The whole shale gas story has North America’s natural gas producers feeling like they’ve been hit in the head by a fastball of change. Those in the industry who are partial to finding oil may not believe that the same fastball can hit them too. But it may be time to set aside any preconceived notions. Leading indicators on the oil side of the business bring to mind the pithy wisdom of baseball legend Yogi Berra, “It’s déjà vu all over again.”

Like natural gas, oil production in North America may soon reverse a longstanding downtrend and begin growing again.

Less than a decade ago, rising natural gas prices combined with innovative drilling and completion technologies provided the catalyst to start delivering large volumes of gas from resources that were previously considered unviable. Aggressive land purchases, ongoing innovation, economies of scale and access to billions in foreign capital turned a once-sleepy trend into today’s new reality of omnipresent gas supply and lower prices – something unthinkable less than five years ago. Since then we’ve witnessed the transformation of the entire continent’s natural gas supply and the story is far from over. Are the same series of events showing themselves in the oil business?

The Barnett Shale was the headline natural gas play, which had the right geology to be an engineering laboratory for new horizontal drilling and hydraulic fracturing technologies. Production volume from this prolific area in Texas went from zero to 2.2 Bcf/d in six short years between 2000 and 2006. The secret sauce was out and the technology proliferated rapidly to other plays. Soon Haynesville, Fayetteville, Woodford and Marcellus became household names in the business too, all collectively contributing to a 20% bump in US natural gas production in a few short years.

The oil equivalent to the Barnett Shale is the Bakken oil play in North Dakota and Montana, which also extends into southern Saskatchewan. Just like the Barnett story, attractive prices and new technology were the initial catalysts. And though the Bakken story lagged the Barnett by four years, the déjà vu is now showing itself to be quite vivid. Oil production is growing rapidly after an initial learning phase. In fact, Figure 1 shows that the growth in oil production from the Bakken has followed a hauntingly similar path to the Barnett when the latter is time shifted forward four years, converted to Barrels of Oil Equivalent (BOE), and overlain.

What’s really provocative is that only 2,400 wells in the Bakken have taken the play’s production from near zero to 250,000 barrels a day in six years, with the bulk of the volume growth in the past 18 months. Admittedly, the Bakken has geology that is very conducive to horizontal drilling and hydraulic fracturing, just like the Barnett. But North America is a big place and the déjà vu is getting stronger. Compelling oil economics at $80.00 per barrel has industry moguls paying big dollar premiums for large tracts of oil-bearing leases, signing up foreign joint-venture dollars, and pointing their high-tech drill bits and fracturing equipment at previously unviable light sweet crude. Over the last 12 months, the horizontal rig count targeting oil plays in the US has more than tripled, from 88 to 303. Newer, not-yet-headline oil plays like the Eagleford, Avalon, Niobrara, Tonkawa and Bone Spring, to name a few, are sure to be tomorrow’s big news if they perform anything like the Bakken. No doubt, at least a few of them will; already the Eagleford is being touted as having more potential than the Bakken.

The money is pouring into new oil plays too, just as it did for shale gas. Last week China’s state-owned oil company CNOOC agreed to enter into a $US 2.2 billion joint venture in the Eagleford with Chesapeake Energy, one of the original protagonists in the shale gas story. Some are suggesting that the Eagleford play will be producing between 400,000 and 500,000 barrels of oil per day before the decade is out.

Here in oil-endowed Alberta, I showed last week how year-to-date land sales topped a record $1.8 billion, mostly on the back of oil leases. The broadly distributed Cardium play is the headliner, but those chasing black gold already know the list of other plays waiting to be drilled up is getting longer and longer, as company after company diverts activity from hardly-profitable natural gas to highly lucrative oil. Saskatchewan too is endowed with Bakken; for example in the Estevan area production has gone from zero to 50,000 B/d in half a decade. It’s not a lot yet, but oil momentum in the Western Canadian Sedimentary Basin is just starting up.

If the trends on the oil side continue (increasing land sales, accelerating investment, rising rig activity, improving productivity), and if even half of the nascent plays each grow to a couple hundred thousand barrels a day of new production, it’s not too early to start thinking that North American oil production could rise by significant volumes, perhaps up to a million new barrels a day before the decade is out. That would come as a big surprise to everyone (except maybe to those who have lived the shale gas).

In the world of conventional oil (excluding oilsands), North America has long been a region assumed to be in an irreversible decline ever since output peaked in 1970s. But budding trends once seen clearly on the natural gas side of the business are now repeating themselves like crisp déjà vu on the oil side. I don’t believe oil prices will be falling any time soon, but shale gas has taught us that it’s unwise to take any historical assumption for granted. It’s certainly not too early for oil producers to be watching out for fastballs of change, because as Yogi Berra once put it, “The future ain’t what it used to be.”
Source: The Calgary Herald

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