Hype, Broken Promises, and Shales

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The term shale revolution has been used so much that it almost has no meaning anymore. But were shales ever really the energy panacea promised or merely a self styled hype machine? Would the frenzy in drilling ever have truly taken off if it weren’t for cheap money? These are valid questions which have not been explored adequately because too many investors, journalists and elected officials were caught up in shale mania. But was this ever truly an exercise that would provide long term benefits to American consumers?

It is an inarguable fact that shales have produced copious quantities of hydrocarbons in the past few years but this is not really surprising given that the wells, by their very nature, produce the most oil or gas they will ever produce in the first twelve months or so of their lives. So when the industry engages in a frenzy of drilling and brings many wells online very rapidly and essentially all at once, then it stands to reason that it will look like an enormous success. For a short while.

The problem is that operators have not been able to maintain a stable long term production profile. Looking at the following chart, one can see why.


A great portion of all new wells being drilled in the best of our shale plays are doing nothing more than replacing declines in older wells. And older, in this case, means a mere 4-5 years. Not decades. If one considers the per well production in both the Bakken and the Eagle Ford, it peaked in June, 2010. Although there have been countless wells added since that time, the production per each individual well has never reached that level again. This is highly problematic in the long run.

Even EIA is now admitting that shales as a whole are likely to peak in just a few years. And this has been corroborated by other entities like the University of Texas and independent geologists such as Dave Hughes in his comprehensive report, Drill, Baby, Drill. Without a long term reliable supply, shales become a blip of enhanced output in an otherwise slippery slope of downward production profiles.

Industry also promised that electricity costs would fall thanks to cheap and abundant natural gas supplies but this too has not happened. Residential electricity costs have risen steadily and relentlessly for more than a decade in spite of the shale revolution.


Wholesale costs too have risen negating the notion that natural gas would forever replace coal as the fuel of choice for power generation. In fact, utilities that have the ability have been simply switching between coal and nat gas leaving natural gas to trade in a range of about $3.50-4.50/mcf. And yet, most shale gas plays don’t breakeven at this price.

And then there is the industry darling: promises of energy independence. This notion has been repeated ad infinitum by industry representatives and elected officials. And it makes a good and effective sound bite. But it is completely false. Firstly, all the rhetoric about getting off Middle East oil is just that…rhetoric. The U.S. actually imports very little oil from the Middle East. The problem has never been where the oil came from but who controlled the price. This latest plunge in prices leaves no doubt as to who has the power. It is the low cost producer. And that is not shale operators. Even if shales produced enough for us to use them solely, they are expensive and operators would need the price per barrel to be about $80-85. Oil being a fungible commodity can easily be substituted by crude from elsewhere. So if there is a producer, such as the Middle East, who can undercut that price, why would we not buy that product?

We have also heard a great deal about jobs creation thanks to the shale revolution. This, too, has turned out to short lived. Layoffs were announced almost immediately as the price of oil careened downward. It is clear that these jobs were wholly dependent upon a high oil price and a corporate willingness to bet that OPEC would cut production as shale production rose in order to maintain pricing equilibrium. But that bet borders on the ridiculous. Why should the lower cost producer cut its market share in order to give more market share to the high cost producer. Out of the goodness of their hearts? This goes against every rule of free markets and confuses business with philanthropy. And yet, the oil and gas industry actually expected this to happen.

The shale revolution has unfortunately been characterized by a distinct lack of critical analysis. Would it be nice to be energy independent? Of course. But you can’t do it unless you can provide the cheapest version of your product out there. Or force Americans to use your higher cost crude. Would we not create jobs and economic benefit if shales could produce copiously for decades and decades? Yes, but drilling would need to ramp up considerably, perhaps even beyond the capacity of the industry at present and that entails considerable encroachment and land use. Would it not be wonderful if the price of gasoline stayed at $2/gal. You betcha! But shales simply cost too much to drill and complete so to give the operator a fair profit, they would need considerably more than $45/bbl. and gasoline prices would rise again.

It is time for us to be more circumspect about the shortcomings of shales. They are not all that they are purported to be.