Is shale oil cheap?

Just a quick note here based on some information I have been hearing about shale oil. If you recall, I wrote a primer on peak oil a week or so ago. The crux of that post was that it is not a question of our running out of oil but rather of our running out of cheap oil. And that has economic implications since we are at a point where oil prices are high enough that people begin to cut back on consumption, so-called demand destruction.

Some anecdotal evidence suggests that the nonconventional oil we are seeing pop up is more expensive to extract. An example is the Bakken shale oil fields in North Dakota. Hess Corp has warned that its oil production output from the Bakken fields would fall short of its 2012 target.

“While we expect the monthly average to continue to increase throughout the rest of the year, we now expect the average for the full year to come in somewhat lower than our original estimate of 60,000 bpd”.

This quote is what we should take away:

"Hess is one of the largest acreage holders there — nearly a million acres — so its production is scrutinized."

A lot of these fields will require oil prices significantly in excess of USD100 a barrel. An unnamed oil executive was quoted in Foreign Policy magazine as saying:

"There are sweet spots, and there are areas that are not so good. You can produce oil just about anywhere you drill, but — and it is a big ‘but’ — in many areas you might not recover enough oil (even with West Texas Intermediate oil at $100-plus a barrel) to pay for the well. These areas may become profitable when oil hits $150 to $200 in real terms someday".

Moreover, some parts of the Bakken fields have an accelerated rate of production decline as high as 90% in the first year of production. That’s why we see huge growth in well count there.  And only 14 of the nearly 9,000 wells in production produce more than 800 bpd (average production is only 52 bpd). According to my sources, Bakken and Eagle Ford account for about 80% of US shale oil production and are expected to still amount to 60% by 2020. What that tells you is that this is not a lot of oil and its expensive.

Something to think about especially in the Argentine context where Cristina Fernandez de Kirchner plans on riding the shale oil finds there to a more prosperous future.

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