Saturday, December 8, 2012

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.


  1. My personal current take on matters, to put it in political terms, is that the Democrats are math challenged, and the Republicans are math deniers.

  2. Math challenged vs math deniers, I love it!!