The energy independence mirage

The new 2012 World Energy Outlook from the International Energy Agency leads with the statement: “The global energy map is being redrawn … by the resurgence of oil and gas production in the United States.” The IEA goes on to project that by 2020, the U.S. will overtake Saudi Arabia to become the world’s largest oil producer. And by 2030, the IEA has North America as a major oil exporter. New technology involving horizontal drilling and hydraulic fracturing is unlocking tight oil and gas shale deposits, leading to this optimistic forecast.

This latest vision of an American golden age of energy independence is receiving wide acceptance and support. Ed Morse, head commodities analyst at Citibank, summed it up in the Wall Street Journal. “The United States,” he said, “has become the fastest-growing oil and gas producer in the world, and is likely to remain so for the rest of this decade and into the 2020s. North America is becoming the new Middle East.”

Gov. Mitt Romney chimed in at a campaign stop in New Mexico. “We’re not going to have to buy oil from the Middle East,” he said, “or any other place we don’t want to. We may even be an exporter of energy, considering all our resources.”

Sadly, U.S. energy independence is still as much of a mirage as it was in 1973 when President Richard Nixon called for a “Project Independence.”

The problem for natural gas is illustrated in the large U.S. fracking regions such as the Barnett, Fayettville and Haynesville reservoirs. A report from geologists Lynn Pittinger and E. Berman shows that most of these plays are not commercial at current natural gas prices because of the high cost of the wells and land plus the short life and limited output of the typical well.

Their analysis indicates that the estimated ultimate recovery per well is approximately one half of the values commonly presented by operators in the major reservoirs. The average gas EUR per well for the most active operators is 1.3 Billion cubic feet in the Barnett, 1.1 Bcf in the Fayetteville and 3.0 Bcf in the Haynesville shale gas plays. At current gas prices, total revenue from the average well is much less than the $6 to $10 million capital cost of a properly cased fracking well and its operating and land lease costs.

In the most productive reservoir, the Haynesville, a Louisiana State University study reports that the average well completion declines rapidly and produces 80 percent of its expected recovery during the first 2 years of production. Thus, estimates of the total U.S.  natural gas resource could be at least double the actual, economically recoverable total.

As to actual crude oil, U.S. production in 2011 was 5.7 million barrels per day, and it will reach about 6 MMbd in 2012. Our demand is running 18-19 MMbd. Our output is a little over half the crude oil output of the largest producers, Russia and Saudi Arabia, and it is not likely to approach them in the future. We may even be passed in a few years by Iraq, whose vast reserves are more accessible to conventional drilling.

The limits of fracking for natural gas also apply to U.S. crude oil, although the higher relative price of oil improves the economics for oil production. But the total recovery percent from tight oil reservoirs like the Bakken Shale in the Williston Basin is in the single digits. There are also significant environmental issues with fracking wells, including high water usage and possible contamination of ground water. We do have very large new oil discoveries in the Gulf of Mexico. But they are under salt at great depths, where high temperatures and pressure make recovery difficult.

As Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas puts it, “We are no Russia or Saudi Arabia when it comes to producing oil per unit time.”

Conservation and efficiency have cut U.S. oil consumption by nearly 2 MMbd since 2005. Let’s not be sidetracked from those efforts by misplaced energy independence euphoria.