Fracking Insiders See No End To Boom

Despite official predictions that the U.S. energy boom will pop like a bubble in the next 20 years, people engaged in drilling for oil and gas—from the financiers to the frackers—see no end to boom times or low gas prices, industry insiders said in Chicago Friday.
Late last year the International Energy Agency predicted the U.S. would surpass Russia and Saudi Arabia to become the world's largest energy producer by 2015 but would run out of gas, so to speak, in the 2020s. The U.S. Energy Information Administration made a similar assessment last year, predicting production would decline after 2020 and then increased demand would drive up gas prices.
But such glum assessments underestimate not only the amount of domestic shale oil and gas, but also the ingenuity of those tapping it, the insiders suggested Friday at the Energy Forward conference hosted by the Chicago Booth Energy Group.
"It's amazing how much is out there, and we have very high confidence on most of these plays that they're going to be very long lived," said Robert Beck, who explores for Anadarko Petroleum Corp.
Most shale oil wells today start strong but taper off quickly compared to conventional wells, and some cease production in 7.5 to 8 years. But drilling technologies are evolving quickly to change that, said James King, vice president for unconventional multi-stage completions with Baker Hughes, an oilfield services company.
"There are a lot of bright minds working today to make the wells have higher rates of production, slower decline curves, better terminal production and at less cost," King said. "In the long term I think there will be technological solutions to fast decline curves and short-life wells."
The U.S. will set records for oil production this year, King said. "I would expect it's sustainable. The technology didn't just happen, it wasn't just switched on, it evolved over time, and we'll have better technologies than we did before."
New technologies are likely to be employed re-fracking wells that seem depleted to current technologies.
"There's nothing to keep you from fracking the same well a second time or a third time. As we go back to fracking these existing wells, what we might find is that we'll have more patience and spend a little more money on the science up front to determine where to stimulate an existing well, and so we'll be able to bring wells back on at least as strong as they were originally."
There is an estimated 5 to 6 trillion barrels of oil locked up in shale, said Vance L. Scott of the management consulting firm A.T. Kearney—resources up to 15 times the size of the largest oil field in Saudi Arabia, he said. "To date we've used as a species, depending on the source, 700 billion to a trillion in oil."
In its 2013 Outlook, the Energy Information Administration predicted gas prices would increase by 2040 to $7.65 per million BTU. The industry insiders at Friday's conference, while not venturing so precise a prediction so far ahead, expect prices to stabilize at a lower level for the foreseeable future.
"Eventually we think the markets are going to balance between $4 and $5—$5.50 kind of the upper bound," Scott said.
The financial advisory firm Lazard also expects gas prices to stabilize between $4.50 and $5. The firm hired "very contrarian thinkers" to try to burst the bubble of optimism within the industry, said George Bilicic, Lazard's global head of power, energy and infrastructure.
"We hired a consultant about 18 months ago to do a very elaborate study for us on natural gas. We said, it cannot be that everyone is right about natural gas…. We said prove why everyone is wrong. And they came back—these very contrarian thinkers—they came back and said everyone is right."
Asked how confident he was in Lazard's $4.5o price estimate, Bilicic said "I'm not confident at all." There's an argument between bulls who see prices rising with economic growth and LNG exports and bears who expect the demand for gas to be undercut by energy efficiency, renewable energy, and environmental concerns. But Lazard's calculations place the price in that range.
"We're not so sure where gas prices will be over the long term. We do a highly proprietary and, of course because its Lazard, highly sophisticated levelized cost of energy analysis where we use long-term gas prices at about $4.50 or $5 across the U.S."
"When we look at the reserves and we look at people's ability to drill it's hard to see how you're going to see anything other than" that price, Bilicic said.
Environmental concerns remain the most overt threat to the boom.
"If you look at the carbon effects of natural gas and carbon is the issue, the difference between an all natural gas system and the system we have now, it's not that much better from a carbon perspective, even displacing a lot of the coal," Bilicic said. "So we're a little worried, but we think that's the right outlook on things right now."
Constraints could also come from unforeseen directions. Two years ago, there was a shortage of guar gum from India, a component of fracking fluids, and this winter's polar vortex slowed transports of fracking sand from Wisconsin.
"Who would have thought little bitty things like guar and sand could slow the unconventional growth curve," said Beck from Anadarko. "That's another way the industry is different nowadays."
Correction: This story originally attributed Vance Scott's estimates of shale resources to the U.S. He later clarified that he was referring to global resources.
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