A new, landmark report shows that hopes of a long-term golden era in American oil & gas production are unfounded.
America’s energy landscape has undergone a dramatic shift over the last decade—literally and figuratively—as a result of the widespread use of horizontal drilling and hydraulic fracturing (“fracking”). Whole areas of the country have been transformed in a matter of months, while the fossil fuel industry has reversed the decades-long decline in crude oil production and increased natural gas production to record highs. Thanks to shale gas and tight oil (“shale oil”), by 2013 annual crude oil production was 24% higher and natural gas was 20% higher compared to just ten years earlier.
While this achievement is impressive, it pales in comparison to the sea change that has been triggered in “conventional wisdom” about our energy future. In a few short years we have gone from President Bush warning that the U.S. was addicted to oil and dangerously reliant on Middle East imports to fears of a production glut, as a recent New York Times article stated:
With domestic oil production growing month after month, many oil experts predict that the country’s output will rise to as much as 12 million barrels a day over the next decade, which would mean the country will be swimming in oil the way it is currently dealing with a surplus of natural gas.Analysts at Turner, Mason & Company, a Dallas engineering consulting firm, say the country could hit a saturation point when production hits 10 million to 10.5 million barrels a day, at which point large exports will become necessary or drilling and production may have to slow.
Running Down a Dream
While the so-called “shale revolution” came as a complete surprise to most analysts and government forecasters, the conventional wisdom now appears to be that this is the beginning of a long-term transformation. Production of shale gas and tight oil in the U.S. is expected to grow at breakneck speeds throughout the decade, with natural gas production increasing for the next 25 years while domestic oil production peaks by the end of this decade and slowly declines to near current levels by 2040. Not only will supplies expand, according to conventional wisdom, but oil and natural gas prices will remain stable and relatively low for decades to come.
Far from being an academic exercise, the implications of this shift in conventional wisdom are profound and far ranging—influencing geopolitics, climate policy, domestic manufacturing and jobs, investments in renewable energy, and the health and well-being being of communities across the country. In fact, the perception of a long-term oil and gas boom has led to:
- Proposals that the U.S. can use its newfound energy strength to counter the international influence of OPEC and Russia, and shift geopolitical trends in our favor;
- Forecasts of a manufacturing resurgence and millions of new jobs as a result of cheap natural gas supplies;
- Calls to lift the oil export ban, which was first imposed 40 years ago after the Arab oil embargo;
- Approval of new liquefied natural gas (LNG) export terminals and calls to fast-track more;
- New limits on carbon dioxide emissions from power plants, made possible by natural gas replacing coal as the primary source of electricity production;
- A tempering of investments in renewable energy and nuclear power; and
- Claims that peak oil (the point at which global crude oil production begins its terminal decline) “is dead.”
Putting aside important questions about the validity of these claims (for example, that shale gas is better for the climate than coal), assumptions that the “shale revolution” is a long-term game changer are undeniably transforming energy policy in the U.S. and abroad. But what are these assumptions based on?
Fool Me Once, Shame On You. Fool Me Twice…
While oil and gas companies and energy market analysts regularly come out with their own estimates, the U.S. Department of Energy (DOE) is universally viewed as the preeminent source of unbiased projections of future U.S. energy supplies. Each year the DOE’s Energy Information Administration (EIA) releases its Annual Energy Outlook (AEO), which provides a range of forecasts for energy production, consumption, and prices.
Policymakers, the media, investors—almost all receive the EIA’s estimates with little to no skepticism, despite the agency’s poor track record. A quick glance at what the EIA was forecasting just ten years ago is illustrative. In its 2004 AEO Reference Case, the EIA forecast oil prices to be $23.61 per barrel in 2010 and $26.72 per barrel in 2025. In reality, oil prices in 2010 were three times higher than forecasted and persistently remained over $100 a barrel until just a few months ago.
More recently with shale gas and tight oil, the EIA has had to significantly correct for previously optimistic estimates. In 2011, the EIA was forced to cut its estimates of technically recoverable shale gas in the Marcellus Play by 80% and Poland by 99%, after the United States Geological Survey came out with much lower numbers. At the time of the Marcellus downgrade, an EIA spokesperson said, “We consider the USGS to be the experts in this matter… They’re geologists, we’re not. We’re going to be taking this number and using it in our model.”
Earlier this year, the EIA slashed its estimate of technically recoverable tight oil from California’s Monterey Formation—which just three years previously had been estimated to hold two-thirds of all U.S. tight oil—by a whopping 96%. The author of the original EIA estimate, INTEK Inc., admitted that it had been derived from oil company presentations rather than hard data. The downgrade occurred a few months after Post Carbon Institute published an analysis that showed—using actual production data from the Monterey Formation—that the federal government’s estimates were wildly optimistic. But during the three years when the EIA’s initial estimates were rolling off the tongue of every oil and gas industry lobbyist in California, policy discussions in the Golden State were dominated by discussions of how to use the wealth from this soon-to-come bonanza.
In the Department of Energy’s defense, the EIA conducts regular retrospective reviews (which clearly show how badly they’ve missed the mark) and provides disclaimers to its estimates and forecasts.
Estimates of technically recoverable tight/shale crude oil and natural gas resources are particularly uncertain and change over time as new information is gained through drilling, production, and technology experimentation. Over the last decade, as more tight/shale formations have gone into production, the estimate of technically recoverable tight oil and shale gas resources has increased. However, these increases in technically recoverable resources embody many assumptions that might not prove to be true over the long term and over the entire tight/shale formation.
However, like most fine print, these are hardly ever read or noted and seem to have no impact whatsoever in tempering optimism—either within the EIA or amongst the policymakers, media, investors, and general public who rely upon it.
Drill Deeper and What Do You Find?
Considering the EIA’s poor track record and the enormous implications that result from its forecasts, we at Post Carbon Institute felt it critical to closely examine the EIA’s most recent Annual Energy Outlook. Using actual production data from over 80,000 wells, and coupled with an understanding of geology and trends in technological advances, we analyzed the production potential of the top twelve shale gas and tight oil plays in the U.S. Together these plays account for 89% and 88%, respectively, of current shale gas and tight oil production. (These same twelve plays also account for 82% and 88% of the EIA’s reference case forecasts.)
The result of our analysis—Drilling Deeper: A Reality Check on the US Government’s Forecasts for a Lasting Shale Boom—was just released.
What did we find? That the so-called “shale revolution” has more in common with the California Gold Rush and the Dot-Com Bubble than a new golden age of energy abundance. The implications of this are profound. If the “shale revolution” is nothing more than a temporary respite from the inevitable decline in US oil and gas production, then why are we rushing to rewrite our domestic and foreign policy as if we’re going to be “Saudi America” for the rest of the century?
And it raises painful questions about whether all of this—the tens (potentially hundreds) of thousands of wells drilled across the landscape; the billons of tons of fresh water used and contaminated; the millions of truck trips and damaged infrastructure; the NOx pollution and methane emissions; the flaring wells in North Dakota that can be seen as brightly at night as Minneapolis from space; the social impacts of booms and busts on communities across the country; the hundreds of billions of dollars invested in fracking rather than renewables; etc.—is worth it.
It’s not too late to choose a different path, but first we have to recognize that the yellow brick road we’ve been walking isn’t what it’s fracked up to be.