Unconventional oil and gas and the hydrocarbon renaissance in the USA

The combination of high prices for oil and the combination of horizontal drilling with hydraulic fracturing have opened up huge quantities of hydrocarbon resource in the USA over the past decade or so.  It used to be that oil and gas could only be produced out of geological formations that had high porosity, high permeability, had a source for hydrocarbons below it, and had an impermeable trap layer above it to keep the hydrocarbons from moving to the surface, and had sufficient internal pressure to push the oil out of the formation and into the well-bore.  These oil reservoirs ranged from very tiny, to very huge, but all the big ones have likely been found in the USA.

Starting in the 1970s, the focus shifted from on-shore USA to offshore in the Gulf of Mexico, and Alaska.  But although Alaska provided a second lower peak in the early to mid 1980s, the trend in US oil production has been decisively downward since the early 1970s, as oil production failed to be replaced by new discoveries.

But then it was discovered that by using horizontal drilling and hydraulic fracturing, economic quantities of gas could be extracted from vast shale layers.  Drilling took off first in the Barnett shale around Ft. Worth, Texas.  It then took off in the Haynesville and Fayetteville shales of Louisiana and Arkansas.  It was discovered that the Marcellus shale in Appalachia  was perhaps the most economic shale region, although it lacked some of the infrastructure that the southern Mid-West enjoyed, delaying development.  The same techniques were applied to “tight gas” regions as well, like the Permian Basin of West Texas, and the Anadarko Basin of the Central Plains.  This new type of gas drilling came about at the same time that conventional gas production was declining, and import terminals for expensive liquefied natural gas were being built.  The high prices created something of a euphoria around the shale gas producers.  One of the most early shale gas companies, Chesapeake Energy, spiked from $10 per share in 2003 to $65 per share in 2007 before the gas price collapsed in the financial crisis.  

 Note that these projections are a bit silly.  Shale gas production will match demand, and if we were to start exporting LNG in significant quantities, or shift to gas as a transport fuel, production would increase.  Production increases will be constrained by demand, and not the other way around, since the resource size is truly massive.

Subsequent to this rush into shale gas it was discovered that similar techniques could be applied to the production of “tight oil”, sometimes incorrectly referred to as shale oil.  EOG (formerly “Enron Oil and Gas”) drilled a few good wells in the Sanish Field of North Dakota in 2006.  Offset operators like Whiting petroleum quickly expanded the play, then at some point, the vast scale of the play was understood and dozens of companies rushed in.  Similar techniques were also applied to the very mature Permian Basin region of West Texas, reversing the long decline of the region since the 1970s.  The Permian is really a different beast than the Bakken though, since most of its production is through vertical wells that are hydraulically fractured and completed in multiple zones.  Horizontal drilling is increasing there, but it is still a relatively small part of overall Permian production.   After discovering the Bakken, EOG also discovered the Eagleford shale of South Texas.  Technically Petrohawk may have drilled the first real Eagleford well in 2008, but EOG recognized the huge areal extent and aggressively leased up hundreds of thousands of the best acres.  These three regions make up by far the bulk of the onshore US crude oil production growth.

One cause of tremendous confusion is the fact that hydrocarbon production has typically been grouped into the simplistic catagories of oil and gas.  Much of the shale gas is “wet gas” where large quantities of natural gas liquids (NGLs) are also produced.  As a result of this you see may occasionally see statements suggesting that the USA has passed Russia and Saudi Arabia to be the number one oil producer.  This is certainly not the case.  The USA produced about 6.5 mmb/d of crude oil in 2013, compared to 9.8 mmbd for Saudi Arabia and 9.9 mmbd for Russia.  But the US produces a massive quantity of natural gas liquids like ethane, propane, and butane.  If these are included (which they shouldn't be, because they are far less valuable, and have less energy content) then the USA produces more “liquids” than any other country.  Because much of the shale gas production also includes large quantities of these liquids production has increased an incredible pace.  But at the moment there are limited things to do with these liquids, and they can be hard to transport, the prices for some, especially ethane, have been driven down.  Very roughly speaking, Ethane trades for about $.30 per gallon, propane .90, butane 1.20, vs crude oil at $2.50.

See that the growth in natural gas liquids has massively outpaced crude oil production growth in the US.  The "total oil production" includes ngls like ethane, propane, and butane, whereas crude oil production on the left does not.