume that the capital will always be there to drill the wells and that there will be no environmental concerns that restrict access to drilling locations. So in that way I am the best case. But even if you take my best case, the medium and long-term supply picture from shale is disturbing.

Sadly, corporations tend to think about the next couple of quarters. Politicians may think about the next election, but an energy sustainability plan has to have a vision of decades we certainly don’t see that in all the hype read every day. If you look at the mainstream media, I don’t think there is a lot of original research that is done there. I think people tend to repeat what other people said and it kind of takes on a momentum of its own, which is why I was so interested in trying to lay out as much of the basic data on these shale plays as I could. It's dangerous.

I mean, if you look at the infrastructure going forward in an era of declining oil and gas the number one way to promote energy sustainability in my view is figuring out ways to use less. And some of the infrastructure that needs to be built in order to give people an alternative to high energy throughput lifestyles takes a lot of oil and gas to build. And you know, this short term bounty that we are looking at should in fact be used to do that not to maintain business as usual to the bitter end and then face the consequences.  

Click the play button below to listen to Chris' interview with David Hughes (47m:24s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/the-shocking-data-proving-shale-oil-is-massively-over-hyped/

2

First, I am NOT going with this where I might: this isn’t about heckling Chris. Chris, in general you are very, very right. But in the details, you said (IIRC) that oil wouldn’t ever again get down to $50 a barrel. You said this, because the economics don’t support oil at $50 a barrel.
I think this is time for another, deep learning experience, some that (again, IIRC) Chris is all about.
It is this: prices can go – and stay – where they are absolutely unsupportable, as long as the people in power are willing to make others pay even larger costs.
Second: prices are likely to get worse, if the people in power want it that way; and if they already have been acting to hold things that way, you can expect it to continue unimaginably long.
Third: if economic necessity forecasts a crash, if that forecast is wrong, it means the situation is likely to be worse, not better.
I am sure there are other lessons that can be taken. I think that a lot of this website NEEDS to be rethought, as we discover other of our assumptions are wrong.
Is there a forum or group for hashing these things out, and trying to discover the truth behind each error?

3

Off the mark on some predictions, at times, yes…are the big picture assumptions "wrong"?  I hope so.  Are the warnings which make up the foundation of the Crash Course off the mark?  In the long term, probably not.
If Chris and Peak Prosperity have made a few incorrect calls at times, oh well.  It is up to each of us to use multiple sources to guide us through that which we feel is important.  It is not possible for anyone to be right all of the time, but the updated Crash Course is an effort to expand on information that was put together years ago.

Deflation vs Inflation. Chris has stated his belief on this multiple times.

Peak Oil vs the status quo. If he is off on the timing, oh well.

Here in Vermont the price of a gallon of gas back in the spring was about. $3.75.  We just dipped to $2.95 this week.  That is around a 25% drop in eight months.  Before the 2008 crisis it spiked to around $4.65…you have to wonder as all this works itself out…how high the next spike will be.

Peace,

Jason

4

You can stay in 100 foot deep water for 1 minute but not immerse your face in 1 foot deep water for 10 minutes.
It is not 2008 in which oil price drop, although deep, was short in duration. Why, in 2008, we saw OPEC reacted differently. They cut production.

Today, virtually no OPEC nation is in a position to cut back production. Most need $$$ NOW for domestic reasons which most US politicians elected by people would agree if it happened to USA. Saudi Arabia and handful of small Gulf nations can tolerate for a while but they simply don't want lose market share. Furthermore, tap into reserve now may mean a fire sale (such as US stocks) which won't bring them much.

5

Hi Michael_Rudmin 
 
I don't doubt that Chris would be the first to admit to making errors. I think he'd also recall advising everyone of something he has said during his recorded addresses: everyone should form their own views when all is said and done.
 
As you no doubt know, many of the arguments presented in the Crash Course and on this site are fact-based. Sure, there are suggested outcomes, but outright, money-down predictions are generally rare. To call $50 oil economically unsupportable might be reasonable based on historical economic theory, but who really knows in a world of complex market distortion? But that's still another 17% drop from today's price. That oil has managed to reach ~$60 is possibly an aggregation of many different factors, some predictable, others not. For instance, who could've predicted that an aircraft would be shot down over Ukraine, followed later by sanctions and maybe the spark of an attack on the rouble & Russian producers via an oil price war?
 
Personally I think it's too early to start calling errors on the basic assumptions on this site, many of which are based not on on conjecture or what-ifs, but on data and facts… with us members left to decide for ourselves. I note a sense of conjecture in your first and second points, but I'd be genuinely interested to see how you would reshape the basic fact-based assumptions on which PP is based. Please share them.
 
Like you I question why the wheels haven't come off yet, but I don't think any of us - Chris included - could say how long this particular piece of string is. However, all the signs of the GFC horror show are still with us. Unless TPTB are ready to unveil their magic bullet (and I'd love to know what that might be), then we're still staring down the same barrel this time around, only it's been re-bored a little larger than before.

6

“…but I’d be genuinely interested to see how you would reshape the basic fact-based assumptions on which PP is based. "
First, let me state absolutely that I think the basic PP is spot on. I stated that ‘in general, Chris is very, very right’.
However, I do think Chris has been missing some of the immediate calls, and is more likely to miss immediate calls the farther his model is from reality.
To a large extent, AFAICT his model hopes for the best, and fails to model outright lies, chicanery, war, mass murder … even as he mentions them as possibilities. All of those characteristics which nation-states reserve to themselves, he doesn’t model. He allows that they may happen, but his model assumes the best. If you will, it plots a curve: best case fail, this is where we are.
Well and good: there are a lot of things in politics that are very hard to model.
But not only do nation-states do these things, so do corporations (how about blackwater?), NGOs (IMF), and the super-wealthy (Russian oligarchs, Putin the worst of all).
So although you do well to say ‘best case fall, this is how it goes’, you can’t say ‘This is how it WILL go’. That limit case is not a limit as to ‘what can happen’, it is rather a baseline.
If you will, the crash course shouldn’t be saying ‘oil can’t reach 50’; rather it should say ‘50 is unsupportable; with enough economic disruption, it could hit 20; if we see it approach 50, we will start looking at side effects’.
In other words, you take Chris Martenson’s limit case line, and black out the far side of the envelope, when you should be taking his line, and clustering predicted data around both sides of it.

7

I think it's important to separate prices from value and from costs.  In a world of manipulated prices anything is possible.  
I never said oil could not go to $50, all I ever said was that the days of cheap oil are behind us.  And that's unequivocally true from the cost side of the equation.

Here's what I said in a recent piece on energy:

Which brings us to the IEA's  conclusion which is that shale oil is actually doing two things;  driving the price of oil down below the price required for this massive investment program, and masking the supply issues by temporarily providing extra oil.

Emphasis on ‘temporary’ because the average shale field in the US peaks about ten years after the drilling begins in earnest an all US shale fields are currently projected to peak somewhere around 2020.

The risk the IEA sees is that shale oil, coupled to a generally weak global economy, could conspire to keep oil prices down below the new project threshold long enough to cause real trouble in the future.

The call for things to be incorporated in the PP model is off the mark because there is no 'model' because you cannot model human behavior.  I have no idea what corrupt politicians and venal power brokers will do in the future.

Would they conspire to drive down oil prices to use as a geopolitical weapon without any apparent regard for the damage that such a policy would inflict on future oil supplies? Certainly.  That level of idiocy would barely crack the scale of recent moronic political maneuvers.

It's really, really important, especially in a bubble, to never confuse prices with reality.  And very hard to do because our entire machinery of cultural reinforcement always puts prices at the center, as if they were more real than reality itself.

Which makes sense because once you understand how things work you realize that currency is meaningless because it can be electronically created in unlimited amounts by unelected people whose books will never be audited.

What do 'prices' mean in such a world?  Less than most assume, is how I see it.

So instead we collect the data on how the world works, how much oil is produced, how much it costs to produce new marginal barrels, how many new marginal barrels are coming out of the ground and suddenly - voila! - things are pretty clear and easy to understand all of a sudden.

Just put these three facts together and see what you come up with, and then trust yourself:

 

  1. Ex-US, since 2005 the world has spent $3.8 trillion on upstream oil and gas projects to increase production.
  2. Again ex-US, the world is producing exactly zero more barrels despite all that spend.
  3. Since 2005 the OECD countries have collectively piled on $30 trillion of new debts, mostly at the sovereign level.

Even when we toss in the US's shale production gains the incremental gains to the world supply of oil are very, very modest on percentage terms.

So....we have increasingly difficult and modest oil gains on the the one hand, and we have skyrocketing levels of debt on the other.  We can each come to our own conclusions about how that will all play out.

But, to be crystal clear, I have always made it clear that oil demand is a key variable in the equation and that an economic decline could cause oil prices to dip back down again.

The concern I have about that particular outcome is that even with oil over $100 we weren't increasing global oil supplies and now with oil under $60 so many needed projects are going to be scrapped that future oil supplies simply won't be there to provide the growth we need to justify all piles of debt draped across the developed nations.

But don't let prices be your guide.  Or, if you do, don't be too surprised if your holdings of Italian ten-year debt at a yield of 2.06% turn out to be a monumentally bad 'investment' .. just because everybody is paying a certain price for something does not magically confer "good idea status" upon it.

8

Let us be clear that in a real sense, there is a single governance over all the world – and it is failing. But then let’s compare it to a dying cancer victim: the blood sugar, oxygenation, pressure will all at times shoot high, crash low, even past unsupportable levels. A lot of it is caused by medicines applied to counter a different problem. A lot of it is caused by competing failures (diabetes, brain, heart, etc.)
So it is with a dying system – and largely the people in the dying system are more likely to die, than to change successfully to a new system. Some will kill (here you see the pessimist in me); many will fail to thrive.
In line with that, you are likely to see oil prices – and gold ,and anything else – crash insupportably low, shoot high, swinging more and more wildly. That’s what happens during the pillaging process, and short term, the pillaging overwhelms the other economic processes as well.
So you can’t just say, ‘this is a limit – we won’t see $50 oil again’. You can say, ‘Yes, you quite will possibly see $50 oil again, and you might like it when you do, but a year later, the nation will still be doing worse than it is doing now’.
Also in line with that, one should be considering each and every industry, and how it will react or respond to extremes that are happening now. when overly stressed, some players may choose the honorable bankruptcy; some may choose mergers; some may develop better processes; some may dissolve as their founder and owner dies from the stress and shock.

9

Chris, my apologies, perhaps I misunderstood what you had said in the crash course, or perhaps my IIRC was indicative that I a# not remembering correctly.
I kear what you say about not being able to guess what politics may do – you’re probably right. But it also makes sense to try to model how the recent swings will impact particular industries.
That is, say 'suppose the swing gets worse, how will this affect oil? Gas stations? Auto production? Employment near and far? The Pentagon? The Ruble? Medical insurance? Some of the answers will be strong and sure – model those first. Likewise, see what will happen if the swing reverses, though initially that is unlikely.

10

Aloha! Even the rule of thumb is ruled!
We are now living in the dual realms of "securitisation" and "hypothecated" financed assets. It seems if you find an asset like shale oil and then finance it using securitised junk bonds, the Oil SubPrime, then it guarantees price will crash. The question is who is on the short side of the oil price? My guess is it will be the brokers who sold the securitized junk oil bonds! That's just way too convenient of a way to own oil assets through the back door. Who owns the GSCI? Who, by chance, is one of the largest commodity and futures and derivatives traders on the planet? If you own the index, the exchange and sell the bonds and then back all that with the AAA rating agency you own and backstop it all with the Congress you own, then you inevitably will own the rights to all the consumable assets in the world! A very nice privileged positioning for a world mired in a deflationary cycle. It's as if anti-trust laws never existed!

In the old days back in the 1970s when you went to use the toilet at a gas station the toilet seat had a paper banner on it that read "sanitized for your protection"! They've changed the wording to "securitised for your protection", but it still stinks bad enough to flush!

11

Chris, This is a subject I am very close to since I am an ultra deep water drill ship Captain.  I obviously know a bit about the deep water plays but beyond what I read don't know much about shale oil.  Your writing among others has partly opened my eyes to shale oil.  When crunching the numbers it seems deepwater is a much more viable play but wanted to get your take.  Here are some numbers to just throw out.
Deepwater drilling costs per well
50mil in prep, including seismic and exploration per well.
150mil to drill a deep water well
150mil for initial production costs  
250mil for maintenance costs over the life of the well
Total cost per well 600 million
Production 7000bbls/dayx365daysx25yearsx 50 dollars per bbl = $3.2 billion > 5x investment
Shale
1mil in prep work 
12mil to drill the well
2mil in production costs and maintenance. 
Total cost 15 mil
Production 350bbls/day x 365days x 2.5years x 50 dollars per bbl = 12.7mil, a losing proposition 
 
I just wanted your thoughts since you spend a lot of time on shale oil but not much on deepwater except to mention it is expensive, very true.  It seems that though the shale plays can be profitable at 100 dollar oil in only produces like a flash in a pan and is very short sighted compared to deepwater conventional oil which after a significant investment in both time and money will be producing for our grandchildren.  Clearly I would be bias but an unbiased opinion would be nice.
If you have any questions for me feel free to ask.  I will do my best to answer. 
 

12

[quote=Michael_Rudmin]I think that a lot of this website NEEDS to be rethought, as we discover other of our assumptions are wrong.
[/quote]
It is essentially given that modeling human activity and making accurate and detailed future projections may be more complicated that modeling global warming.  Take a look at how accurate those models have been over time.
To do it effectively, it seems to me, you'd have to be able to predict actions at the single individual level.  Think about how much more impact on history Winston Churchill had than say a butterfly flapping it's wings in what's left of the rain forest.  Then consider how it would be possible to predict Churchill's actions and the impact, before they happened.
It's one thing to get a gut level feel for the direction we are headed.  It's a different matter entirely to draw a precise picture of the what the future will look like.  
Chris originally emphasized that he couldn't predict the next 20 years, other than to say that it would look nothing like the last 20 years.
I think the best we can do is get a general direction of where things are headed, plan accordingly and then sit back and, to the extent possible, enjoy the ride.  
At least we might as well try to enjoy it.  It is what it is.

13

[quote]It is essentially given that modeling human activity and making accurate and detailed future projections may be more complicated that modeling global warming.  Take a look at how accurate those models have been over time.[/quote]And like many cheap shots, wrong:
http://www.skepticalscience.com/climate-models.htm
 
 
 

14

I've experienced first hand the challenge in conveying the 'cheap oil' message.  In presenting this concept to coworkers several months ago, I walked them through the historical drop in EROI. Then I layered on the idea that the global economy has been and will be going through a start-stop-start volatility because the world now has reached a point where boom economies now create supply-demand prices that are not viable.
So when the price of oil imploded, several coworkers came back to say 'so, end of cheap oil, eh? heh heh'.  Which leads to me to 2 lessons learned:  they filtered out much of what I said and I was likely not as explicit on certain points as I could have been.  Example:  cost of conventional oil is still relatively cheap and there's enough of it to satisfy demand during economic contraction (for now) vs the cost of new sources which are becoming a bigger proportion of total supply during boom times.   Compounding the disconnect for most people is that the fallout of dropping oil prices in the oil industry and credit markets have enough time lag from the original price shock as to be lost on most people.

Chris' message in the CC is bang-on in macro terms.  The ongoing challenge is to refine the lexicon and nuances needed to encompass the factors behind short term volatility.

15

The best model I can come up with is offered by Chaos theory and Systems theory.
Think of self-simularity where big swings in price look just like little swings at a different scale.

There are different states that are stable. Life is a state, death is another. Venus is in a stable state. But Life is a dynamic stable state with feedback loops. Our economy was in a dynamic state, a living state. Without oil it will be in a different state, dead.

These stable states are called Strange Attractors. The measured variable does not go in a straight line from one Strange Attractor to the other.

Here is a visual of a Lawrenz Strange attractor. It is formed by plotting the measured variable's position over time. The variable orbits the two stable states- the Strange Attractors.

Systems Dynamics informs us we can expect the variable (Oil price) to slam violently as it approaches the other Strange Attractor.

Expect more volatility. This sudden drop in oil price is just such an effect. Do not expect it to last.

 

16

[quote=Michael_Rudmin]Chris, my apologies, perhaps I misunderstood what you had said in the crash course, or perhaps my IIRC was indicative that I a# not remembering correctly. I kear what you say about not being able to guess what politics may do – you're probably right. But it also makes sense to try to model how the recent swings will impact particular industries. That is, say 'suppose the swing gets worse, how will this affect oil? Gas stations? Auto production? Employment near and far? The Pentagon? The Ruble? Medical insurance? Some of the answers will be strong and sure – model those first. Likewise, see what will happen if the swing reverses, though initially that is unlikely.[/quote]It is probably better to look at the supply side and the problems there and how those could impact the broader economy credit system.  Jim Rickards: 
    Math class: $9T emerging market debt+$5.4T energy debt = $14.4T. A 20% mark- down (due to oil price, strong USD) = $2.9T losses = 2x Subprime in '07 
So we are probably looking at least at a 2008/2009 event but given the moar print probably much more that is not seen yet.

17

Interesting perspective, particularly with Bakken down to $52.56 BBL.
In defense of Chris, it is difficult to predict both oil demand (soft global economy) and the supply response from OPEC and US producers.

https://confoundedinterest.wordpress.com/2014/12/14/bakkenization-u-a-e-sees-opec-output-unchanged-even-if-oil-falls-to-40-bakken-shale-at-52-56-bbl/

18

Not a cheap shot.  In fact it wasn't intended as a shot at all, rather a point about modeling complex system.
Without breaking a sweat you can find Global Warming enthusiasts who are dissatisfied with the reliability of predictions and statements made by the IPCC and some climate change scientists over the entire time the warnings have been being published.  
I could pick a couple of seriously embarrassing examples, similar to your picking a couple of charts you are obviously comfortable with, but what would be the point.
What is most embarrassing for the global warming movement is that people loose their jobs, are denied promotions or censured by their employers for not supporting the movement.  That smacks of religion more than science.
Another telling observation I have made is that the vast majority of people who have condescended to me on the subject have not gone nearly as far as I have to reduce their carbon footprint.  I changed because of other concerns.  They talk the talk, but don't walk the walk.  Who is doing more for the environment?

19

[quote=LesPhelps]What is most embarrassing for the global warming movement is that people loose their jobs, are denied promotions or censured by their employers for not supporting the movement.  That smacks of religion more than science.
[/quote]
Les, I agree that it is important not to let theories become beliefs and eventually to take the place of religion itself.  While there may have been cases of censorship or other consequences for those who did not support what you call the global warming movement, there is plenty of evidence that many of those who have raised concerns about climate change have also been censored in various ways.
Those of us at PP have probably all experienced some frustration at some point when we said, "Look out, dangerous curves ahead!" and the response has been silence or worse.  Perhaps this is because the god of our time is materialism and blind faith that we will have MORE!  Like unsustainable debt buildup and peak oil, climate change is another limit to growth that challenges mainstream beliefs and often gets smacked down for doing so.  So, while some may have made climate change into a religion, a far greater number of people bow to the god of MORE.
Here are some specific examples of climate censorship:
From a blog post by George Monbiot:

If you want to know what real censorship looks like, let me show you what has been happening on the other side of the fence. Scientists whose research demonstrates that climate change is taking place have been repeatedly threatened and silenced and their findings edited or suppressed. The Union of Concerned Scientists found that 58% of the 279 climate scientists working at federal agencies in the US who responded to its survey reported that they had experienced one of the following constraints. 1. “Pressure to eliminate the words ‘climate change,’ ‘global warming’, or other similar terms” from their communications. 2. Editing of scientific reports by their superiors which “changed the meaning of scientific findings”. 3. Statements by officials at their agencies which misrepresented their findings. 4. “The disappearance or unusual delay of websites, reports, or other science-based materials relating to climate”. 5. “New or unusual administrative requirements that impair climate-related work”. 6. “Situations in which scientists have actively objected to, resigned from, or removed themselves from a project because of pressure to change scientific findings.” They reported 435 incidents of political interference over the past five years(9). In 2003, the White House gutted the climate change section of a report by the Environmental Protection Agency(10). It deleted references to studies showing that global warming is caused by manmade emissions. It added a reference to a study partly funded by the American Petroleum Institute, which suggested that temperatures are not rising. Eventually the agency decided to drop the section altogether. After Thomas Knutson at the National Oceanographic and Atmospheric Administration (NOAA) published a paper in 2004 linking rising emissions with more intense tropical cyclones, he was blocked by his superiors from speaking to the media. He agreed to one request to appear on MSNBC, but a public affairs officer at NOAA rang the station to tell the programme that Knutson was “too tired” to conduct the interview. The official explained to him that the “White House said no”. All media inquiries were to be routed instead to a scientist who believed there was no connection between global warming and hurricanes(11). Last year the top climate scientist at NASA, James Hansen, reported that his bosses were trying to censor his lectures, papers and web postings. He was told by public relations officials at the agency that there would be “dire consequences” if he continued to call for rapid reductions in greenhouse gases(12). Last month, the Alaskan branch of the US Fish and Wildlife Service told its scientists that anyone travelling to the Arctic must understand “the administration’s position on climate change, polar bears, and sea ice and will not be speaking on or responding to these issues.”(13) At hearings in the US Congress three weeks ago, Philip Cooney, a former aide to White House who was previously working at the American Petroleum Institute, admitted he had made hundreds of changes to government reports about climate change on behalf of the Bush administration(14). Though he is not a scientist, he had struck out evidence that glaciers were retreating and inserted phrases suggesting that there was serious scientific doubt about global warming(15). ... Would it be terribly impolite to suggest that when those who deny that climate change is happening complain of censorship, a certain amount of projection is taking place?
The citations can be found at the original article.
20

I was looking for a model that is struggling for a simple example of complex modeling having issues.  I forgot, for a brief second that you are not allowed to question the IPCC.
First, Compare the IPCC predictions from 1990 on with the hadcrut database and tell me that the model is too accurate to be criticized.  Look at the slope of temperature change in the hadcrut database from 2001 to 2014 and tell me if the temperature is rising dangerously.

I never once denied global warming.  I deny that the science terribly accurate at this point.

Yes, you are right.  I should have said that the global warming topic is political, not religious and there have been abuses on both sides.  

This is not the topic I posted on.