According to Goehring & Rozencwajg LLC, higher prices alone will not be enough to counteract geological realities, and the situation is comparable to the oil crisis of the 1970s.
Just a month before US President-elect Donald Trump begins his second term in the Oval Office, oil prices are fluctuating, reinforcing the sense that oil markets are waiting for him to take office.
Trump has repeatedly promised to push shale oil producers to increase production, even if it means risking bankruptcy for the operators. It is unclear how he intends to do that, however, since U.S. oil is produced by independent companies, not by a national oil company. Last month, Exxon Mobil (NYSE:XOM) Upstream President Liam Mullen dismissed the idea that U.S. producers would dramatically increase their output under Trump’s second term.
However, the production ambitions could be thwarted by an even bigger challenge: U.S. oil fields may be nearing the end of their life cycle. In an article titled “U.S. Shale Is Running Out,” one of the most popular energy news portals, Oilprice.com, quotes Goehring & Rozencwajg LLC, a fundamental research firm specializing in natural resource investments. According to it, U.S. shale oil production is in the early stages of a long decline, with depletion, not market dynamics or regulatory controls, the main culprit. Analysts had previously predicted that the explosive growth in production driven by the U.S. shale revolution would level off in late 2024 or early 2025.
The reality, however, could be worse. According to the EIA, shale crude production peaked in November 2023 and has since fallen by about 2%, while shale dry gas production peaked in the same month and has since fallen by 1%, or 1 billion cubic feet per day. And things are set to get worse, with Goehring & Rozencwajg’s model projecting even steeper declines in the future.
Investors are comparing the unfolding situation to the oil crisis of the 1970s. They recall that President Nixon responded to OPEC’s first oil crisis in 1973 by with the “Independence Project” to reverse the decline in U.S. production by deregulating and speeding up permitting. Oil prices jumped from $3.18 per barrel in 1973 to $34 per barrel in 1981, leading to a boom in drilling activity. As a result, the number of oil rigs in the U.S. jumped from 993 in 1973 to a staggering 4,500 by the end of 1981. Unfortunately, the increase in drilling failed to defy the natural law of depletion: by the end of 1981, U.S. crude oil production had fallen to 8.5 million barrels per day, a 15% decline from when Nixon launched his ambitious program.
Analysts note that U.S. crude oil production hit a low of 5 million barrels per day in 2010, even as prices hovered around $100 a barrel. Goehring & Rozencwajg calls this phenomenon the “Depletion Paradox” and warns that higher prices alone will not be enough to counter geological realities. The analysts quote legendary Shell Plc (NYSE:SHEL) geologist King Hubert:
“Every oil basin is a finite resource. The yield of every oil and gas field starts at zero, increases as production increases, and eventually reaches an upper limit that represents the total recoverable resource in the basin.”
Making matters worse, U.S. producers will have no incentive to get high prices under a second Trump administration. A new study by law firm Haynes Boone LLC revealed that banks are preparing for oil prices to fall below $60 per barrel by the middle of Trump’s new term.
Enhanced Oil Recovery
However, new technologies are increasingly likely to emerge that could boost U.S. oil and gas production, just as hydraulic fracturing revolutionized U.S. shale production two decades ago. A new study has found that injecting nearly depleted oil wells with CO2 could extend their production for decades. Calgary-based Senior Geologist Menwei Zhao conducted a study for the AAPG Bulletin on the use of CCS (carbon capture and storage) in enhanced oil recovery (EOR). He analyzed more than 22 years of production data from the Weyburn Midale oil basin in Saskatchewan, which has been receiving carbon dioxide injections since 2000, making it the world’s longest-running EOR project. Zhao concludes that the basin would stop producing oil by 2016. without CO2 injection, but that “enhanced oil recovery could extend the life of the basin by 39 or even 84 years.” While Zhao acknowledges that he focused on a specific project in Canada, he says he expects to see “similar results” for large-scale CCS projects around the world.
Zhao’s claims may not be an exaggeration. The Denver Unit CO2 EOR project in the Wasson oil field resulted in a nearly sevenfold increase in crude oil recovery after CO2 injection.
Crude oil recovery in U.S. oil fields is often divided into three distinct phases: primary, secondary, and tertiary (or enhanced) recovery. During the primary recovery phase, gravity, natural reservoir pressure, and artificial lift techniques are used to push oil into the well. This initial phase typically recovers only about 10% of the original oil in the reservoir (OOIP).
Secondary recovery techniques are used to extend the productive life of a reservoir, typically by injecting water or gas to displace the oil and force it toward a production well, typically resulting in the recovery of 20 to 40% of the OOIP.
However, much of the readily recoverable oil has already been extracted from U.S. oil fields, forcing producers to turn to various tertiary, or enhanced oil recovery (EOR) techniques. EOR technologies offer the prospect of eventually producing 30 to 60% or more of a reservoir’s OOIP.
Three main categories of EOR have proven commercially successful: gas injection, chemical injection, and thermal recovery. Gas injection is the most common EOR technology in the United States, accounting for nearly 60% of the country’s EOR production. Gas injection uses gases such as CO2, natural gas, or nitrogen to expand in a reservoir to force additional oil toward a production well, while other gases dissolve in the oil and help reduce its viscosity and improve its flow rate. CO2 injection has been used successfully throughout the Permian Basin in West Texas and eastern New Mexico, as well as in Kansas, Mississippi, Wyoming, Oklahoma, Colorado, Utah, Montana, Alaska, and Pennsylvania.
The U.S. Department of Energy is currently investigating new techniques that could significantly improve the economics and expand the application of CO2 injection to a broader group of reservoirs. The U.S. Department of Energy estimates that next-generation EOR with CO2 has the potential to produce over 60 billion barrels of oil that would otherwise remain trapped in the rock. It would take about 13 years for US producers to pump this volume of oil at the current rate of ~13 million barrels per day.