Academic journal article Economic Review (Kansas City, MO)

What Could Lower Prices Mean for U.S. Oil Production?

Academic journal article Economic Review (Kansas City, MO)

What Could Lower Prices Mean for U.S. Oil Production?

Article excerpt

Oil prices have declined sharply since the summer of 2014, raising questions about whether the boom in oil and gas production can continue. Since 2005, U.S. oil and gas production has increased more than 50 percent. The share of oil and gas in private fixed investment increased from 2.9 percent in 2005 to 5.8 percent in 2013. With oil prices at about half their summer 2014 level, will the investment continue to be profitable and boost production?

The dramatic increase in production post-2005 became possible when high and rising energy prices allowed two complementary but expensive technologies--multistage hydraulic fracturing and horizontal drilling--to be applied on a large scale for the first time. Energy producers were able to access previously untapped reservoirs using the newly profitable technologies, first in shale gas fields such as the Barnett field of east Texas, and then in tight oil fields such as the Bakken in North Dakota. Since 2011, over 95 percent of the growth in U.S. oil and gas production has come from these unconventional sources. To continue this growth, however, energy prices must remain high enough to justify the costs of extraction. Shale fields require significant drilling activity and thus significant ongoing capital investment to increase, much less maintain, production levels. Moreover, the cost of an unconventional well could be as high as five times the cost of a conventional well.

The recent sharp decline in oil prices and drop in oil rig counts have called into question whether oil production will continue to increase in 2015. This article estimates that, despite highly productive new wells and an increase in the number of wells drilled per rig, U.S. oil production could decline from 0.7 to 8 percent in 2015, due in part to the significant decline in rig counts and depletion in existing wells. While the 0.7 to 8 percent range appears wide, it reflects uncertainty regarding productivity gains in the sector over a one-year period as well as how much further rig counts could decline. For production to increase in 2015, rig efficiency and initial well production would need to increase markedly or the decline in rig counts would need to halt.

Section I reviews the key technologies driving the recent boom and describes tight oil and shale gas field characteristics. Section II investigates the trends in energy prices and production in the U.S. oil and gas sector since 1990. Section III examines the implications of the recent oil price decline for drilling activity and U.S. oil production.

I. Tight Oil and Shale Gas

The recent growth in U.S. oil and natural gas production reflects a move toward shale gas and tight oil extraction. Shale gas is natural gas trapped deep within shale formations, while tight oil is oil produced from low-permeability source rocks deep within the earth. Horizontal drilling and hydraulic fracturing have made these fields accessible (see Box for a description of these technologies). In 2000, shale gas provided only 1 percent of U.S. natural gas production; in 2010, it provided over 20 percent.

Although companies have only recently developed horizontal drilling and hydraulic fracturing on a large scale, the technologies have existed for over 50 years. When U.S. oil and gas production started to decline in the 1970s, producers searched for other sources of domestic production. (1) A combination of private and government funding contributed to improvements in the late 1970s. (2) Output nearly stabilized in the 1990s as a result of both management and technological advancements in the oil and gas sector (Bohi). (3)

Box

Overview of Key Technologies

The key technologies that contributed to the oil and gas boom are
horizontal drilling, hydraulic fracturing, and pad drilling.

Horizontal wells typically start vertically and then curve to
horizontal at depth to follow a particular reservoir (Hughes
2013a). The first horizontal oil well was drilled in 1929, but the
commercial application was not developed until the 1980s. … 
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