This article first appeared at The McAlvany Intelligence Advisor on Wednesday, September 17, 2014:
Logo of International Energy Agency (Photo credit: Wikipedia)
The explosion in production in the oil patch makes it nearly impossible to keep up. Economist Mark Perry is trying. On September 2, he reported that texas crude oil production in June topped three million barrels per day, noting that, as a separate nation, Texas would be the world's eighth largest oil producer. The very next day Perry reported that natural gas production from the Utica Shale formation has increased by a factor of seven in just two years, and it's just getting started.
Less than two weeks later, Perry reported that in July North Dakota's Bakken oil fields produced one million barrels per day for the second month in a row. In each report, Perry published graphs showing exponential growth just over the last five years.
This confirmed the report from Bank of America in July that the United States is now the world's leading oil producer, ahead of both Saudi Arabia and Russia. And the International Energy Agency (IEA) reported that in the last five years US oil production has more than doubled from five million barrels a day to 11 million, and stated further that it expects production to continue to climb for at least the next five years.
Russell Gold of the wall street Journal says that the fracking boom will likely continue for an underreported reason: technology is improving the amount of production each well is able to generate. Although the number of oil and natural gas rigs has stayed constant since the summer of 2011, oil and gas production since then has gone from less than seven million barrels a day to almost 12 million.
As an example, in 2003 the best producing natural gas well generated just under six million cubic feet of gas every day, while the best producing well last year produced more than 30 million cubic feet of natural gas – five times as much. Drilling productivity has doubled in less than two years, according to Lynn Westfall, the EIA's director of energy markets. The rig count in South Texas' Eagle Ford Shale formation “has not changed since 2012, but the production per new well has doubled.”
Major players in the oil patch are banking on the fracking boom to continue. For instance, energy company Access Midstream is building three huge plants in rural Harrison County, Ohio, which sits on top of the Utica Shale formation. This is an investment approaching $2 billion, with more to come. Said the company's Scott Hallam: “This is a 50-year asset. We wouldn't be spending billions here if we didn't believe that.”
But international oil giant Sasol is making an investment in Lake Charles, Louisiana, that dwarfs that of Access Midstream. It's building a 3,000-acre energy complex expected to cost more than $21 billion. The project will require more than 7,000 workers to build, and local entrepreneurs have already begun construction of a “man camp” to house 4,000 of them. So far, Sasol's investment has drawn 66 other energy projects to the area, with total investments there estimated in excess of $100 billion. This has astonished Laurens Scott, a Louisiana economist who has been watching and tracking the oil patch for years:
As an economist, I can only say, “Wow, Holy Cow!” We typically measure expansion in terms of hundreds of millions of dollars. Something like that makes your eyes bug out.
None of this seems to have impressed Roger Howard over at Newsweek magazine, however, who calls the fracking boom a “bubble” that will inevitably pop, with all manner of negative consequences following. He noted:
Even in their best case scenario – of high and climbing oil prices – America's shale producers will be pushed to maintain the high level of output they have achieved in recent years. This is because a shale well has a limited lifespan of around seven or eight years. Its output plummets after the first three years, and then deteriorates steadily thereafter.
Howard strains to make his case, calling the fracking boom a “panacea” that is making Americans “complacent” about the need to develop alternate sources of energy. The fracking boom “may be welcome, but it is a stopgap, a temporary fix, providing a breathing space, which would best be used exploring a sustainable fuel of the future,” says Howard.
The only thing that might slow down the boom is the “neighborhood effect” attendant with that boom. These are not the concerns of the environmentalists who have been crying about the dangers of water poisoning, earthquakes, and air pollution directly or indirectly attributable to fracking. The real risk is above ground. According to the Wall Street Journal, more than 15 million Americans now live within a mile of a well that has been drilled since 2000. The most extreme example is in Johnson County, Texas, where, in 2000, there were fewer than 20 oil and gas wells – so few in fact that almost none of the county's 150,000 inhabitants knew where they were. Today, however, nearly 4,000 wells have perforated the county – more than five wells for every square mile – and every resident now lives within sight of at least one. While most of those residents are happy to receive royalty checks (averaging about $250 per acre) and signing bonuses for leasing out their property to developers, those not receiving them are frequently complaining, likening the development of those wells to a circus which has come to town. Author Gold explained why:
Each well requires earthmoving machinery to create a flat 1- or 2-acre pad of compressed earth. Then a 10-story rig is assembled to drill a hole up to 10,000 feet deep.
After that, the well is fracked, creating thousands of tiny cracks in the rock to free the oil or gas. That entails heavy equipment: truck sized containers of water and sand, mixers, stadium lighting, pumps, chemical storage and injection vans, and recreational-vehicle command centers to orchestrate the operation.
The process can last three weeks to three months.
Once drilled, however, the circus moves on to the next well, leaving behind just a pipe that sticks up a few feet in the air, which is serviced by one truck every day.
Mark Boling of Southwestern Energy says the industry is becoming aware of the public relations problem:
The industry has done a great job of figuring out how to crack the code below ground – how do you get natural gas or oil out.
However, it hasn't spent a lot of effort thinking about how you handle development above ground. We need more unconventional thinking about this.
But he thinks those relations can be vastly improved by installing better mufflers on the drilling machinery, installing equipment to capture emissions before they enter the atmosphere, and erecting temporary sound barriers around the drilling site until the job is complete.
If Boling is right, and local, state, and federal governments can be kept at bay, the country will continue to close the gap between the 20 million barrels of oil it consumes every day and the now nearly 12 million barrels of oil that it produces every day. As that gap closes, gas prices at the pump are likely to remain steady, as will the costs of derivatives from oil such as plastics and food packaging. The fracking boom will also continue to put considerable distance between the US and the next two largest oil producers in the world, Russia and China, neither of which have the infrastructure of the United States, nor the legal assurances provided by the rule of law.
In other words, in the next few years America is due to regain its stature as the number one energy supplier to the world, muting the naysayers at Newsweek and elsewhere whose predictions of an inevitable bust in the oil patch will prove to be resoundingly wrong.
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Sources:
The Wall Street Journal: Fracking Gives U.S. Energy Boom Plenty of Room to Run
Newsweek: Is the U.S. Fracking Boom a Bubble?
The Wall Street Journal: Are We Underestimating America's Fracking Boom?
The New York Times: Boom in Energy Spurs Industry in the Rust Belt
The New american: Why aren't gas prices lower?
The Wall Street Journal: Energy Boom Puts Wells in America's Backyards
How much oil is consumed in the United States?
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