California Shale Oil Reserves Lowered by 96%

A recent article at Marketwatch points out that the Monterey shale oil reservoir in California has just suffered a 96% change in its reserves estimate, at least according to the federal government's assessment:

 

A recently as this week, the much-publicized Monterey formation accounted for nearly two-thirds of all technically recoverable U.S. shale oil resources, standing at a world-class 13.7 billion barrels. But on Wednesday, that estimate was downgraded to a mere 600 million barrels, or 96% lower than the day before.

You read that right: 96% lower. This takes the Monterey from one of the world’s largest potential fields to a play that, if all 600 million barrels thought to be there were brought to the surface all at once, would supply the U.S.’s oil needs for a mere 33 days.

Yep. 33 days.

And along with that oil come tremendous water demands, environmental, and infrastructure damages. The reasons for the downgrade are easy enough to understand. The initial estimates were mere guesses that relied on company statements and not actual results. Now with enough wells in play the Energy Information Agency can calculate the potential of the Monterey play and it’s obviously a lot less than originally thought.

With that, California’s dreams of 2.8 million new jobs from the Monterey shrank to 112,000 and the hoped for $24.6 billion in tax revenues withered to $984 million.

More importantly, the U.S. shale “miracle” turned into a pumpkin overnight with overall U.S. reserves shrinking from approximately 24 billion barrels to approximately 11 billion barrels. This is not surprising at all to anybody following the shale story with a critical eye. We always knew that the best plays were being prosecuted first for obvious reasons; it’s human nature to go after the easy stuff first. And this is especially true for the folks in the oil patch.

The best plays were tapped first, not by some accident of technology or lucky holes plunged into the ground, but because they were cheapest to prosecute. The remaining shale deposits are less rich, more costly to explore, and the profitable pockets much harder to find.

Your main take-away is this: the U.S. has a lot less shale reserves on the books today than it did yesterday. Look for future downward revisions as the other remnant shale plays are poked and prodded and found to be wanting.”

 

(emphasis added)

It should be noted to this that it is simply good economics to produce the easiest to access and cheapest to produce reserves first. It is well-known that production from shale wells declines precipitously once it is begun, with rates of production in some cases falling by up to 70% within one year. And yet, the fact that such production is pursued proves ipso facto that it makes economic sense (although to be fair, the article at Marketwatch inter alia alleges that unprofitable production has been pursued due to cheap funding being made available through Wall Street. If so, then it is a typical example of capital malinvestment encouraged by central bank policy).

 

Are Reserves a Fixed Magnitude?

Total estimated reserves were unlikely to ever have been held to be equal to  total recoverable reserves at the current state of technology and at current prices for oil and gas. This is however a crucial point: neither extractive technology nor prices can be assumed to stand still. After all, the existence of shale reserves has been known for a very long time already – but production only began when a sufficiently advanced extraction technology and higher prices combined to make such production economically viable.

In other words, it is actually erroneous to believe that 'recoverable reserves' are a fixed magnitude. They clearly are not: in the more distant past, they were actually 'zero' in the case of shale oil and gas. We simply don't know yet what  recoverable reserves will amount to a decade or two hence.

A more general point needs to be made here about the economics of raw materials production: it has e.g. often been alleged that it is 'impossible' that certain oil reserves estimates haven't declined after a decade or two of uninterrupted production. However, this is actually possible. The reason is that it is simply not economically viable for companies in the resource extraction business to estimate what the reserves of e..g. an oil field or a mine deposit amount to beyond a certain time horizon.

In order to assess reserves, expensive drilling and assaying activities need to be undertaken, and in producing oil fields or mines these activities are spread out over time. It can therefore easily happen that e.g. a gold mine that 20 years ago was reported to have a mine life of 20 years, still has an estimated mine life of 20 years today. Of course at some point every specific oil field or mine deposit will be exhausted, but the advance of production techniques can alter the outlook of such reserves dramatically (e.g. 150 years ago, not a single mine producing gold or platinum group metals in South Africa today would have been held to be economically viable).

 

Conclusion:

No doubt there is a certain amount of hype surrounding the shale oil boom. However, one must be careful not to underestimate its potential either. Today's estimates of recoverable reserves are only relevant from today's perspective. Their status is bound to change as time passes and even more efficient and cheaper production techniques are employed. In addition, reserve estimates also depend on commodity prices. Lastly, note that US oil production has clearly experienced sharp growth and this growth shows no signs of slowing down so far. It is difficult to believe that this would be the case if producers were unable to make money.

 

Gas-Drilling-Rig

Shale gas drilling rig in the Marcellus shale.

(Photo via chathamjournal.com / Author unknown)

 

weekly us oil production

So far, US crude oil production continues to rise sharply due to the 'shale revolution', chart by AEI / Carpe Diem blog- click to enlarge.

 

 

 

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10 Responses to “US Energy Independence Outlook ‘Revised Away’?”

  • andreasM:

    There is a reason, why they go after oil 3000 meters below sea-level or accepting depletion rates of 70 pc p.a. etc. The cheap and easily extrectable stuff is not there any longer. Crude oil is a pretty unique thing as it is the source of power for the mobility of the whole world – from your weekend trip to international trade.

    But yes, Pater’s reasoning has to be correct: Extraction must to be profitable at current oil prices, otherwise producers would not engage in this undertaking. Of course credit costs do matter, but do they really make the big difference between investment and not-investment here ?

    In a pure – non monetary – net energy calculation (http://en.wikipedia.org/wiki/EROEI) shale oil does not look too good. It may be at an EROEI of 5, meaning that you need 1 unit of energy to get back 5 units. Conventional oil currentlly is at 10 or 12 – while in the beginning of the oil age it was at 100 or so. I wouldn’t dismiss the peak oil stuff prematurely.

  • Through good times and bad times, it seems they have been able to find more oil. The problem is the rate of extraction.

    When I was in high school in the early 1970’s, the first energy crisis hit. Seems I recall the reserves of the US were around 37 million barrels. Annual production was roughly 10% of that, making the reserves worth about 10 years of supply. That was 40 years ago and I would venture that between the extremes, the production of oil has averaged around 2.5 billion barrels a year or since that time have totaled roughly 100 billion barrels. Somehow, they replaced all there was 3 times since 1973.

    The rate of extraction and the sustainability of the rate of extraction are the primary problems faced with oil. I think most of what we have done over the 40 years I mentioned is learned how to get more oil out of the holes where it was previously found. Regardless, we have produced 3 times what they told us was there. Maybe it doesn’t make much sense to have more production than the market can use or spend money to develop a below ground inventory over so much? I happen to believe there is a lot more oil to be found. Maybe not in the US, but Russia or any number of countries and under the sea. Still, the US chugs on with one of the largest production capacities on earth.

  • jks:

    “…Total estimated reserves were unlikely to ever have been held to be equal to total recoverable reserves at the current state of technology and at current prices for oil and gas. This is however a crucial point: neither extractive technology nor prices can be assumed to stand still…”

    Exactly. Yet the shortage-meme drum bangers continually make their projections as if technology and prices do stand still. They don’t just bet against human ingenuity; they don’t even acknowledge that it exists.

  • Kreditanstalt:

    Is it permissible to be a (broadly defined) ‘libertarian’ or even ‘anarcho-capitalist’ whilst still holding little or no faith in unfettered free enterprise technological development?

    80% of this seems to be HYPE. But even if a good deal of the techno-worship re: shale & gas is true, it will not be economical to undertake the work – and I doubt this economy can run on much more expensive oil.

    Moreover…while everyone lauds the possibility of being able to maintain Amerikan living standards, never-ending energy-thru-technology, run all the cars and power all the gadgets…no one ever stops to ask if, just perhaps, it would be better for all if such gluttony died quietly…

    • JE Stater:

      Good point. I am asking myself the same question. If you are sceptic about sustainability of the current economic set-up, and I mean beyond the debtberg-issue into the fossile energy consumption debate, it gets harder to be libertarian even if you value freedom very very much.

      • Kreditanstalt:

        Actually, I find it compellingly easy to be a ‘libertarian’ given the present ongoing destruction of individual liberty around us. That doesn’t have to mean that I subscribe to the “unfettered-technology-will-solve-all-our-energy-problems-and-raise-living-standards” line that is such a favourite of most conservatives, neocons and libertarians…I rather agree with Jim Kunstler on the finite nature of resource extraction and the limits of technological advancement.

    • JE Stater:

      I got a questions to all you anarcho-capitalists. Let’s imagine we abolish central banking for a market based currency system, like gold. Do you really believe free markets would prevail automatically? What is more likely: the ruling elite goverment-banking-big buiseness complex will start a highly innovate, cut-throat competetive, customer friendly self-disempowerment, OR that they will put the best and brightest to the task of figuring out new ways to shield themself from a leveled playing field?

      Balance of power, that’s the only – even if ugly – option left, as far as my maybe limited imagination is concerned. Not very anarchistic.

    • The price of oil won’t matter much, as long as it is available or there is an alternative. The price of everything would remain pretty much the same, as a whole, if the money was stable. Supply and demand would merely adjust.

  • Hans:

    Sorry, but I am dubious of this entire story, as it
    does not past the smell test.

    The IEA, also has a most horrible record predicting
    the future.

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