Could the U.S. energy revolution fall prey to the law of diminishing returns?
Oil depletion, or the rate at which a new production is sapped from existing wells, is a hot topic in energy circles. It was common fodder during the years where some analysts ominously warned about demand outstripping oil, but is rarely mentioned in the context of America's budding energy boom.
At least for now, depletion is not an immediate risk for a country that has only begun to scratch the surface of its oil and gas potential, and in an environment where global demand is expected to remain tame. Yet as the momentum toward U.S. energy independence accelerates, the depletion effect looms as a potential speedbump, some say.
"You've definitely experienced a slowdown in global production growth.It hasn't peaked but it's close to plateauing," said John Hummel,president and chief investment officer at AIS Capital Management. In addition globally exported oil is on the decline due in large part to higher consumption in exporting countries.
Given high depletion rates with tight oil production, Hummel is skeptical that the U.S. will achieve its stated goal of energy independence.
What follows from depletion is an endless quest by energy companies to discover new sources as existing wells yield less oil. Estimates of rates of depletion swing wildly – anywhere from two to twenty percent per year, according to analysts – but everyone agrees wells will yield less each year until they are completely exhausted.
ExxonMobil, the world's largest energy company, said in its 2012 annual report that it plans to invest some $190 billion worldwide on what it called "attractive long-term growth projects to bring new energy supplies to the market."
Yet the imperatives to keep economies greased with crude run headlong into concerns about environmental degradation, which have hamstrung development in the U.S. and key parts of the globe. In particular, fracking has come in for sharp protests, given the impact it's feared it has on the environment.
Additionally, skeptics point to low rates of worldwide production. Data from the Association for the Study of Peak Oil and Gas USA estimates that the net increase in global oil production is currently about one percent. The ASPO expects that to fall to zero before going negative by 2015.
"Slightly more than one percent of oil fields produce 65 percent of oil produced every year," Hummel said. "The peak in discoveries was in the decade of the 60s. Every decade since then we've found less oil."
For Now, a Surplus
For now, however, the naysayers are decidedly in the minority.
In its recent yearly outlook, the International Energy Association said the "supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15 years." The agency expects oil production to rise by nearly 4 million barrels per day from 2012 to 2018.
Much of that surplus of oil will be reaped from U.S. shale hotspots like Bakken, Eagle Ford and Marcellus. Although estimates for how much each can produce have varied, private estimates have stated the Bakken could produce enough oil to last a century.
"We have seen decline rates, but the question is are you able to continue to develop this massive resource," said John Felmy, chief economist of the American Petroleum Institute.
"Even if you have a decline, this can continue for decades," Felmy said, adding that many of the areas currently off limits to oil development in the U.S. could bring as much as 100 billion barrels more of oil online. "As long as you keep drilling out, you've got a lot of opportunities," Felmy added.
Clarification: an earlier version of this story mischaracterized a quote made by John Hummel of AIS. He was speaking about global rates of oil production, not the U.S. specifically.