ENB Pub Note: Michael and I will cover this on our next podcast. As I have said, there will be no “Drill Baby Drill”, it will be more like: “Drill Baby when fiscally responsible.”
- Goehring & Rozencwajg: U.S. shale production peaked in late 2023 and is now declining.
- Geological depletion rather than market dynamics poses the biggest challenge.
- Novel technologies like CO2 injection offer hope for extending oil field lifespans.
With just a month left before U.S. President-elect Donald Trump begins his second term at the Oval Office, oil prices have been struggling to find direction, intensifying the notion that oil markets seem content to wait for him to take office.
Trump has repeatedly vowed that he’ll push shale producers to ramp up output, even if it means operators “drill themselves out of business.”
But it’s not clear how he intends to accomplish this feat since U.S. oil is produced by independent companies and not a national oil company (NOC).
Last month, Exxon Mobil’s (NYSE:XOM) Upstream President Liam Mallon dismissed the notion that U.S. producers will dramatically increase output under a second Trump term. However, Trump’s drilling ambitions might be thwarted by an even bigger challenge: U.S. oilfields could be nearing their final act.
According to Goehring & Rozencwajg LLC, a fundamental research firm specializing in contrarian natural resource investments, U.S. shale output is in the early innings of a protracted decline, with depletion, not market dynamics or regulatory overreach, the chief culprit. The analysts had previously predicted that the explosive production growth triggered by the U.S. shale revolution would flatline in late 2024 or early 2025. However, the reality could be worse: According to data by the EIA, shale crude oil production peaked in November 2023, and has declined about 2% since then while shale dry gas production peaked that same month and has since slipped by 1% or 1 billion cubic feet per day. And, it’s about to get worse, with Goehring & Rozencwajg’s model predicting an even steeper decline going forward.
The contrarian investors have compared the unfolding situation to the oil crisis of the 1970s. They note that President Nixon responded to the first OPEC oil crisis in 1973 by launching Project Independence, which aimed to reverse the decline in U.S. output through deregulation and expedited permitting. Oil prices soared from $3.18 per barrel in 1973 to $34 per barrel by 1981, inducing an explosion in drilling activity. Consequently, the U.S. oil rig count jumped from 993 in 1973 to a staggering 4,500 by late 1981. Unfortunately, the surge in drilling was unable to counter the natural law of depletion: By the end of 1981, U.S. crude production had fallen to 8.5 million barrels per day, good for a 15% decline from the time Nixon launched his ambitious program. The analysts note that U.S. crude output hit a nadir of 5 million barrels per day in 2010, even as prices hovered around $100 per barrel. Goehring & Rozencwajg has labeled this phenomenon ‘The Depletion Paradox’, and have warned that higher prices alone will not be sufficient to counteract geological realities. The analysts have pointed to the famous aphorism by the legendary M. King Hubbert, a geologist for Shell Plc. (NYSE:SHEL): every hydrocarbon basin is a finite resource. In effect, the production of any oil and gas field begins at zero, rises as extraction ramps up, and ultimately reaches an upper limit that represents the total recoverable resource in the basin.
To exacerbate matters, U.S. producers won’t have the incentive of high prices under a second Trump administration: A new survey from law firm Haynes Boone LLC has revealed that banks are gearing up for oil prices to fall below $60 a barrel by the middle of Trump’s new term.
Enhanced Oil Recovery
That said, there’s a growing likelihood that more novel technologies will come along and jumpstart U.S. oil and gas production, much like hydraulic fracturing revolutionized the U.S Shale Patch two decades ago. New research has revealed that injecting near-depleted oil wells with CO2 can extend their productivity for decades. Calgary-based senior geological advisor Menhwei Zhao has conducted an AAPG Bulletin study regarding the use of CCS in Enhanced Oil Recovery (EOR). He analyzed more than 22 years of production data from the Weyburn Midale oil pool in Saskatchewan, which since 2000 has been receiving carbon dioxide injections thus making it the world’s longest-running EOR project. Zhao concluded that the pool would have stopped producing oil by 2016 without CO2 injection, but that “enhanced oil recovery could extend the pool’s lifespan to 39 or even 84 more years.” Although Zhao acknowledges that he focused on a specific project in Canada, he says he would expect to see “similar results” for large-scale CCS projects around the world.
Zhao’s claims might not be exaggerated: The Wasson Field’s Denver Unit CO2 EOR project resulted in a nearly seven-fold increase in crude production after injecting CO2.
Crude oil production in U.S. oil fields frequently encompasses three distinct phases: primary, secondary, and tertiary (or enhanced) recovery. During the primary recovery phase, gravity, the natural pressure of the reservoir and artificial lift techniques are used to drive oil into the wellbore. This initial phase typically recovers only about 10 percent of a reservoir’s original oil in place (OOIP). Secondary recovery techniques are used to extend a field’s productive life usually by injecting water or gas to displace oil and drive it to a production wellbore, typically resulting in the recovery of 20 to 40 percent of OOIP.
However, much of the easy-to-produce oil has already been recovered from U.S. oil fields, forcing producers to turn to several tertiary, or enhanced oil recovery (EOR), techniques. EOR technologies offer prospects for ultimately producing 30 to 60 percent, or more, of a reservoir’s OOIP.
Three major categories of EOR have been found to be commercially successful: gas injection, chemical injection and thermal recovery. Gas injection is the most common EOR technology in the United States, accounting for nearly 60 percent of EOR production in the country. Gas injection uses gasses such as CO2, natural gas, or nitrogen that expand in a reservoir to push additional oil to a production wellbore while other gasses dissolve in the oil and help to lower its viscosity and improve its flow rate. CO2 injection has been used successfully throughout the Permian Basin of West Texas and eastern New Mexico, as well as in Kansas, Mississippi, Wyoming, Oklahoma, Colorado, Utah, Montana, Alaska, and Pennsylvania.
Source: DoE
The U.S. DoE is currently researching novel techniques that could significantly improve economic performance and expand the applicability of CO2 injection to a broader group of reservoirs. The DoE estimates that next-generation CO2-EOR has the potential to produce over 60 billion barrels of oil that would otherwise be left trapped in the rocks. It would take around 13 years for U.S. producers to pump that volume of oil at the current clip of ~13 million barrels per day.
By Alex Kimani for Oilprice.com
