The Fallacy Of U.S. Oil Dominance

Phot0: Exxon In Eddy County, New Mexico, Courtesy of The Journal of Petroleum Technology

U.S. Tight Oil Reserves Are Here Today, Gone Tomorrow

United States crude oil production from conventional sources peaked in 1970 at the rate of 10.05 MM BOPD and this production rate corresponds perfectly with a 1970 peak estimate of 39.4 billion barrels of proven developed producing (PDP) oil reserves. We estimate this conventional production decline has slowed since 1996 to somewhere in the vacinity of 4.3% annually, this in spite of the onslaught of the U.S. tight oil phenomena beginning in 2009-2010 and capital to the the onshore and offshore GOM sectors essentially having dried up almost completely. In the late 1950's there were 2,200 rigs drilling vertical, conventional assets in the US, today there are 18 nationwide (Baker Hughes).

We estimate PDP reserves for conventional resources in the US at the close of 2022 to still be 18-22 billion barrels, a decline of only 50% since the peak in 1970. Today, almost 55 years later, conventional reserves still provide our nation with a reserve to production (R/P) of 11 years.

The increase in U.S. PDP reserves since 2010 is 95% related to the onslaught of the tight (shale) oil phenomena in the Williston, Western Gulf Coast/Maverick, DJ and Permian Basins. 2022 PDP reserve estimates (last available) are 48.3 billion barrels, an increase of 9% over 2021.

Tight oil PDP reserves are essentially "booked" and, or reported to the Security Exchange Commission (SEC) and eventually to the Energy Information Administration (EIA) in 450,000-550,000 barrel increments per tight oil well drilled. Those reserves estimates are determined by the use of sector generated type curves for similar tight oil wells and unaudited before reporting. Some analysts, left, suggest these type curves, and therefore PDP reserves, may be exaggerated by 30% or more.

Tight oil PDP reserves decline at the rate of 85+% the first 32 months of a horizontal well's production life. If 50% of the 2022 PDP reserve estimate by the EIA was based on unconventional shale oil growth, in 2024 those "reserves" have declined something in the order of 80%. We estimate that at any given time in unconventional shale oil reserve estimates the actual reserve to production ratio is 3.3 years. Less if indeed these reserves are exaggerrated.

Sixty three percent (63%) of total U.S. crude oil and condensate production now comes from HZ tight oil wells. The decline of these wells is horrific, so much so that 83-85% of all HZ tight oil wells drilled today do nothing more than offset annualized decline of tight oil produced from the previous year. Our nation's oil future is now literally hand to mouth.

So steep tight oil decline, if no new tight oil wells were drilled starting tomorrow, current tight oil production in the US of 8.6 MM BOPD would decline to < 1.0 MM BOPD in three years. That's not going to happen, of course, but its good to have some perspective on how precarious the United State's role is in now as the biggest oil producing nation in the world.

The U.S. Has Less Than Four Percent Of the Worlds Oil Reserves

Roughly 87% of all US tight oil production in the U.S. comes from four major shale oil basins, the Williston, DJ, Permian and Western Gulf Coast/Maverick Basins (Eagle Ford).

The only shale oil basin in the country still growing is the Permian. The Williston and WGC Basins have all plateaued and are stuggling to maintain. The DJ Basin is in significant decline.

The Permian is America's last refuge for oil production. It produces 5.6 MM BOPD. 86 % of all Permian Basin tight oil production comes from four benches in the Delaware Basin, and 4 1/2 counties, and three primary benches and 4 1/2 counties in the Midland Basin. The current productive limits of the Permian HZ play is actually quite small; only 12% of total Permian HZ production comes from outside these 9 counties (Enverus, Novi, TRRC).

The United States has only 4% of the world's remaining PDP reserves. Less if indeed HZ shale oil reserves have been exaggerated.

The Middle East, on the other hand, produces 21.6 MM BOPD of oil (declining at the rate of roughly 5-6.5% annually) from ten countries in the region, right.

The Middle East controls 47.6% of the worlds proven developed oil reserves.

These ten countries in the Middle East are arresting annual decline rates and discovering new fields (Kuwait, Al-Nokhatha; Iraq, Eridu; UAE, Upper Sakum; KSA, Four un-named new fields in the EQ of the Eastern Province) with a total rig count of 342...

The four major shale oil basins in the U.S. from the Candian border to the Rio Grande River are grinding away with 421 rigs, 294 rigs (70% of total) in the Permian Basin alone (Baker Hughes).

The Runway For U.S. Oil Dominance

In 2020 all U.S. shale oil basins declined 20% or more, save the Permian that declined 10%. The Williston and WGC Basins never recovered, only the Permian Basin is still growing and only in the first half of 2024 does HZ tight oil production from the Permian appear to be plateauing.

Rig counts are down in the Permian and because of lag time between spudding and first published reporting of production (6-8 months) we believe Permian production is set to fall in the 2nd half of 2024 and that decline may rock some people's boats.

Permian Basin wells are less productive than they were just four years ago on an initial potential plus 365 day metric (IP365) and we attribute that to over-drilling wells too close to each other, rising gas-to-oil ratios and ensuing pressure depletion. A recent "dash for cash" with longer laterals and more proppant loading per peforated foot is resulting in much steeper decline rates in the Midland Basin, left; in 2019 those first year declines were 47%, at the end of 2023 they were 71%. Estimated ultimate recoveries (EUR's) from current wells appear to be headed lower than they were in three previous years.

We see well productivity falling in the Delaware Basin, on the same IP365 metric, for the exact same reasons. Overdrilling and pressure depletion.

As associated natural gas becomes a bigger component of the production stream, gas prices are low and likely going lower as more associated gas from the Permian comes on line, with no end market. We believe this is effecting well economics negatively and is one of several reasons rigs counts in the Basin are down 15% from the start of 2023.

Declining drilling inventory in core areas, particularly the ability to drill longer laterals in densely populated sweet spots, and produced water disposal issues Basin wide are other reasons for low rig counts. The United States Geological Survey reports a 4.9 magnitude earthquake near Snyder, in Scurry County on July 22nd, felt in Dallas, Fort Worth. It is most certainly produced water disposal related.

The era of production growth over profit is over. In the absence of outside money for capital exenditures the tight oil sector appears to have found the level of rigs it can support from net production revenue.

How big of a problem is remaining drilling inventory and how much more runway does the Permian Basin have to exert oil "dominance" on the rest of the world?

It depends on which data-sell company you trust. Rystad, for instance, says there are 16 more years of HZ locations to be drilled in the Permian Basin, most of them in the Midland Basin where 25,000 HZ wells aready exist, some of them spaced less than 500 feet apart. Rystad does not define what "commerical inventory" means economically, nor does it say how close these new wells will need to be drilled to each other to reach estimated remaining inventory.

Novi, far more reliable, suggests there are nine years of drillable locations left in the Midland Basin alone, as an example, below. We've got a problem with this scnario as well, however, as it appears the vast majority of its 25,ooo more drillable locations lie in Tier 3 and 4 fringe areas in N.E. Howard, Glasscock, Eastern Reagan, Western Irion and even Crockett Counties.

The Southeast portion of Midland County (red) is very gassy with high initial GOR's that get higher. We do not believe at current oil prices ($74 net at the WH) and current natural gas prices (0-<40 cents net at the WH) wells in these fringe areas are capable of 2 year payouts, even 3 year payouts. We do not know, similarly to Rystad's estimates, what spacing is used in this estimate. If it is anything less than 700-800 feet between wells, we're not buying it.

A reminder please about well economics in the Midland Basin, the two largest producers, having merged with Pioneer and Endeavor, have now effectively added $3.0-4.0 MM dollars to single well leasehold costs, In other words, future well costs in the Midland Basin are no longer $8-9 MM they are closer to $11-12 MM dollars each. Those additional leashold costs can be diluted, of course, for locations with stacked laterals. All Permian HZ well economics much carry the burden of servicing, and ultimately paying down, ALL long term debt as well as retirement costs for depleted wells. Any so called, "breakeven" price estimates must include debt and retirement costs. Same with the Delaware Basin, all shale oil basins in the U.S; retirment costs are a liability, paid from net production revenue.

The Bottom Line

We conclude that the "Drill Baby, Drill" battle cry is a domestic hydrocarbon policy blunder of immense proportions. Any additional production growth from the Permian Basin will be exported to foreign countries because U.S. refinery absorption of light, tight oil (LTO) is limited to only 4.8 MM BOPD (Bureau of Economic Geology). Additional growth will leave America, never to be seen again, and not help the average American consumer at the pump, nor the burner tip. Oil prices are set by the world market, not a U.S. market.

While LTO exports have increased, crude imports of better quality oil into the U.S. have risen from 5.8 MM BOPD in 2020 to 7.04 MM BOPD in June of 2024 (EIA, Rystad).

The U.S. does NOT have the remaining affordable tight oil resources left in the Permian Basin, or any other basin in the country, to use as a foreign policy tool or to "dominate" the rest of the world, either to control the price of oil or affect world geopolitics.

Simply put, we cannot proivde the rest of the world with cheap U.S. oil. When the Permian Basin is depleted that is all she wrote for America's oil resources.

More US tight oil production from a "drill baby, drill" plan will, in fact, result in lower oil prices, and much lower natural gas prices, will negatively affect the tight oil sectors finances and make it harder for the sector to provide a secure source of American oil in the future.

Our nation's internal long term energy security depends entirely on affordable, readily available tight oil from the Permian Basin. The United States is the largest consumer of crude oil and condensate in the world by a significant margin. We, America, needs the stuff.