The Next American Oil Boom?

Decline rates.


There are not very many people outside the “Peak Oil” crowd who care — heck, even know — what “decline rates” are.

Yet the “story that isn’t being told” is often where you find the best investment narratives.

“At first,” our resident energy enthusiast kicks us off with just such a tale, “the conservative approach was to estimate that the Marcellus wells would be productive for about two-three years and then the decline curve would kick in.

“Now, after three years of testing in some areas, that window is more like five years.”

After five years? Many operators will go back and refrack the wells. Those five-year wells might become 10-year wells.

Or 15.

“We’re finally making history,” Byron King goes on. “We’ll look back on 2012 as the best year for the energy business in Pennsylvania since Col. Drake drilled his first well. before the Civil War.”

Full disclosure: We’re still skeptical about some of the big claims Byron makes. Can a domestic energy boom really overcome decades of debt racked up at the local, state and federal levels? As with any functioning relationship, we keep an open mind.

And examine the evidence…

After 20 years of sinking deeper and deeper into dependence on foreign oil, the United States reversed that trend last year.

“Domestic oil output is the highest in eight years,” reports Bloomberg, after crunching the numbers from the Department of Energy. “The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal.

“The transformation, which could see the country become the world’s top energy producer by 2020, has implications for the economy and national security — boosting household incomes, jobs and government revenue; cutting the trade deficit; enhancing manufacturers’ competitiveness; and allowing greater flexibility in dealing with unrest in the Middle East.”


Let’s examine the numbers:

  • U.S. energy self-sufficiency bottomed in 2005 at 70%. Now it’s 81%
  • Domestic crude production reached 5.7 million barrels a day last year — the highest since 2003
  • Natural gas output grew 10.9% between 2007-10.

“We’ve had large-scale drilling in Pennsylvania only over the past three years or so,” says Byron, putting some flesh on the bones of that last statistic. After a laborious process of leasing land, seismic work, permits, drilling the wells, testing the wells, hooking the wells up to pipelines.

“We’re finally — year 2012 — at that point where literally hundreds of new wells are coming online,” Byron says. “It’s part and parcel of the national ‘gas glut’ that’s contributing to historically low pricing — and keeping your winter heating bills down, to boot.”

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning