Sapping the sweet spots: How long will US energy boom last?

In his 2012 State of the Union address, President Barack Obama said that the U.S. had a supply of natural gas “that can last America nearly 100 years.”

But that unbridled optimism, shared by the natural gas industry as well as politicians who want to see the U.S. become more energy independent, is worrying a growing group of activists and analysts who say U.S. oil and gas production may start declining in a matter of years as drillers run out of sweet spots in U.S. shale reserves and are forced to explore less productive — and less lucrative — regions.

“Most of the wells right now are going into sweet spots,” said David Hughes, who authored a report released this week on the future of oil and gas production from the Post Carbon Institute, a green energy think tank. “You’re going to have to go into other parts of the reservoir eventually.”

He says more pessimistic observations have for years been swept under the rug, as the recent flood of untapped oil and gas made accessible by newly popularized technologies like hydraulic fracturing has buoyed the spirits of fossil fuel optimists. These optimists believe the U.S. oil and gas boom could create hundreds of thousands more jobs, cut dependence on foreign oil and even use U.S. energy sources to leverage power in diplomatic battles — as long as the country manages to keep producing gas and oil at the current rate for decades to come.

Their claims have been bolstered by the U.S. Energy Information Administration (EIA), a part of the Department of Energy tasked with analyzing and predicting energy trends. Most of the EIA’s reports see a bright future for oil and gas, especially shale gas and shale oil, otherwise known as tight oil. The agency predicts U.S. reserves will last for decades more.

Those rosy predictions have the potential to seriously affect U.S. policy and economics. In recent years, there has been a push to end the United States’ oil export ban so producers can sell domestic oil to Europe and Asia. Furthermore, companies have spent billions building out a network of pipelines and gas export plants that makes financial sense only if the natural gas boom continues, and the Obama administration has centered its energy policy on the idea that natural gas will remain cheap and abundant for years.

But the relentless upbeat nature of the U.S. government’s predictions may mask a more complicated truth about oil and gas development. No one knows exactly how much oil and gas will be accessible in the future, and some people say it’s a lot less than what the government and industry think.

The Post Carbon Institute report suggests that while the U.S. does have a lot of shale oil and gas, the majority of it may be too deep and too expensive to drill.

The report is based on an analysis of the productivity of thousands of wells in the most productive U.S. shale regions. Shale is a kind of rock that can hold oil and gas and can broken up through a variety of methods. One of the most popular, hydraulic fracturing (also known as fracking), involves blasting a mixture of sand, water and chemicals thousands of feet into the ground to break up the rock and force the oil and gas in it to the surface. Shale oil and gas is responsible for ushering a new era of energy development in the U.S., catapulting the country to becoming the world’s biggest oil and gas producer in just a matter of years.

But Hughes says that revolution could come to a grinding halt.

According to his report, oil development in tight oil plays, which includes the Bakken formation — the shale field that brought about an economic boom in North Dakota — will go into terminal decline before 2020.

From 2013 to 2040 (the furthest EIA estimates go), the report predicts, oil production will be 28 percent lower than EIA estimates. In the most productive regions — the Bakken in North Dakota and Montana and the Eagle Ford in Texas — oil production could be a tenth of what the EIA estimates by 2040.

In gas-producing regions, like the Marcellus in Pennsylvania and Ohio, production could be an average of 39 percent lower than the EIA estimates from 2013 to 2040 and a third of what the agency estimates in 2040.

The wildly differing predictions are due not to how much oil and gas is in the ground but to how much is economically feasible to extract. Hughes makes more pessimistic assumptions about the expense and technological difficulty of accessing gas and oil in the outskirts of the shale regions, where oil and gas producers will likely start exploring once the sweet spots have dried up.

“The industry, the government and academia have all promoted the idea that shale gas and oil will be abundant and cheap forever,” said Bill Powers, an energy analyst who works for oil and gas companies. “But there are just certain laws of physics that you aren’t going to overcome.”

He said that even if technologies are invented to access the deeper and less productive shale, they would likely be prohibitively expensive, given that the price of oil is falling rapidly, recently dipping below $90 a barrel.

“When you go out into the fringe areas, it’s not going to be worth it to drill unless oil is $130 a barrel,” he said.

The EIA would not return multiple calls for comment for this story. The industry and its supporters say EIA estimates are more accurate than Hughes’ and Powers’.

“Aside from [Hughes’] activist orientation ... his assumptions are just flat out not true,” said Steve Everley, a spokesman for Energy in Depth, a pro–oil and gas publication run by the Independent Petroleum Association of America, an industry trade group.

He pointed to an Energy in Depth article that says production is rising across the U.S. and predicts technological advances will make it easier to access pockets of oil and gas.

“Saying [oil and gas] is there but we’re not going to get it out — that’s utter bullshit,” said Philip Verleger, an energy analyst. “As technological progress moves forward, shale that’s not accessible now will become accessible in the future.”

But this wouldn’t be the first time the EIA’s projections have been off by wide margins. Earlier this year, the agency cut its estimates about the amount of recoverable oil in California’s Monterey shale by 96 percent. And in 2012, research from the U.S. Geological Survey forced the EIA to cut its estimates of how much shale was accessible in Poland by 99 percent.

Meanwhile, falling oil prices have even the oil cartel OPEC questioning the future of shale development in the U.S. “If prices stay at $85, we will see a lot of investment, a lot of oil, going out of the market,” OPEC Secretary General Abdalla el-Badri said recently.

The implications of a sharp decline in oil and gas are wide-ranging. Economies reliant on oil and gas production could falter, national and international policy would have to shift, and infrastructure would likely go unused, straining pipeline and other oil and gas companies.

But at least for now, some are saying the panic isn’t worth it. Industry projections and the EIA’s data may be overly positive, but Hughes and others’ analyses rest on a set of pessimistic assumptions. The truth likely lies somewhere in between.

“[Shale development] is good and has a stimulative effect on the economy,” said Shashank Mohan, an analyst at the Rhodium Group, an economic consultancy. “But the people saying this will fundamentally change the way people live — I don’t think that’s correct. It’s just not as crazy as people say.”