There are two schools of thought among shale oil drillers: One camp believes that there will be no other North American shale oil plays with quality as high as the Eagle Ford or Bakken. At its most recent roadshow presentation, Eagle Ford heavyweight EOG Resources (NYSE: EOG ) put itself firmly into this camp.
According to EOG's management, U.S. oil production will steadily decelerate from here. While the newer shales may provide high return in some places, these plays will not yield nearly as much oil as the "big two." For example, the Permian shale formations provide a high return. However, these shales are, in management's words, a "combo play" with significant dry gas and NGLs in the production mix.
In the opposite camp are companies such as Pioneer Resources (NYSE: PXD ) , which estimates that the Permian is now the second biggest oilfield in the world thanks to new shale discoveries. But perhaps the most outspoken, high profile supporter of the "more shale oil" camp is Floyd Wilson, the CEO and founder of Halcon Resources (NYSE: HK ) .
Wilson surprised the industry at this year's Howard Weil conference in New Orleans when he claimed the Tuscaloosa Marine Shale would be the last big shale oil play in the country. Since then, events have proven him right: So far, most wells drilled in the Tuscaloosa have yielded entirely oil, and production has rivaled that of the Bakken.
The big question is: Who is right and what will it mean? The answer could shed light on when, and where, the shale oil revolution will come to an end. Both EOG and Floyd Wilson are very reputable sources, and dismissing either one would be foolish (with a lower case 'f').
This chart shows that the U.S. really doesn't have much more waterborne oil imports left to displace, and oil consumption in the U.S. is flat at best. Furthermore, the remaining oil imports will be of the medium, heavy, and sour types, which are less commonly found in the shale. In order to process this growing volume, either the ban on oil exports will have to be lifted or refineries will have to greatly expand capacity. Both options come with strong political opposition.
EOG believes that decelerating growth will save this future impasse from happening because slower production growth will allow refiners to adapt; processing more medium and sour oil. Conversely, Plains All American Pipeline (NYSE: PAA ) , the provider of the above chart, sees possible shut-ins and lower domestic crude prices as a way to compensate for a future lack of refining capacity. Either flat growth or shut-in production would likely end the shale revolution, or at least the oil part of it.
EOG's thesis points to a gentle end. Plains' thesis would result in a more volatile outcome. Personally, I'm a believer in the shale revolution, but this awesome growth momentum can only last past 2017 if crude exports are allowed, or if refining capacity is allowed to increase. In my opinion, there is plenty more shale oil to be developed, especially in the Permian and the Tuscaloosa Marine Shale.
If Floyd Wilson is right and there is more oil in the newer shales, the greatest upside beyond 2017 may be in the refiners, which will benefit from volatility and chronic undersupply. For a more stable, long-term shale story, you might even look into natural gas. Unlike oil, demand for dry gas is growing thanks to a renaissance in the industry and a steady conversion from heating oil and propane to natural gas.
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