30 Billion Barrels of United States Oil Won't Lower Prices

Even with the U.S. Energy Information Administration recently announcing that crude oil proven reserves grew at the fastest rate since the agency began publishing such information, at least one area of the U.S. is showing signs of slowing growth. The numbers from the Bakken shale in the Williston Basin suggest that without an exponential level of well expansion, production will grow at a slower clip. Earlier this year, however, Rob Wile argued that the fact that 77% of the Bakken remains untested supports a comment from the EIA that, at worst, production will plateau. Understanding the growth picture is an important first step in thinking about how to invest in the industry.

Metric

Crude Oil and Lease Condensate,
Billion Barrels

U.S. proven reserves at Dec. 31, 2010

25.2

Total discoveries

3.7

Net revisions

1.4

Net adjustments, sales, acquisitions

0.7

Production

(2.1)

Net additions to U.S. proved reserves

3.8

U.S. proven reserves at Dec. 31, 2011

29.0

Percentage change in U.S. proven reserves

15%


Source: U.S. Energy Information Administration, Form EIA-23 "Annual Survey of Domestic Oil and Gas Reserves."

Overestimating drilling capabilities?
On one side of the argument is the reality that shale-based wells have very rapid depletion rates. Raymond T. Pierrehumbet, a professor at the University of Chicago, argues that overlooking these depletion rates and the costs of each well has led us to a false sense of our production capabilities. Pierrehumbert points out that with the bulk of the recoverable oil from wells in the Bakken extracted within the first few years, the number of wells needed to maintain production is unreachable, given that each well can cost as much as $10 million.

Giving some color to this was Core Labs (NYSE: CLB  ) CEO David Demshur during the company's recent earnings call, using Bakken as an example:

If we are to keep pace with that level of production in the Bakken increase, we would need to add somewhere near 4,000 producing wells in the year 2013. The most we've ever added was 1,722 wells last year. Through April of this year, we've added 570 producers in the Bakken.

This comment was made in the context of explaining the importance of improving efficiencies overall through the use of developing technologies.

Still, Demschur's point stands: "The decline curve never sleeps and the decline curve always wins." This conflict sets up the push and pull between supply, demand, production, and technology. Demschur echoes Pierrehumbert's concern that we can't add wells fast enough to keep continue growing production at an exponential clip over the long term.

Positive growth
On one hand, coupled with the rapidly expanding proven reserves (see the following table) is that so much of the shale acreage in the Bakken remains untested, but with high potential. According to data from the EIA, the region has one of the lowest well densities of any U.S. shale play, at two wells per square mile. Eagle Ford shale, for example, has five wells per square mile. Add to this the fact that the EIA reports that 97% of the Bakken has potential and 77% remains untested.

The argument posited by Sam Gorgen of EIA is that production could flatten out but won;t drop off: "The long-term outlook for shale/tight oil and gas production is supported by the large area extent of the plays and hence the number of wells that can be drilled." This view overlooks Pierrehumbert's concern over the cost of each well but sets up the argument nicely.

What does this mean to you?
Since the Bakken was one of the earlier developed shale plays, it's likely that the signs of slowing being witnessed there are likely to appear at other shale plays as well. While the United States still sits on 29 billion barrels of oil, diminishing returns are sure to set in over the long term. The great news is the U.S. can significantly cut the amount of crude imports, but even then, crude prices will still be dictated by the global market. 

Don't discount shale production
Even with these concerns, record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, The Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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