Over the last five years, Americans have enjoyed consistently low oil and gas prices thanks to a massive uptick in the production of oil and gas produced from shale in the U.S. This industry growth has enabled the country to play an increasingly important role in global and domestic energy markets. But how long will these low prices and high productivity levels last? The answer is of great importance for matters like the economy and national security – not to mention the price you pay for gas.
If you look at our current production levels, you might think the good times will last for quite a while. The U.S. is now considered by some to be the world’s “swing producer” of shale oil and gas. In North Dakota’s Williston tight oil basin, crude oil production grew from 98,000 barrels a day in 2005 to 1,174,000 barrels a day in 2015. As a result, the U.S. power sector has drastically increased its reliance on domestically produced natural gas, especially from shale.
A lot of credit for this industry growth is going to technology. Many people say that the technology used to get the resources out of the rock – and the subsequent technology developments – are to thank for the gains we’ve seen in well productivity. But how much can we really link to technology versus the location of the wells?
Looking at this question in a recent study, we found that the oil and gas business is just like real estate. It’s all about location, location, location. Where you drill matters, but in the shale business it matters even more.
We looked at data from the Williston Basin during a 42-month period starting in 2012 to quantify the extent to which improvements in well productivity have been associated with technology as opposed to changes in development location. Using five different regression models, we found that the impact on technology on well productivity is greatly over-estimated. In fact, our study showed that the portion of improvement that came from technology is over-estimated by about 50%. This means that a great deal of the time, the operator was just drilling in the right spots.
A major takeaway from this study is that we need to be careful about our forecasts of oil and gas productivity. We can’t assume that the low cost and high productivity levels will continue, as productivity is driven by drilling in the right acreage. At some point, that acreage will dry up regardless of the technology.
Oil and gas companies may want to rethink their strategies. Instead of hiring expensive specialists for their technology, they should consider using simpler completion strategies that could save a lot of money without impacting productivity.
The value of acreage could significantly change as well. Currently, oil companies pay huge sums of money for the rights to drill in certain locations. They essentially make bets based on the assumption that the technology can deliver certain productivity levels. But our data shows that those levels are significantly over-estimated. There are billions of dollars at stake!
Operators ultimately need to understand how the balance of value flows between the actual quality of the rock and how they can extract oil out of the rock through the technology used for completion. Our study allows them to think about this relationship to get the most bang for the least buck. They are better off spending more on good acreage and less on the bells and whistles of the completion technology.
On the government side, we need to revise our forecasting models because it’s likely that we will have a much steeper supply curve in the future. If we make national economic, policy, and security decisions based on today’s incorrect assumptions, we are in for a nasty shock when it turns out that we can’t produce the volume of oil we need at the price we expected.
By Francis O’Sullivan, a senior lecturer at MIT Sloan and director of the MIT Energy Initiative. He is the coauthor of Spatial variability of tight oil well productivity and the impact of technology” with MIT Engineering PhD student J.B. Montgomery.
Photo Credit: Mike Mozart