The US is currently in the midst of what has been dubbed an energy renaissance. This renaissance was spurred by the country’s ability to tap unconventional oil and gas. Unconventional oil lacks a standard definition, but it is generally characterized as more difficult and expensive to extract than conventional oil. The conventional/unconventional categories are fluid, as some types of oil currently considered conventional were once labeled as unconventional.
Following decades of decline in the US, oil production has been on the rise since 2009. Part of this growth comes from significant increases in tight oil production. Light tight oil (LTO) is considered by some experts to be unconventional while others classify it as conventional or transitional. LTO, not to be confused with oil shales, is a liquid form of light crude oil contained in sedimentary rock formations with low permeability. Tight oil resources can be produced from shales, low-permeability siltstones, sandstones, or carbonates that are in close proximity to shale rock formations.
Tight Oil Extraction
Many tight oil formations in the US have been known about for decades, but commercial productivity remained elusive until producers took the knowledge gained from shale gas extraction and applied the technologies to tap tight oil. Similar to shale gas, LTO extraction generally requires the combined use of horizontal drilling as well as hydraulic fracturing. While these technologies were utilized for shale gas extraction since 1998 it was not until the mid 2000’s that producers began using them for tight oil exploration and production in the US. Despite the higher production costs of tight oil extraction, it remains profitable due to high oil prices.
For tight oil extraction, vertical wells are drilled to a depth of 1,000 m to 3,000 m, then the horizontal section is added, extending the well up to 4 km. Hydraulic fracturing, or fracking, is then utilized to stimulate the well. Hydraulic fracturing is the process of pumping highly pressurized fracturing fluids into the well. Fracturing fluids are generally water-based, with chemical additives and proppants, generally sand. The injection of the fluids creates fissures in the shale which are then held open by the proppants, allowing for oil to flow. Once hydraulic fracturing is completed, conventional production methods are utilized. Beyond the general approach to tight oil extraction, the specific technologies for well completion and hydraulic fracturing vary according to each play’s geology.
Tight Oil in the US
Extraction of tight oil has been a game changer for the US. In 2012, 24% (2.1 mb/d) of the US’s oil production was from tight oil. Production in the US is expected to expand to 7.05 mb/d in 2013. According to the US Energy Information Administration (EIA), by the end of 2014, the crude production rate in the US will be 2 mb/d higher than imports. If this rate is achieved, it will be the first time that US production will exceed its imports since 1995.
Notable tight oil plays in the US include the Bakken play in the Williston Basin that stretches through parts of Montana, North Dakota and into Canada, the Eagle Ford play in Texas, and the Miocene Monterey play in the San Joaquin Basin of California. Other potential tight oil plays have been identified in the Rocky Mountain region, the Gulf Coast and in the northeast US. It is important to note, that despite vast amounts of tight oil reserves, only a fraction is actually recoverable, ranging from 1 to 2 percent. The Bakken and Eagle Ford are currently the most developed plays, responsible for over 80 percent of the tight oil production in the US. The Bakken is the largest “continuous” oil play that the US Geological Survey (USGS) has ever assessed. Estimates of recoverable tight oil in the Bakken play range from 3.65 billion barrels (bb) to 4.3 bb.
According to Andy Lipow of Lipow Oil Associates, in 2012, “the most attention certainly came from the North Dakota Bakken, but actually growth [in] oil production in Texas exceeded that [of the Bakken] over the last 12 months.”(1) In February 2013, Texas’s Eagle Ford shale Basin produced a record yield of 471,258 b/d, according to the Texas Railroad Commission, which monitors oil and gas production in the state. The rate signifies a 74% increase compared to February 2012, when production was at 271,521 b/d.
Following the success of production in the Bakken and Eagle Ford, companies are seeking to explore other potential tight oil plays. The next big LTO producer may be the Denver-Julesburg (DJ) Basin located within Colorado’s Niobrara Basin. Nobel Energy announced plans to drill 300 horizontal wells in the basin in 2013. Nobel is expected to invest USD 1.7 billion in drilling operations in the basin. The Niobara Basin has a history of oil production but has failed to meet expectations. In 2012, the basin’s output was estimated at 116,000 b/d. Tight oil extraction may change production in the basins. According to Bentek Energy, the production in the DJ Basin alone should rise to 140,000 b/d in mid-2013.
In addition to improving US energy independence, tight oil has been praised for job creation at the local level. North Dakota, the hub of the Bakken play, currently has the lowest unemployment rate out of any state in the US. However, the rapid growth of the industry in the state has contributed to traffic problems as well as a rising homicide rate. Concerns have also risen over the potential contamination of groundwater supplies due to the environmental risks associated with hydraulic fracturing. John Auers, analyst at Turner Mason, cautioned that the lack of pipelines, possible government restrictions on shale drilling and the costs of hydraulic fracturing may impact production in the Bakken next year (2).
Global Effects of Tight Oil
The rapid production of tight oil in the US is expected to exceed growth in global demand over the next few years, according to the International Energy Agency (IEA) (3). It is expected that this will weaken the demand for oil exports from members of the Organization of the Petroleum Exporting Countries (OPEC) during the next five years. US imports from West Africa have already begun declining. Thus far, Nigeria and Algeria are suffering the worst due to the curb in exports to the US (4). In 2012 exports from Nigeria, Algeria, and Angola dropped 41 percent from 2011 due to US production growth. In contrast, Saudi Arabia and other Gulf Countries remain relatively unaffected by US production. The uneven impact stems from the differences in crude that the countries produce. Nigeria has been hit the hardest, as its light low-sulfur crude oil is similar to the tight oil the US is producing. By contrast Saudi Arabia’s crude is heavier and more sulfurous.
The uneven impact on OPEC members may cause divisions within the organization. Recent tensions have emerged over prices, as countries including Iran, Venezuela and Algeria require high oil prices to cover spending and offset decreases in production, whereas Gulf countries have the flexibility to withstand lower prices. OPEC is reportedly reviewing studies on the impact of US tight oil production. During a meeting on May 31, OPEC agreed on maintaining its current output quota of 30 mb/d despite rising production in the US. According to some OPEC delegates, a collective response was unlikely, as it would have required Gulf countries to cut production to support prices(5). Countries such as Venezuela have expressed concern over “excessive production” by other OPEC members that contributes to price drops (6). Analysts have voiced similar sentiment as John Kildfuff of Again Capital LLC who cautioned, “They needed to cut back, given rising supplies and the demand outlook.” The issue will likely be revisited during OPEC’s next meeting on December 4.
Boom or Bust?
Commercial tight oil extraction remains concentrated in the US, making the future of LTO outside of the country unknown. According to British Petroleum (BP), it is estimated that there is 240 bb of recoverable tight oil worldwide. BP predicts that tight oil will grow to 7.5 mb/d by 2030 with rapid growth occurring during the current decade, primarily in the US, and slowing to a moderate pace after 2020. Similarly, the EIA’s 2013 Energy Outlook predicts a decline in tight oil production after 2020.
The growth of tight oil production in the US continues to be debated among producers and scientists. According to industry proponents, a few months of horizontal drilling and hydraulic fracturing creates tight oil wells that are productive for 20 to 40 years (7). However, some scientists remain skeptical over the promises of shale gas and tight oil. The Post Carbon Institute reports that tight oil wells have steep decline rates, between 81-89 percent within the first two years (8). This means that 40 percent of production must be replaced annually simply to maintain current production rates. Research by J. David Hughes, of the Post Carbon Institute, indicates that tight oil production will peak between 2015 and 2017 at a rate of 2.3 mb/d. (9) At this point, all possible drilling locations in both the Bakken and Eagle Ford will have been used. According to Hughes’ research, by 2019 tight oil production will fall back to 2012 levels, and by 2025 production will be down to 0.7 mb/d. The lifespan of America’s energy renaissance remains undetermined, however, we do know it is finite. While LTO can diminish the country’s energy dependence in the short run, it must be recognized that LTO is a non-renewable resource and thus a temporary solution.
- Platts, Oil Producers Focus on Bakken and Eagle Ford. January 31, 2013.
- OilPrice, US Shale Boom Not Enough to Remove the Threat of Peak Oil. May 26, 2013.
- Wall Street Journal, US Oil Boom Divides OPEC. May 27, 2013.
- Bloomberg, Oil Drops to One-Month Low as OPEC Keeps Output Target. May 31, 2013.
- Energy From Shale, Hydraulic Fracturing 101.
- Post Carbon Institute, A Reality Check on the Shale Revolution.
- Hughes, David. Drill Baby Drill. February 2013.
By Maya Moseley