Quantifying The Impact Of A Fracking Ban On The US Oil & Gas Industry
Let's be frank. The institution of a fracking ban would simply be bad policy for the U.S. oil and gas industry. In quantifying this position, I want to highlight a paper that was published in January by Michael Lynch of the Energy Policy Research Foundation (EPRINC), titled "The Impact of a Fracking Ban on Shale Production and the Economy". EPRINC is a Washington, D.C.-based non-profit organization "that studies energy economics with special emphasis on the production, distribution and processing of oil and gas resources."
According to its website, it "is known internationally for providing objective analysis of energy issues."
In his paper, Lynch provides an overview of his analysis to estimate the production declines that would occur in the major U.S. shale basins if fracking were halted at the beginning of 2021. He estimates that oil production from the major shale oil plays would decline 80% in the first year, and the first year decline in major shale gas plays would be over 50%. Some of this loss would be offset by increased drilling activity in conventional plays (spurred by higher prices). Overall, however, he estimates a loss of about 6 million barrels of per day (MMbbl/d) of oil production. According to Lynch, there exists about 3 MMbbl/d of excess capacity, and such a large production shortage could quickly lead to oil prices in excess of $100/bbl.
A key assumption in Lynch's analysis is the aggregate decline rate that the U.S. Energy Information Agency (EIA) estimates the currently producing wells are experiencing in each major shale basin. He recognizes that this decline rate will flatten over time, but doesn't have access to well level production data to forecast the individual wells and add up their production curves to generate an aggregate forecast.
We decided to take a look at the Haynesville play to derive our own aggregate decline curve. We collected all the production data from the horizontal wells in the play and binned them by year of first production. Each year was extrapolated using decline curve analysis and we used the previous vintages to inform our estimate of the behavior of the most recent ones. When we summed the curves, we estimated that the combined gas production from the existing wells in the Hayneville play will decline 50% in the next year. Compared to Lynch's charts, we saw his estimate was about the same.
We haven't examined the other plays in Lynch's paper, but we think he's on the right track. A fracking ban would result in a sudden rapid decline in oil and gas production that would lead to significant price shocks and have negative economic impacts.
This article was published in the March 3, 2020 issue of the RED Weekly E&P Update Newsletter
About the Author:
Steve Hendrickson is the President of Ralph E. Davis Associates, an Opportune LLP company. Steve has over 30 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development and operations. In addition, Steve possesses extensive knowledge of petroleum economics, energy finance, reserves reporting and data management, and has deep expertise in reservoir engineering, production engineering and technical evaluations. Steve is a licensed professional engineer in the state of Texas, and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He currently serves as a board member of the Society of Petroleum Evaluation Engineers and is a registered FINRA representative.