Two Charts and Their Portent

David Archibald
Last week brought news that the Energy Information Agency (EIA) has reduced its estimate of recoverable oil from the Monterey Shale in California from 13.7 billion barrels to 600 million barrels. To put that in perspective, the U.S. consumes 6.9 billion barrels per annum and produces 2.7 billion barrels. The shortfall of production relative to consumption is made good by spending $400 billion a year-odd on imported oil. While the initial estimate for the Monterey Shale can be put down to hubris, there is another tight oil formation in which the EIA’s reserve estimate looks quite good given the vagaries of geological science. Specifically, their estimate of 3.2 billion barrels recoverable from the Bakken Formation centred on North Dakota.  Why we now know that the EIA estimate for the Bakken is in the ballpark is because of these two figures produced by a retired French oil geologist by the name of Jean Laherrere:

First a short primer on logistic decline plots (the upper graph is an example of one). King Hubbert was a Shell Oil geologist famous for making a prediction in 1956 that U.S. oil production from the lower 48 states would peak in 1970. The U.S. Geological Survey at the time was predicting that the U.S. would ultimately produce three times as much oil as Hubbert’s forecast. U.S. domestic production duly peaked in 1970, as Hubbert had predicted.  He not only picked the peak correctly, his prediction of the rate of decline after the peak was very close to what actually happened.

To make that prediction, Hubbert used an analytical method called the logistic decline plot -- a way of estimating future oil production by graphing historical oil production. This methodology is based on the theory of the rate of extraction from a finite resource originally developed by the early nineteenth-century Belgian mathematician Pierre Francois Verhulst (1804–1849). After some initial volatility, the trend settles down to a straight line. On the logistic decline plot, the point at which that straight line intersects the horizontal axis is the total amount of oil that will be produced from the system. And halfway along the horizontal axis is the year of peak production and the level at which production will peak. It is a very simple and powerful methodology.

What the upper graph is telling us is that the Bakken has produced nearly half of the 2.4 billion barrels that it will ultimately produce. The halfway point will be reached in 2015 and then production will decline as fast as it rose, as shown in the lower chart.  At near to one million barrels per day, the Bakken is producing about 5% of U.S. oil consumption. But its greater significance is that there is currently a perception that the rise in Bakken production of the last few years would continue for at least a few more years yet and then plateau, helping to make the U.S. energy independent and ultimately a net exporter. There has been wild talk of selling the Strategic Petroleum Reserves because it is no longer needed. The financial community has swallowed these cornucopian visions whole with NYMEX futures trading at $81.48 per barrel for December 2022. That equates to a current day price of $65 per barrel assuming inflation at 3% per annum. 

Another sign that the Bakken is no cornucopia is that the number of drilling rigs has fallen from its peak two years ago. Natural gas produced with the Bakken oil has largely been flared to date because the small amount of gas along with the short production profiles of the wells has made it uneconomic to attempt to connect them to pipelines. Starting 1st June, that situation will change with a requirement that companies submit gas capture plans with their drilling permit applications. That requirement, coming when the resource is half-depleted, is likely to accelerate the production decline.

Those two graphs mean that perceptions of American energy abundance will do an abrupt about face in the next twelve months or so. The EPA restrictions on carbon dioxide will be hitting about the same time. 

David Archibald, a Visiting Fellow at the Institute of World Politics in Washington, D.C., is the author of  Twilight of Abundance: Why Life in the 21st Century Will Be Nasty, Brutish, and Short (Regnery, 2014).  

Last week brought news that the Energy Information Agency (EIA) has reduced its estimate of recoverable oil from the Monterey Shale in California from 13.7 billion barrels to 600 million barrels. To put that in perspective, the U.S. consumes 6.9 billion barrels per annum and produces 2.7 billion barrels. The shortfall of production relative to consumption is made good by spending $400 billion a year-odd on imported oil. While the initial estimate for the Monterey Shale can be put down to hubris, there is another tight oil formation in which the EIA’s reserve estimate looks quite good given the vagaries of geological science. Specifically, their estimate of 3.2 billion barrels recoverable from the Bakken Formation centred on North Dakota.  Why we now know that the EIA estimate for the Bakken is in the ballpark is because of these two figures produced by a retired French oil geologist by the name of Jean Laherrere:

First a short primer on logistic decline plots (the upper graph is an example of one). King Hubbert was a Shell Oil geologist famous for making a prediction in 1956 that U.S. oil production from the lower 48 states would peak in 1970. The U.S. Geological Survey at the time was predicting that the U.S. would ultimately produce three times as much oil as Hubbert’s forecast. U.S. domestic production duly peaked in 1970, as Hubbert had predicted.  He not only picked the peak correctly, his prediction of the rate of decline after the peak was very close to what actually happened.

To make that prediction, Hubbert used an analytical method called the logistic decline plot -- a way of estimating future oil production by graphing historical oil production. This methodology is based on the theory of the rate of extraction from a finite resource originally developed by the early nineteenth-century Belgian mathematician Pierre Francois Verhulst (1804–1849). After some initial volatility, the trend settles down to a straight line. On the logistic decline plot, the point at which that straight line intersects the horizontal axis is the total amount of oil that will be produced from the system. And halfway along the horizontal axis is the year of peak production and the level at which production will peak. It is a very simple and powerful methodology.

What the upper graph is telling us is that the Bakken has produced nearly half of the 2.4 billion barrels that it will ultimately produce. The halfway point will be reached in 2015 and then production will decline as fast as it rose, as shown in the lower chart.  At near to one million barrels per day, the Bakken is producing about 5% of U.S. oil consumption. But its greater significance is that there is currently a perception that the rise in Bakken production of the last few years would continue for at least a few more years yet and then plateau, helping to make the U.S. energy independent and ultimately a net exporter. There has been wild talk of selling the Strategic Petroleum Reserves because it is no longer needed. The financial community has swallowed these cornucopian visions whole with NYMEX futures trading at $81.48 per barrel for December 2022. That equates to a current day price of $65 per barrel assuming inflation at 3% per annum. 

Another sign that the Bakken is no cornucopia is that the number of drilling rigs has fallen from its peak two years ago. Natural gas produced with the Bakken oil has largely been flared to date because the small amount of gas along with the short production profiles of the wells has made it uneconomic to attempt to connect them to pipelines. Starting 1st June, that situation will change with a requirement that companies submit gas capture plans with their drilling permit applications. That requirement, coming when the resource is half-depleted, is likely to accelerate the production decline.

Those two graphs mean that perceptions of American energy abundance will do an abrupt about face in the next twelve months or so. The EPA restrictions on carbon dioxide will be hitting about the same time. 

David Archibald, a Visiting Fellow at the Institute of World Politics in Washington, D.C., is the author of  Twilight of Abundance: Why Life in the 21st Century Will Be Nasty, Brutish, and Short (Regnery, 2014).