The insanity continues in the United States second largest shale oil field as the fundamental economics go from bad to worse. While it is true that the shale industry doesn’t look as dire as it did back in 2016 when oil prices fell off a cliff, I can assure you the worst is yet to come. Unfortunately, the market is blind to the biggest Ponzi Scheme in history, because wisdom and reason have disappeared from the energy industry years ago.
How can I say that? Well, I heard it from several oilmen that worked in the conventional oil industry… an industry that made good money, paid its bills, and didn’t go much into debt. They told me that the only way shale oil could work is if the company went public so it could raise money from some poor unworthy slobs they didn’t know in order to fund an uneconomic business model. These oilmen told me none of them would be crazy or stupid enough to go into the shale oil business. As veteran oil analyst Art Berman stated, “Why on earth would anyone want to invest in shale to at best, breakeven?”
So, the shale oil saga continues as the blind lead the blind. I know this because I have been fortunate enough to speak with someone in the shale industry and I continue to receive updates on just how bad the situation is unfolding. Sounds crazy, but there are a few very smart and clever people that know the disaster taking place in the shale industry, but not many.
Now, as I mentioned in the title of the article, the Bakken hit a new record in 2018, and it wasn’t a good sign for the industry. While it’s true that the Bakken did hit a new high in shale oil production last year, it also produced the most wastewater on record. And, it’s this tremendous amount of wastewater that exposes the increasing trouble the companies are facing in producing shale oil.
BAKKEN RECORD PRODUCTION 2018: 25 Billion Gallons Of Wastewater
It’s hard to get one’s mind around 25 billion gallons of wastewater, but it’s a lot. According to one source, 25 billion gallons of water would supply approximately 200,000 homes usage for the entire year. Regardless, it’s not just the massive amount of wastewater generated by the Bakken oil industry, it’s also the rising ratio of water to oil production that is troubling.
For example, the North Dakota Department of Mineral Resources puts out a monthly update on the amount of oil, natural gas, and water produced in the Bakken. Unfortunately, they only list the amount of wastewater generated in their excel spreadsheets that go back until May 2015. While they have data on PDF’s going back 2003, it doesn’t include wastewater production.
However, the data going back until 2015, is good enough to show just how much more water is needed to produced oil than it did only a few years ago. Before I make the comparison, we must remember that Bakken oil production peaked in 2015 and then declined due to the crash in oil prices. It took three years for the Bakken to surpass that peak.
In May 2015, one month before the first peak, the Bakken produced a total of 35 million barrels of oil and 40 million barrels of wastewater. Thus, there were 5 million barrels more wastewater generated than oil. I found that June 2018 was the closest month that produced about the same amount of oil, at 35.4 million barrels. But, that 35.4 million barrels of oil came at a much higher wastewater production cost. How much? How about 22% more wastewater, or 49 million barrels:
It took 9 million barrels more wastewater to produce about the same amount of oil back in 2015. And the trend continues to get even worse. According to the most recent data for December, the Bakken produced 55.1 million barrels of wastewater versus 39.7 million barrels of oil:
So, in May 2015, the Bakken produced 5 million barrels more wastewater than oil but is now generating three times that amount at 15 million barrels.
May 2015 water = 40,000,000 barrels
May 2015 oil = 35,000,000 barrels
Difference = 5,000,000 barrels wastewater
Dec 2018 water = 55,000,000 barrels
Dec 2018 oil = 39,700,000 barrels
Difference = 15,000,000+ barrels wastewater
You will also notice how quickly the wastewater to oil production has increased in just the past year. In January 2018, the Bakken produced 10 million barrels more water than oil, but in just 12 months, it shot up to 15 million barrels.
We must remember, if the frackers in the Bakken are producing a great deal more water, they are also using a lot more sand and other chemicals. Thus, more stuff equals more money. I am not going to get into the details of the financial economics in this article, but I wanted to show that the companies producing shale oil in the Bakken are now forced to use much more water, sand, resources and money to produce oil today than they did just a few short years ago.
At some point, the Falling EROI (Energy Returned On Investment) will destroy the ability for the shale oil industry to offset declines with new production. Of course, the oil price is a major factor in determining the fate of the U.S. Shale Oil Industry, and if it falls along with the broader markets this year, we could see some serious fireworks.
Here are two charts showing the total Bakken production of oil and wastewater for the first and second half of the year:
For the year, the Bakken produced 578 million barrels of wastewater, or roughly 25 billion gallons (42 gallons contained in a barrel). Again, we can see that the wastewater to oil ratio continues to widen in the second half of the year as 85 million barrels more were produced than oil compared to only 67 million barrels in the first half.
Furthermore, the estimated cost to dispose of this water is approximately $2.3 billion at $4 a barrel. While some of the shale wastewater is recycled, the majority of it is still injected back into the ground. It’s just cheaper that way.
Lastly, the companies producing shale oil in the Bakken exploited the “sweet spots” first and will soon be forced to move outside to the less economic areas. Can you imagine, if the industry as a whole didn’t make any money drilling in the core areas, what will it look like when they start to drill outside the sweet spots?