Why Shale Oil Works in the Short Run

Matt Badiali wrote a useful article, "Don't Believe This Shale Oil Argument... It'll Cost You", on The Growth Stock Wire.  Much of it is hyper-optimistic about the prospects of shale oil, but towards the middle there is a very useful analysis:

The Eagle Ford is one of the largest shale oil fields in the country. According to one company operating there, it costs $5.5 million to drill an oil well in the Eagle Ford.  

 

The wells have an estimated ultimate recovery of about 438,000 barrels of oil. Let's assume the company will get $85 per barrel (slightly below today's price) and that it costs $15 per barrel to move it. That means the company earns $70 per barrel in profit.

 

In short, the well pays for itself after 78,571 barrels... in about six months of production. After that, it becomes like an annuity. It's a risk-free profit. At $85 per barrel, it works out to a return of 4.6-to-1 on the money.

 Now, the numbers he doesn't crunch is that 78,000 is 18% of 438,000, so if production is linear the well would run dry in 33 months.  So yeah, shale oil is quite profitable, for now, but that doesn't say a lot for it's long term prospects.