Oil prices are responding positively to an extension of the current OPEC/Non-OPEC production deal, especially because Nigeria and Libya agreed to cut production, but a monthly report by the Energy Information Administration (EIA) on U.S. production rising over 3% to 9.48 million barrels a day seemed to put a bit of a wet blanket on the market’s enthusiasm. Not to mention a million barrels of hedged shale oil output. Yet, a new study by MIT suggests that the EIA may be vastly overstating the potential for U.S. shale oil and if that is true, the potential for a major oil price spike in the coming years is a real danger. The report from MIT says that shale oil output may come short of EIA projections by a whopping 10% in the next 3 years. In other words, the data on shale may be all fracked up.
As reported by Bloomberg, researchers at MIT have uncovered one potentially game-changing detail: a flaw in the Energy Department’s official forecast, which may vastly overstate oil and gas production in the years to come. The culprit, they say, lies in the Energy Information Administration’s premise that better technology has been behind nearly all the recent output gains, and will continue to boost production for the foreseeable future.
Yet, the study says according to Bloomberg “That’s not quite right”. Instead, the research suggests increases have been largely due to something more mundane: low energy prices, which led drillers to focus on sweet spots where oil and gas are easiest to extract”.
“The EIA is assuming that productivity of individual wells will continue to rise because of improvements in technology,” said Justin B. Montgomery, a researcher at the Massachusetts Institute of Technology, and one of the study’s authors. “This compounds year after year, like interest, so the further out in the future the wells are drilled, the more that they are being overestimated.”
Extrapolating from field studies Montgomery and his colleague Francis O’Sullivan conducted in North Dakota’s Bakken shale deposit, the research suggests that total U.S. oil and natural-gas production from new wells could undershoot the EIA estimate by more than 10 percent in 2020. Things would get progressively worse each year after that as wells in various sweet spots are exhausted and technology fails to close the gap. “The same forecasting methods are used in other plays in the U.S., and the same dynamic is likely to be present,” Montgomery added.
