Analysis: At Margins of Shale Oil Boom, a Tempered Euphoria

Analysis: At Margins of Shale Oil Boom, a Tempered Euphoria by Kristen Hays, editing by Marguerita Choy, May 20, 2013,  The New York Times
For the past three years, the boom in the U.S. shale oil industry has outstripped all expectations. Production surged far faster than any forecasts; drillers raced to secure space in new pipelines to get their crude to market. Now, at the periphery, that may be changing – at least for a while. News from two of the country’s less developed shale plays in Colorado and Ohio last week offer a reality check for the wave of euphoria that has washed across the industry. The stumbles mark a break from the past few years, when nearly every new project was an overnight success and output grew and grew. On Thursday, Ohio, home to the Utica shale, finally released annual data on 2012 production that showed the state pumped less than 700,000 barrels of oil from its shale wells — barely enough to fill a small oil tanker. North Dakota’s Bakken shale pumps more than that every day. Even state officials said it the result was “lower than initially estimated.”

The day before, NuStar Energy LP had said it would shelve a plan to reverse a pair of underused refined products pipelines to ship crude from Colorado’s Niobrara shale oil play to Texas. It failed, twice, to garner enough commitments from potential customers to justify investing in the conversion. Neither development was a surprise to industry experts, and both were likely affected by extenuating circumstances. A growing preference for rail shipments likely dimmed interest in long-term commitments to use NuStar’s pipeline. Ohio’s shale may yet offer up large volumes of liquid gas and condensate, if drillers can find new ways to coax it out. Yet taken together they offered a sign that the flush of enthusiasm and rush of investment that piled into shale fields from one coast to the other has hit a curve. While the basic technologies of hydraulic fracturing and horizontal drilling was enough to coax an unexpected gusher of oil from shale rock in many regions, these more challenging seams may require incremental innovation to unlock. “This is all about technology,” said Sandy Fielden, an analyst at RBN Energy in Austin, Texas. “The bottom line is that this stuff is down there, it’s just figuring out the sweet spot of where to get it and the right conditions to get it out.”

For now, few are questioning the notion that the booming Bakken and Eagle Ford and Permian Basin in Texas will keep growing, driving domestic oil production beyond its highest in two decades and shrinking America’s reliance on imports. But the breakneck pace of the past three years was unlikely to last forever.

“The companies have established their acreage positions, they have established sweet spots, but there are still a number of really enormous challenges in understanding how to most efficient and effective ways to maximize production in the long run,” Pete Stark, senior research director at IHS. “We’re in the start of the second inning in a nine-inning ball game as far as know-how.”

Niobrara and Utica are not the first shale plays to disappoint investors. Michigan’s Collingswood enjoyed a mini-boom for a few months in 2010; California’s huge Monterey shale has thwarted drillers for years. Yet the scale of the let-down is remarkable. Just two years ago, Chesapeake Energy’s former CEO Aubrey McClendon put the Utica on the map, proclaiming it could hold a $500-billion bounty and that it would be the “biggest thing to hit Ohio since the plow”. Oil companies including Total spent billions of dollars buying drilling rights. State geologists estimated that it could hold between 1.3 billion and 5.5 billion barrels of oil reserves, a vast sum. “The Utica has failed so far to live up to its hype,” said Ed Morse, managing director of commodity research at Citigroup.

“We’re at a point now where we’re going to see some of these lower-quality projects weeded out,” said Bradley Olsen, director of midstream research at Tudor Pickering Holt & Co in Houston. [Emphasis added]

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