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Is US Shale Boom Turning To Bust? OPEC Can Only Dream

Terry Engelder, The Conversation

A boom, like beauty, is in the eye of the beholder. A boom occurs when people rush to claim something that seems to have out-sized value. The value can arise from scarcity in the face of demand or from abundance made possible by recovering something in demand with greater ease.

For natural resources, like 19th-century gold in California, a boom is often triggered by the latter. Not all the participants find the easy gold. Often, the first to arrive see rewards, while later arrivals go home hungry.

Organic-rich black shale in Pennsylvania and North Dakota is the source of the most recent natural resources boom. Today’s “gold diggers” are finding huge quantities of natural gas in Pennsylvania’s Marcellus Formation and oil in North Dakota’s Bakken. These two formations contain the largest US reservoirs of recoverable gas and oil, though other black shale sources across the country offer significant resource potential.

The ability to economically extract gas and more recently oil from shale is one of the greatest paradigm shifts in the global energy system. I played a role in that shift when my nearly 40 years of research on gas shale in Pennsylvania contributed over the past decade to a better understanding of unconventional gas fields.

Since then, production of gas and oil has surged, making the US the world’s top producer of oil and gas. But already, just a few years after my reserve calculations in 2008 identified the Appalachian Basin as the world’s largest unconventional gas field, the Organization of the Petroleum Exporting Countries – a cartel of 12 oil-exporting countries led by Saudi Arabia – is arguing the boom is about to go bust.

A report released by OPEC in April asserted that US oil supplies would grow to 13.65 million barrels a day in the second quarter and then level off before beginning a steady decline by the end of the year. While there has been an inevitable decline in production as a result of the sharp drop in oil prices last year, is OPEC correct to predict US suppliers will never recover their peak levels of production?

This graph charts the variation in the price of oil and gas over the past 12 years. EIA

The boom’s first ‘bust’

It may be argued that the boom in both Pennsylvania and North Dakota was triggered by a combination of higher prices and easier access. During the 2000s, the prices of oil and gas were coupled in an upward drift culminating in the 2007-2008 price spike that ended with the collapse of the economy in 2008, when both plunged.

Drill rigs are the modern gold miners in places like Pennsylvania and North Dakota, where the rig count is as sure a measure of a boom as any. This spike and collapse of prices was mirrored by the rig count in both places, which lags price declines by several months because rigs can’t be demobilized instantaneously. But the boom was far from over despite the collapse in prices – as improvements in technology ensured that access kept getting easier and plenty of oil and gas remained under the Earth, ready to be tapped.

This graph charts how the number of rigs in the Bakken and Marcellus have surged and declined over the past 12 years. Baker-Hughes

By 2009 a huge amount of money had been spent on oil and gas leases, especially in Pennsylvania. To protect this billion-dollar investment, the shale gas boom continued independently of falling prices. The effect was that gas prices decoupled from oil in January 2009 and stabilized at about $3.5 per thousand cubic feet – compared with a peak of just under $13 – whereas oil started to recover and returned to the $80 a barrel range in 2010, within 12 months of its crisis low of under $40.

By then, the oil and gas rush was back on. The Marcellus surpassed its pre-collapse peak rig count by April 2009, while the Bakken surged beyond its previous peak a year later. Both plays arrived at their maximum rig counts, the peak of the boom, about a year apart in 2011 and 2012, respectively. […]

Not going away

Despite a production slowdown in early 2015, oil in the Bakken is not going away. To date, the Bakken has yielded 1.2 billion barrels, and the US Geological Survey estimates there is another 7.4 billion barrels of recoverable oil.

To keep US oil in the ground and out of markets, OPEC has to produce and sell its commodity at bargain basement prices. One wonders if this is the wisest long-term policy for OPEC.

The boom as measured by rig count may be over for both US gas and oil but the resource is still there. The abundance of US gas and oil will continue to be a threat to OPEC at all but rock bottom prices and OPEC, countries with an economy based on one commodity, would suffer as much or more from lower prices than the US industry.

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