Raining on Fracking’s Parade: The Red Queen Syndrome

The increase in oil and natural gas production as fracking became more efficient and drilling more widespread caused quite a bit of excitement. Last year the International Energy Agency (IEA) predicted that the US would exceed Saudi Arabia in oil production by 2020. Many articles were issued predicting energy "independence" for both total energy and for oil in the coming years. Unfortunately, not everyone is in agreement with the cheery projections issued by the IEA. In particular, the US Energy Information Administration (EIA) provides an improving, but more limited picture of future gains.

EIA has the US approaching total energy independence but not quite making it.

The major reason why we don’t quite make it is because the surge in oil production from fracking is expected to peak and total oil production will then resume a long-term gradual decline.

Given this projection, the conclusion is that oil imports, while lower, will have to continue indefinitely.

An article by Asjylyn Loder in Bloomberg Businessweek explains what is behind these predictions and introduces us to the Red Queen syndrome.

Wells produced by fracking behave differently than traditional wells. They are characterized by a large initial surge followed by a rapid drop off and then a more gradual but steady decline.

"Chesapeake Energy’s (CHK) Serenity 1-3H well near Oklahoma City came in as a gusher in 2009, pumping more than 1,200 barrels of oil a day and kicking off a rush to drill that extended into Kansas. Now the well produces less than 100 barrels a day, state records show. Serenity’s swift decline sheds light on a dirty secret of the oil boom: It may not last."

Production from these wells drilled into rock and shale tend to lose 60 to 70 percent of their production in the first year. This rapid decline means that if one wishes to maintain a steady supply of oil from fracking it is necessary to continue to keep drilling in order to just stay even. Thus arises the Red Queen syndrome.

"Shale wells start strong and fade fast, and producers are drilling at a breakneck pace to hold output steady. In the fields, this incessant need to drill is known as the Red Queen, after the character in Through the Looking-Glass who tells Alice, ‘It takes all the running you can do, to keep in the same place’."

The level of sustained drilling is enormous and may be reaching diminishing returns as evidence accumulates that the drilling companies started with the most promising sites, and future efforts may not be quite as productive.

"Global Sustainability’s Hughes estimates the U.S. needs to drill 6,000 new wells per year at a cost of $35　billion to maintain current production. His research also shows that the newest wells aren’t as productive as those drilled in the first years of the boom, a sign that oil companies have already tapped the best spots, making it that much harder to keep breaking records. Hughes has predicted that production will peak in 2017 and fall to 2012 levels within two years."

Loder indicates that the costs for these wells are high and vary considerably with terrain.

"The cost of drilling a horizontal shale well ranges from $3.5　million in the Mississippi lime to $9　million or more in the Bakken. That’s far more than the cost of a similar vertical well, which goes from $400,000 to $600,000, according to Drillinginfo."

He also provides this illuminating breakout of the costs.

"The well, known as Begonia 1-30H, will cost about $3.7　million. One-third of that is the cost of fracking: First, thin pipes loaded with explosives are threaded into the hole to blast the ancient reef. Then, at a cost of about $80,000, the Begonia will consume 50,000 gallons of hydrochloric acid to dissolve the limestone; another $68,000 will pay for 1,000 gallons of antibacterial solution to kill microorganisms that chew up the pipes; $110,000 goes for a soapy surfactant to reduce friction; $10,000 covers a scale inhibitor to prevent lime buildup; and $230,000 purchases 2　million pounds of sand to prop the fractures open so the oil and gas can flow into the well. Then there’s $300,000 in pumping charges, plus the cost of equipment rental, pipe, and water, which brings the price tag for fracking the well to $1.2　million. A host of other things, from cement to Porta Potty rentals, accounts for the rest of the cost."

The fracking industry may yet run into environmental restrictions. It has avoided serious problems thus far, but the constant extraction of fresh water needed for this process and the large fraction that returns as waste water can be a long-term problem. Cost is also an issue. Currently around $70 per barrel is the breakeven point. If yields fall, or the cost of business increases, then drilling may decline.

Industry spokespersons will counter with the claim that fracking is still a developing technology and yields will improve and costs will go down.

We shall see.  Meanwhile, the surest path to energy independence requires lowering demand.