Will falling oil prices kill the shale revolution?

The current drilling boom is more sensitive to price fluctuations than its predecessors.

  • Flaring at wells in the San Juan Basin.

    Dom Smith/Ecoflight
 

About 20 miles from the iconic Pueblo Bonito in Chaco Culture National Historical Park, and just a couple away from the elephantine hills that artist Georgia O’Keeffe dubbed “The Black Place,” two rows of tanks and an assortment of pipes interrupt the high desert. They’re painted forest green, perhaps to blend in, though almost everything here is the color of ash or burnished clay.

This is Chaco 2408 32P #114H, one of dozens of oil wells drilled in the last few years in northern New Mexico’s Gallup Sandstone, one of the nation’s newest “tight oil” plays. Chaco #114H and thousands like it in North Dakota, northern Colorado and Texas exist because of high oil prices, driven by demand from China and the developing world. But now, thanks in part to slower growth in China and the flood of U.S. oil, crude prices are falling. Though the resulting drop in gasoline prices benefits most sectors of the economy (average gas prices in New Mexico dropped below $3 this fall), it may dampen or even crush the shale oil revolution.

Chaco #114H can help explain why. The San Juan Basin, home to some 40,000 oil and natural gas wells, was already one of the most prolific natural gas fields in the nation when, in the early 2000s, high prices made it economically feasible to combine horizontal drilling and hydraulic fracturing to drill in tight shale formations. The drilling frenzy that followed glutted the domestic market with gas, causing prices to crash. Rigs abandoned San Juan County for fields also rich with profitable oil. San Juan County’s economy faltered; tax revenues from oil and gas are today just one-third of what they were in 2009, when prices were high.

But there remained hope — oil, that is — in the Gallup Sandstone. Spurred by high oil prices, energy companies recently resurrected this old play, sparking a still small but growing boom.

Chaco #114 is one of the boom’s pioneers. In early 2013, WPX Energy drilled down about 5,400 feet, turned the bit 90 degrees, and ran it another 5,000 feet horizontally through the oil-bearing sandstone. At 10,000 feet “deep,” as drillers say, it’s still shallower than North Dakota’s wells, which average 20,000 feet. But it’s far deeper than its predecessors, which averaged about 4,000 feet deep.

And that helps make shale wells far more expensive, and therefore more sensitive to price drops. In reports to its investors, WPX Energy says its wells in the San Juan Basin cost $5.2 million on average to drill and frack; its Bakken wells run to a staggering $10 million. Old-school oil wells typically cost $500,000 or less to drill.

As much as a quarter of the cost stems from hydraulic fracturing. Chaco #114 was pumped full of nearly 1 million gallons of water and chemicals — everything from walnut hulls to Bactron K-87 Microbiocide — along with 3 million pounds of sand to hold the fractures open.

Chaco #114 responded in March of 2013, initially gushing as much as 272 barrels of oil per day. With oil selling for $108 per barrel on the global market, the well should have turned a tidy profit within its first year.

According to state records, however, each barrel of oil from Chaco #114 has yielded as much as $26 less than the global benchmark for crude, the “European Brent price.” Subtract royalties paid to operate on state land (12.5 percent in this case), other county and state production taxes (about 8 percent), and the costs of extracting hydrocarbons, transporting them to market, maintaining the well and disposing of the tens of thousands of gallons of wastewater, and the well becomes a lot less lucrative.

And there’s a bigger catch. Oil and gas wells produce heartily during their first months, and then wane. It’s called a decline curve, and it’s especially steep for most shale wells. Chaco #114’s production had dropped by half by the time it was six months old. A year after drilling was complete, it was producing just 50 barrels per day — a decline of over 80 percent. This phenomenon is repeated across the West’s shale oil and gas fields to varying degrees.

That means that, just to keep overall production levels stable, energy companies must drill new wells relentlessly. “It’s known as the Red Queen syndrome,” says Mark Haggerty, a policy analyst with Headwaters Economics, a nonprofit based in Bozeman, Montana. “They’ve got to drill faster and faster, just to stay still.” Collectively, the nation’s producers have stayed ahead of the curve, but only by operating 1,700 to 1,800 rigs at any one time, each drilling multimillion-dollar wells.

When prices are high, that might make sense. But when they crash by 20 percent, as they have since this summer, it puts companies in a tough spot. If they stop drilling, production and revenues will fall. If they finish drilling when prices are low, the well uses up that initial production bonus with less of a return, reducing the chances of ever recouping that multimillion-dollar investment. Had Chaco #114 been drilled this October, the company would have made about $82,000 less during the critical first month of production. That math may not stop drilling in the best spots if prices remain in the $80 per barrel range, says Haggerty, but it could result in a total shutdown in smaller, peripheral plays.

For the brand-new boomtowns of North Dakota, and for the reworked ones in the San Juan Basin, a long-term drop in oil prices is a mixed bag. The social and environmental impacts that accompany the drill rigs will dissipate if drilling slows, but so will the taxes paid by the companies to help mitigate some of those impacts. A 10 percent price drop from year to year could reduce North Dakota’s mean annual revenues by as much as $300 million, and the San Juan Basin could forget about recovering from the natural gas slump, at least for now.

This dynamic can be influenced by tighter regulations, which can raise drilling costs, or by technological advances, which can lower them. But whether Chaco #114 will ever pay for itself — or whether the regional boom will keep going or lose its steam — hinges primarily on the price of oil and the unpredictable global forces that determine it. 

High Country News Classifieds
  • PLANNED GIVING OFFICER
    National Parks Conservation Association (NPCA), the nation's oldest and largest national parks nonprofit advocacy organization seeks a Planned Giving Officer. Do you find energy in...
  • DEPUTY DIRECTOR
    The Methow Valley Citizens Council has a distinguished history of advocating for progressive land use and environmental values in the Methow Valley and Okanogan County...
  • ACTING INDIGENOUS AFFAIRS DESK EDITOR
    High Country News is seeking an Acting Indigenous Affairs Editor to oversee the work of our award-winning Indigenous Affairs Desk while our editor is on...
  • GRANTS PROGRAM DIRECTOR
    The Cinnabar Foundation seeks an enthusiastic, team-oriented and knowledgeable Grants Program Director to work from their home in Montana. Established in 1983, the Cinnabar Foundation...
  • ARTEMIS PROGRAM MANAGER
    The Artemis Program Manager will work with National Wildlife Federation sporting and public lands staff to change this dynamic, continue to build upon our successful...
  • ALASKA SEA KAYAK BUSINESS FOR SALE
    Well-known and successful sea kayak, raft, hike, camp guiding & water taxi service. Sale includes everything needed to run the business, including office & gear...
  • MEMBERSHIP AND EVENTS PROGRAM COORDINATOR
    Great Old Broads for Wilderness seeks a detail-oriented and enthusiastic Membership and Events Coordinator to join our small, but mighty-fun team to oversee our membership...
  • PROGRAM DEVELOPMENT FACILITATOR
    ABOUT THE HIGH DESERT MUSEUM Since opening in 1982, HIGH DESERT MUSEUM has brought together wildlife, culture, art and natural resources to promote an understanding...
  • LAND STEWARD, ARAVAIPA
    Steward will live on-site in housing provided by TNC and maintains preserve areas frequented by the visiting public and performs land management activities. The Land...
  • DEVELOPMENT WRITER
    Who We Are: The Nature Conservancy's mission is to protect the lands and waters upon which all life depends. As a science-based organization, we create...
  • CONNECTIVITY SCIENCE COORDINATOR
    Position type: Full time, exempt Location: Bozeman preferred; remote negotiable Compensation: $48,000 - $52,000 Benefits: Major medical insurance, up to 5% match on a 401k,...
  • EXECUTIVE ASSISTANT
    ArenaLife is looking for an Executive Assistant who wants to work in a fast-paced, exciting, and growing organization. We are looking for someone to support...
  • EXECUTIVE DIRECTOR
    The Mountain Lion Foundation is seeking an Executive Director. Please see our website for further information - mountainlion.org/job-openings
  • WASHINGTON DC REPRESENTATIVE
    Position Status: Full-time, exempt Location: Washington, DC Position Reports to: Program Director The Western Organization of Resource Councils (WORC) is seeking a Washington, DC Representative...
  • REGIONAL CAMPAIGN ORGANIZER
    Position Title: Regional Campaign Organizers (2 positions) Position Status: Full-time, exempt Location: Preferred Billings, MT; remote location within WORC's region (in or near Grand Junction...
  • DEVELOPMENT DIRECTOR
    Driggs, ID based non-profit. Full time. Full job description available at tvtap.org. Submit cover letter and resume to [email protected]
  • ENVIRONMENTAL AND CONSTRUCTION GEOPHYSICS
    - We find groundwater, buried debris and assist with new construction projects for a fraction of drilling costs.
  • SPRING MOUNTAINS SOLAR OFF GRID MOUNTAIN HOME
    Located 50 miles northwest of Las Vegas, Nevada in the pine forest of Lee Canyon at 8000 feet elevation. One of a kind property surrounded...
  • MAJOR GIFTS MANAGER - MOUNTAIN WEST, THE CONSERVATION FUND
    Cultivate, solicit and steward a portfolio of 75-125 donors.
  • NATURE'S BEST IN ARAVAIPA CANYON
    10 acre private oasis in one of Arizona's beautiful canyons. Fully furnished, 2123 sq ft architectural custom-built contemporary home with spectacular views and many extras....