Why Shale Fracking Is An Economic Game-Changer That Cannot Be Overhyped

fracking oil drill rig

Photo: westvillagebob / Flickr

Yesterday, we published a presentation by oil analyst Arthur Berman suggesting the potential of fracking to extract fossil fuels buried in shale rock has been way overhyped.But there are many who would argue that the assumptions Berman makes are off the mark.

Using data from the Energy Information Administration and Canadian energy consultancy ITG, we have put together the counter-argument to Berman’s thesis.

Quick review: Fracking involves injecting large volumes of fluids and small particles like sand into a well to free up oil or gas.

It's a great way to access otherwise hard-to-reach energy. But a given fracked well only last so long.

The max production rate for a single well lasts just a few years. That's true even for wells in the country's most popular shale plays.

And here's something else: The further you get into production, the more realistic reserve estimates get.

Indeed, Ohio recently vetoed a proposal to force drillers to disclose monthly production data, which makes some analysts suspicious.

But wait. Here's the overall rig count chart from the EIA. It shows no exponential decline. Instead it shows rig counts declining with prices.

According to research group ITG, natural gas prices would have to rise above $3.81 before production in the Marcellus began to max out. NYMEX prices stand at about $3.41.

Bakken's breakeven price is about $65, and of course crude prices are well above that today. But ITG's model shows that there'll be an average of 200 wells each year that will keep adding to the region's cumulative output.

You do reach some limits -- infrastructure, capacity limits, the Bakken, you'll never see 500 rigs running even though $65, just b/c it's not possible, there are already takeaway capacity, it's not an infinite # of rigs in a given region

Those dampening curves are also what the EIA shows. Even in their worst-case scenario, the EIA says production will merely flatline, not drop off.

And let's look at the gas reserve estimate chart: How much is 482 trillion cubic feet? 410,722 potential wells, according to the EIA.

Source: EIA

And there are currently just 1,700 in operation (including oil wells too) drilling both shale and conventional rocks.

The country's never gotten higher than about 2,000.

So here's the truth: prices, not physics, will determine shale's depletion rates.

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