NEW YORK — The path toward U.S. energy independence, made possible by a boom in shale oil, will be much harder than it seems.
Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60.
Consider Sanchez Energy Corp. The Houston-based company plans to spend as much as $600 million this year, almost double its estimated 2013 revenue, on the Eagle Ford shale formation in south Texas, which along with North Dakota is one of the hotbeds of a drilling frenzy that’s pushed U.S. crude output to the highest in almost 26 years. Its Sante North 1H oil well pumped five times more water than crude, Sanchez Energy said in a Feb. 17 regulatory filing.
“We are beginning to live in a different world where getting more oil takes more energy, more effort and will be more expensive,” said Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin.
Drillers are pushing to maintain the pace of the unprecedented 39 percent gain in U.S. oil production since the end of 2011. Yet achieving U.S. energy self-sufficiency depends on easy credit and oil prices high enough to cover well costs. Even with crude above $100 a barrel, shale producers are spending money faster than they make it.
The U.S. oil industry must sprint simply to stay in place. U.S. drillers are expected to spend more than $2.8 trillion by 2035 even though production will peak a decade earlier, the IEA said. The Middle East will spend less than a third of that for three times more crude.
Shale wells can vary in price. Chesapeake Energy Corp. will spend an average of $6.4 million each this year, according an investor presentation. Houston-based Goodrich Petroleum Corp. will spend up to $13 million on some of its wells, Robert Turnham, president and chief operating officer, said in a Feb. 20 earnings call.
Bullish analysts and oil executives have reason to crow. While drilling in Iraq could break even at about $20 a barrel, output will be limited by political risks, Ed Morse, global head of commodities research at Citigroup in New York, said in a January report. By contrast, the break-even price in U.S. shale is estimated at $60 to $80 a barrel, according to the IEA. The price of a barrel hasn’t dipped below $80 since 2012 and has stayed above $90 since May. Costs in the United States will continue to fall as drillers get faster and improve results, Morse said.
“The U.S. oil and natural gas renaissance is receiving significant investment because return on investment is good and competitive with other opportunities,” Rick Bott, president and chief operating officer of Oklahoma City-based Continental Resources Inc., a pioneer of shale drilling, said in an email. “We’re confident that continued technological advancements will keep the Bakken and other plays at the forefront of investment for the foreseeable future.”
The boom’s boosters have given rise to the misconception that wringing oil and gas from shale can be easily replicated throughout the country, Patzek said. That isn’t the case, he said. Every rock is different.
“To sustain in the short term, the U.S. needs prices at $65 a barrel,” said Leonardo Maugeri, who’s researching the geopolitics of energy at Harvard’s Belfer Center for Science and International Affairs. . “That’s a critical level. Below that level, many opportunities will vanish.”