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New Drilling Method Opens Vast Oil Fields in US

Posted by WARREN MOSLER on February 10th, 2011

Might need to delay ‘peak oil’ a bit.

More interesting, I’d estimate it would take about a 5 million barrel a day ‘shift’ in net demand to dislodge the Saudis as swing producer, as they can only cut production by less than that much to sustain price should that happen.

In other words, a combination of increased non opec supply and reduced world demand of 5 million bpd would force a cut in production of that much for the Saudis to be able to continue to set price, from their current production level of about 8.5 million bpd.

And along with these ‘new drilling methods’ Iraq is looking to add over 5 million bpd in capacity over the next several years.

The question is what will happen with demand, and looks to me the US and Europe are starting to go the other way and reduce gasoline demand via conservation (higher mpg’s in vehicles) and shifting to alternative fuels, directly and indirectly.

So what’s the Saudi’s best move here?
Keep prices high a long as possible and get all the wealth they can before prices collapse?
Or cut price in an attempt to discourage the forces at work that are threatening their pricing power?

New Drilling Method Opens Vast Oil Fields in US

February 9 (AP) — A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day—more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

“That’s a significant contribution to energy security,” says Ed Morse, head of commodities research at Credit Suisse .

Oil engineers are applying what critics say is an environmentally questionable method developed in recent years to tap natural gas trapped in underground shale. They drill down and horizontally into the rock, then pump water, sand and chemicals into the hole to crack the shale and allow gas to flow up.

Because oil molecules are sticky and larger than gas molecules, engineers thought the process wouldn’t work to squeeze oil out fast enough to make it economical. But drillers learned how to increase the number of cracks in the rock and use different chemicals to free up oil at low cost.

“We’ve completely transformed the natural gas industry, and I wouldn’t be surprised if we transform the oil business in the next few years too,” says Aubrey McClendon, chief executive of Chesapeake Energy, which is using the technique.

Petroleum engineers first used the method in 2007 to unlock oil from a 25,000-square-mile formation under North Dakota and Montana known as the Bakken. Production there rose 50 percent in just the past year, to 458,000 barrels a day, according to Bentek Energy, an energy analysis firm.

29 Responses to “New Drilling Method Opens Vast Oil Fields in US”

  1. Keith Newman Says:

    Very interesting indeed. Thanks for this Warren.

    Reply

  2. Tim Says:

    I’ve always believed that we had not exploited many of our known natural resources in a “last man standing” type policy as a lesson learned way back in the colonial days. Use others and hold our own in reserve?

    Reply

  3. beowulf Says:

    Because oil molecules are sticky and larger than gas molecules, engineers thought the process wouldn’t work to squeeze oil out fast enough to make it economical.But drillers learned how to increase the number of cracks in the rock and use different chemicals to free up oil at low cost.

    Ahh, reminds me of my third favorite public works project from the 1960′s, Project Bronco.
    This report describes Project Bronco, a proposed 50-kiloton nuclear explosion experiment. The detonation will fragment and fracture a deep, thick oil shale deposit which will subsequently be retorted in place.
    http://oai.dtic.mil/oai/oai?verb=getRecord&metadataPrefix=html&identifier=ADA382355

    I imagine the design constraint with the err, non-radioactive method would be water (North Dakota, Colorado, Texas and California aren’t known for their abundant fresh water). This wouldn’t be an issue if we and the Canadians had built out my 2nd favorite 60′s engineering project, NAWAPA.
    http://switchboard.nrdc.org/blogs/bnelson/the_rip_van_winkle_of_water_pr.html

    And since you’re wondering, my favorite 60s project (actually from 1972) is, of course, Frank Salter’s planetran underground rail proposal. :o)
    http://www.think-aboutit.com/Reps/LA2NYnHalfnHour.htm

    Reply

  4. Tom Hickey Says:

    Also the new drilling technique involves fraking, which has its own problems. It is commonly used in NG recovery and local pushback is increasing.

    “As well, the U.S. Environmental Protection Agency is reviewing the use of hydraulic fracturing in the gas industry, and the tight-oil development may well be constrained by regulators. The EPA is addressing widespread fears about the impact on local drinking water resources from the hydraulic fracturing – in which chemical-laced water is shot into rock to pry open cracks and let the hydrocarbons flow.”

    “Chinese state-owned oil company, Chinese National Offshore Oil Company (CNOOC) has bought a one-third interest in Chesapeake’s acreage in Eagle Ford and Niobrara for $3.5-billion (U.S.).”

    Drilling technology sparks new oil boom

    Shortage issues seem to be shifting to water and food. (Fraking uses vast amounts of water, as Beowulf notes above.)

    Water Crisis

    The Great Food Crisis of 2011-Lester Brown

    Visionary alternatives to boost food security

    Reply

    beowulf Reply:

    Yeah, most water usage is for agriculture (80% IIRC). Either with a stick (govt stops subsidizing water for irrigation) or with a carrot (govt assumes cost of universal drip irrigation, cutting food production water usage by 50%), the only way to really conserve is by focusing on Ag, by comparison low-flow toilets and other household water uses are just a drop in the bucket (so to speak).

    Of course, I’m a fan of those B&W modular reactors (and no I’m not an investor), its designed to be either water or air-cooled. As you know, nuclear plants require a ton of fresh water, so air-cooled nuke plants would be a step forward for water conservation.
    http://online.wsj.com/article/SB10001424052748703444804575071402124482176.html

    Reply

  5. Adam Says:

    Those that study peak oil always have unconventional oil in their estimates.

    The only solution to peak oil is demand side. Not supply side.

    Reply

    Tom Hickey Reply:

    Right. Marginal suppliers may not be able to meet rising demand as the global economy recovers.

    Energy Agency warns of danger from high oil prices

    The IEA, the energy policy and monitoring arm of the Organisation for Economic Cooperation and Development, said the global oil bill was likely equal to 4.1 percent of total output in 2010 and would rise to 4.7 percent this year.

    “Under current assumptions for global GDP, oil price and oil demand, the global oil burden could rise to 4.7 percent in 2011, getting close to levels that have coincided in the past with a marked economic slowdown,” the International Energy Agency said in its latest monthly Oil Market Report.

    “Indeed, the combination of higher prices … emerging inflationary pressures and instability in the Middle East is not a healthy one,” it added.

    Reply

    WARREN MOSLER Reply:

    aka real terms of trade

    Reply

  6. Keith Newman Says:

    Interesting links. Thanks to all.

    7 or 8 years ago industry specialists predicted natural gas output in North America would increase substantially from unconventional sources such as coalbed methane and shale and account for a significant share of supply. I was a skeptic as the technology was unproven and hardly tried commercially. I believed it unlikely the levels of production required to have a significant impact on supply would be achieved very quickly if at all. I was wrong. Now I do not discount predictions of large increases in oil output from the same technology.

    Reply

  7. Dismayed Says:

    At what cost? Are we sacrificing our ground water to increase oil production?

    Reply

  8. Dan w Says:

    Chaos theory….predicting outcomes in highly and increasingly complex systems is impossible. However, one thing is clear. As systems grow in complexity, and as control mechanisms become stretched to their limit, unpredictable outcomes ensue. anyway….this sounds like another money making scam to me.

    Reply

    WARREN MOSLER Reply:

    the monetary system isn’t all that complex. in fact, it’s a simple public monopoly.

    Reply

    danw Reply:

    the complexity comes from how money is deployed by those who can access it. the more money, the more complexity. can’t wait for some new anointed extremist billionaire—courtesy of course of big time credits to various reserve accounts at the fed—deploys HIS quatloos.

    Reply

  9. scarmani Says:

    Too little, too late, see e.g. Fig 2 in http://peakoiltaskforce.net/wp-content/uploads/2010/11/itpoes_deepwater-briefing-note_nov20103.pdf for hard numbers through 2015.

    By 2013, there will be no spare capacity @ the 92 mbpd ceiling if global economic growth continues at its present rate. By 2015 there will be acute physical shortage.

    Fracking partially offsets post-peak decline, at best – the scale of near term increased production from fracking is not even of the same order of magnitude as global conventional crude oil production and the decline rate attached to it.

    None of this matters, however: http://www.newenergytimes.com/v2/sr/WL/WLTheory.shtml

    Reply

    WARREN MOSLER Reply:

    true, if demand for crude products in fact does grow to 92 mbpd

    Reply

    Mr. E Reply:

    This technique can probably be used in many places, so expect proven fields to dramatically uptick oil production. Also, some oil fields in dramatic decline will probably have a few more years of productive life.

    These fields already have the necessary infrastructure to be able to deliver oil. We’ll have plenty of oil for the next decade – even if we shouldn’t be burning it because of environmental concerns.

    Reply

  10. Craig Says:

    hi warren – i’ve been meaning to ask you a question. I’ve read your articles on oil speculation before but i was hoping i could get you to speak broader to the financialization of the economy. As an outsider looking in it seems the economic system is becoming more disfunctional because accumulating wealth has been decouple from producing value – value in terms of physical goods and services. Look at Paulson’s $5 billion profit on gold in 2010

    http://blogs.wsj.com/deals/2011/02/07/more-detail-on-how-john-paulson-made-5-billion-in-one-year/

    or Anthony Ward cornering the cocoa market.

    http://www.nytimes.com/2010/07/25/business/global/25chocolate.html?_r=1&hpw

    How serious of a problem and what controls would you recommend? What about specific industries such as oil – like Mark Cuban’s idea.

    http://blogmaverick.com/2005/09/22/how-to-lower-the-price-of-gas/

    How are going to get young talent to work on next generation technology (ie. alternative energy) when all the money is in finance?

    Reply

    WARREN MOSLER Reply:

    right, as my tagline says, the financial sector is a lot more trouble than it’s worth

    this website has a lot of my writings about your points, starting with the 7 Deadly Innocent Frauds of Economic Policy.

    and the deadly innocent fraud that we need savings to fund investment is one of several causes of this outcome.

    and my proposals for the banking system, fed, fdic, and tsy address a few more

    Reply

  11. Digger Says:

    I was intrigued by William Engdahl’s thinking that petroleum is not a fossil fuel and that the earth is still making more.

    His website is http://www.engdahl.oilgeopolitics.net/ although I first read of this on page 6 of this interview: http://www.acresusa.com/toolbox/reprints/June08_Engdahl.pdf

    Even if true, still no excuse for unnecessarily pollting the air.

    Reply

    WARREN MOSLER Reply:

    or getting dependent on someone else’s to the point of war and unemployment

    Reply

  12. Mr. E Says:

    Drive prices down to $30 a barrel for 10 months. Much of the risk management of projects and ROI for large scale capital investment is really simple.

    It isn’t my idea – I got it from a Bear Stearns analyst in 1999. She said the Saudis were going to drive the price of oil as low as possible, but with significant volatility for the next few years (1999-2003) to make these investments more “risky’.

    I would expect a huge variance in oil prices, plus several significant ‘crashes” would be the best thing they could try and create.

    Reply

  13. Zarathustra Says:

    I think I might have to take medication if the hype about the Bakken Shales isn’t debunked soon.

    Yes, horizontal drilling and frake technology have given new life to oil fields that were in decline. And yes, there is a lot of oil there. But …

    Never mind, I won’t debunk it again. Please read what has been written about it at Snopes.com and FactCheck.org:

    http://www.snopes.com/politics/gasoline/bakken.asp

    http://www.factcheck.org/2009/03/us-offshore-oil-reserves/

    Here is a rational assessment of the Bakken oil play:

    http://www.investingdaily.com/tes/18230/drilling-for-profits-the-bakken-shale.html

    The Bakken play is good news, even exciting news, but its potential is greatly overstated by most reports. In 15 years it MIGHT be producing 1.5 mbpd which would satisfy about 16.9% of our current consumption of 18.9 mbpd. It’s current production level of about 370,000 bpd meets about 2.0% of current domestic demand.

    If USGS estimates are correct, the entire Bakken formation will produce over its lifetime, 3.65 billion barrels of crude oil, a little over 6 months of consumption. Other more optimistic estimates put the total recoverable crude oil much higher, perhaps 24 billion barrels, enough to supply the U.S. for almost 3 1/2 years.

    The Bakkens are NOT going to rescue the U.S. from the decline of world oil production that has already begun, but they will help for a while.

    Reply

    WARREN MOSLER Reply:

    i was just pointing out a 5 million bdp net supply shift is needed to dislodge saudi pricing power

    Reply

    Zarathustra Reply:

    Forgive me, I go a little crazy and get the whole nervous eye twitch going any time I read anything that smells like we are going to be saved by horizontal drilling, fraking or the Bakkens. It wasn’t really what you wrote but the article you attached and some of the replies.

    Personally, I think that Saudi Arabia is past peak and the only way they can pump more oil is if they can sell us sour crude. The marginal cost of bringing unconventional oil to the market is now driving the price. JMO.

    Reply

  14. Matt Franko Says:

    Warren,
    “So what’s the Saudi’s best move here?”
    I think it is looking more likely that the current regime there will probably “get all they can while they can”. Dominos seem to be falling. Iraq…Algeria…..Egypt…. now I saw something today in Yemen and Bahrain….

    They may just try to stuff their accounts for as much as possible before any social unrest may start there too. Or at least they have to be very concerned about this trend and may come down on the side of any decisions that have more short term benefits for the time being …. Resp,

    Reply

    BFG Reply:

    Matt, Tom,

    If you want to keep up with geopolitic events check out the following site LEAP2020, they are a French outfit that was started by Franck Biancheri who used to work for François Mitterrand. They are or come across as gold bugs but don’t forget Sarkozy and Strauss Kahn want to change the monetary system and they have forcasted all social breakdowns across the world since 2005.

    Thailand, Tunisa, Algeria, the collapse of Mubarak in Eqypt. The ever closer relationship between Germany and Russia. All countries going their own way after agreeing stimulus packages, the breakdown of the international system. Marching boots on the streets of Europe once more e.g. Hungary. The rejection of the Lisbon Treaty, the rise of the Tea Party in the US.

    Reply

    Tom Hickey Reply:

    Thanks, BFG, I read LEAP — with a grain of salt. :)

    Reply

  15. john Says:

    I don’t know that fracking or the Bakken are going to delay peak oil all that much. I’d say it remains to be seen, although it is certainly ramping up. Good article though, thanks.

    Reply

    bakkendispatch Reply:

    @john,

    I agree with you. Even the Bakken only amounts to 600,000 bpd and change right now, and it might ramp up to 1.5 million or so in several years before it peaks. We need to find another 8 million or so per day just for the U.S.

    Reply

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