Why U.S. Energy Independence May Not Last Long

Soaring oil and gas production in the United States has led industry analysts to declare we're about to embark on an era of true energy independence. Indeed, there's plenty of evidence to support the idea that energy independence for the United States is right around the corner. Thanks to technological advancements that have enabled production from previously inaccessible sources of energy, it's easy to see why investors are excited.

This would represent a major catalyst for a host of U.S.-based oil companies that focus on domestic exploration and production, including EOG Resources (NYSE: EOG  ) , Kodiak Oil & Gas (NYSE: KOG  ) , and Hess Corp. (NYSE: HES  ) . However, the verdict is still out on how long newfound oil fields in the U.S. can last. This makes depletion rates a key consideration for investors over the next several years.

The soaring production levels of several U.S. regions
The U.S. Energy Information Administration reports rising levels of production and development across the United States. Areas seeing unprecedented oil and gas activity include onshore fields such as the Bakken shale in Montana and North Dakota and the Eagle Ford play in Texas. These areas will play huge roles in the U.S. inching closer to energy independence. The U.S. Energy Information Administration expects total oil output in the Bakken region to reach 1 million barrels per day as early as next month.

This is why EOG and Kodiak are both placing great emphasis on Bakken oil. EOG generated 10% growth in total production in 2012, and expects double-digit production growth from 2014 through 2017. Much of this growth is due to the company's focus on the Bakken region. In the Bakken core area, EOG holds 90,000 net acres, and average 30-day oil production has surged 50% year to date to more than 1,300 barrels per day.

Meanwhile, Kodiak is devoting the vast majority of its capital expenditures this year to Bakken development to complete 75 new wells, on top of the 62 wells completed last year. As of the beginning of the year, estimated proved reserves were 95 million barrels of oil equivalent with a projected pre-tax value of nearly $2 billion.

For its part, Hess is the third-largest oil producer in North Dakota. Hess recently grew production from its own Bakken operations by 14%, to 71,000 barrels of oil equivalents per day, with plenty of further room for growth. Hess has brought 122 new wells online at Bakken this year, which should fuel growth for the next few years.

Eagle Ford has already crossed the million-barrels-per-day mark. The EIA reported that total production from the Eagle Ford formation reached 1 million barrels per day in August, and is poised to grow even further in the months ahead. Eagle Ford production is even more impressive when you consider that the region didn't even begin meaningful production until 2009.

EOG grew oil production in the Eagle Ford region by 64% through the first nine months of the year. EOG is the largest acreage holder in the oil-producing area of the field, where its reserves are an estimated 2.2 billion barrels of oil equivalents.

Why investors should temper their expectations
As the saying goes, something that seems too good to be true usually is just that. Unfortunately, U.S. energy independence may not last long. While the U.S. is expected to surpass Saudi Arabia and Russia to become the world's top energy-producing country by 2016, it's not expected to last past 2020. That's because of rapid rates of decline in the oil fields most responsible for the U.S. oil boom.

By 2020, the fields in Texas and North Dakota will likely already be past their prime. This means production of oil and gas is expected to rise rapidly, but plateau and then decline just as quickly. By 2020, OPEC is once again expected to reclaim the top spot among energy-producing nations.

Keep an eye on depletion rates
There's no doubt that promising oil and gas discoveries in the United States are fueling the idea that the nation will soon realize true energy independence. And, thanks to huge finds in the Bakken and Eagle Ford fields, many companies will reap huge profits. EOG Resources, Kodiak, and Hess have each placed their bets on booming oil and gas production in the United States. For now, the results speak for themselves, and growth should continue over the next several years.

At the same time, there's doubt as to how long these U.S. discoveries can last. Depletion rate is a cause for concern. Investors with a long-term time horizon should remain bullish on the three stocks, but closely monitor oil-field sustainability going forward.

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  • Report this Comment On December 08, 2013, at 5:08 AM, amvet wrote:

    Crude oil production in the US may not be what it seems.

    An example----- the EIA reports that the Texas oil production is 40% (forty percent) more than the Texas Railroad Commission reports and the TRC has a reputation for being accurate. Peak oil was avoided by changing the definition of crude.

  • Report this Comment On December 09, 2013, at 12:43 PM, RealityCounts wrote:

    Okay, so helping, aiding, investing, any and all of our Oil and Nat. Gas Producers is a lousy idea? Less than two years ago, you analysts were trumpeting 'Energy Independence' from the Middle East (we'd better get there pretty quick, too, because that region is going to become an ashtray someday soon). Let's save the U.S. of A. from-what was it-an $850M $$$ tax-per-day you were all saying (sorry can't remember what that last number was-suffice it to say that Americans pay 'homage' to the Middle East WAY too much). If KOG-like F-has blow-out numbers again-and loses all it's hard-earned gains, then something important, like our priorities are, will suffer greatly...

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