Shale Oil and US Foreign Policy
Last week in Houston Secretary of State, Mike Pompeo, made a remarkable keynote speech to a large audience at CERAWeek. You may read his speech, in its entirety, by clicking on the image above and I urge you to do so.
"The Trump administration is working strongly, based on its firmly held conviction that we must further America’s interests by widening the tools we have available to our diplomats, especially the tool of American energy abundance."
Secretary Pompeo is a good man doing a very tough job. I respect that a great deal; hell, he is an oily guy from way back and understands our business pretty well, I'm told.
His speech at CERAWeek, however, aligns with an energy policy crafted by President Donald Trump's that is based on the false premise of shale oil abundance in our country, that America is literally sitting on top of the Atlantic Ocean of shale oil. Pompeo's message to the world, clearly, was that the US shale oil phenomena now carries the flag of foreign policy. It suggests that the shale oil industry is now too big, and far too important, to fail and that the US government will continue to fund shale oil extraction in America with low interest Federal stimulus, regardless of its financial stress.
The shale oil industry, I am sure, fist pumped each other that evening over scotch and sodas.' When you have the power of the US government behind you, tweets like this one don't even bother you all that much. The shale industry, as someone once said, does not need high product prices anyway, it just needs low interest rates.
OPEC, on the other hand, responded to Mr. Pompeo's comments by threatening the US shale oil industry with much lower prices if NOPEC legislation was passed in Congress.
Its a dangerous game we play.
Chart is based on proven reserve estimates published in BP World Oil Report 2018
The last information we have regarding proven producing (1P) reserves in America is from 2017. The Energy Information Agency (EIA) at that time estimated America had a little north of 42 billion barrels of proven producing reserves. British Petroleum in its 2018 World Report estimated 50 billion barrels. Given shale oil decline rates it would not seem likely those reserves have grown significantly in the past year.
How much crude oil and condensate does America consume ?
According to the Energy Information Agency, over 7.5 billion barrels each year. Essentially that means is if we did not import any crude oil or condensate, or any refined products from any other foreign country into the US, we have enough proven oil reserves in America to last us only six or seven years.
Proven reserves have better than a 90% probability of economic recovery at current oil prices (SPE). President Trump's energy policies are based on probable (2P) reserves that only have a 50% probability of economic recovery at current oil prices and 'possible' (3P) reserves. Possible reserves include "technically recoverable, as yet undiscovered, economic-to-recover-at-some unknown, much-higher-oil-price" type reserves, like those recently estimated by the United States Geological Society in the Delaware sub-basin of the Permian Basin. Possible 3P reserves have a less than 10% probability of commercial extraction. For further clarification on reserve categories I always found this fish analogy to be perfect.
You can put all the lipstick you need on that pig, that's the facts. Probable and possible reserves that someday might be commercial to find, and extract, if they even exist, is no basis for meaningful energy policy. Particularly when those probable and possible reserves are most certainly unconventional resource reserves that decline at the incredible rate of 85% the first three years of production life and anywhere from 12-20% annually until they reach economic limits and are plugged and abandoned.
Further, Rystad Energy Research Group recently stated that between 70-80% of all shale oil wells being drilled in America now simply offset the previous years annualized decline. The amount of capital required to meet EIA and International Energy Agency growth predictions for American shale oil, stacked on hundreds of billions of dollars of existing shale oil debt, will be staggering. Oil prices would have to rise to over $70 per barrel, and stay there, for this miracle of growth to occur without adding more debt.
Secretary Pompeo's address to CERA was patriotic and emotionally stirring. It is a noble gesture to want to use American shale oil to help provide energy security and prosperity to our allies around the world, to spread the "model of United States free enterprise...transparent transactions, not debt traps, and to explore...responsibly," as were some of his other quotes in the speech.
I say let that "responsibility" include energy security for our own children in our own nation ten years from now. That means leaving them oil to use, not exporting all of it to China. Let us not leave them a legacy of debt, a "debt trap," if you will, that will adversely affect their prosperity and their future.
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This is a graphic based on known decline rates from all four of America's shale oil basins depicting how quickly US shale oil production would decline if no more wells were drilled. The graph is a year old; of course drilling continued in 2018 and is continuing today. Current light tight oil production in America is something in the order of 6.5MM BOPD. If no more wells were drilled starting tomorrow, the decline portrayed in this image would actually be slightly steeper and by 2021 US shale oil production would be something like 1.8MM BOPD.
