The United States is losing its energy dominance as shale plays fail to deliver.
Once called the new swing producer of the world, shale wilted when oil prices collapsed earlier this year. The message for America is clear: look for plays that work with lower prices. One clear option is to look to Alaska.
Caelus Energy, Oil Search-Armstrong-Repsol and ConocoPhillips COP -1.9% drilled and proved almost 4 billion barrels over the last three years (Figure 1). The U.S. Geological Survey estimates an additional 3.6 billion barrels of undiscovered recoverable resources may be found in the same reservoirs on the North Slope.
All of this got the attention of the industry and several new players have staked claims on the North Slope. London listed (AIM:PANR) Pantheon Resources proved 76 million barrels earlier this year by re-entering and testing the Alkaid well south of Prudhoe Bay. The company plans to drill its Talitha appraisal well early next year. Petroleum Consultants Lee Keeling & Associates, Inc. have assigned 305 million barrels of recoverable oil based on only one of four prospective reservoirs that the well will test. Pantheon believes that the total resource size will be more than 1 billion barrels.
The American Association of Petroleum Geologists wrote in July that exploration on the North Slope of Alaska is a “hot topic these days.” If you haven’t heard about the exciting activity on the North Slope, it is probably because journalists were busy writing about shale plays.
For many years, shale was viewed as a miracle, something impossible that technology had somehow made possible. Not only had a vast new supply been found but at costs so low that even Saudi Arabia could not compete.
That was not true but many people believed that shale companies could actually make a profit at oil prices less than $40 per barrel. When prices fell far below $40 in April and have rarely moved above $40 since, the truth became clear—shale plays needed much higher prices to survive.
In 2018, almost 3 billion barrels of proved reserves were added in shale plays. What some people don’t realize is that a reserve is a volume at a price. Three billion barrels were added at an SEC threshold price of $65.56. Many of those reserves will be written down at the most recent 2020 SEC price of $43.63.
Pantheon estimates that its Alaska volumes will break even today at a little over $30 per barrel.
“Our modeling shows Talitha is economic at very low oil prices because of the size, reservoir qualities and proximity to the Dalton Highway and Trans-Alaska Pipeline. This is important for a company like Pantheon as we can reduce upfront capital by utilizing modular production units instead of large central processing facilities to expedite development and reduce risk.”
—Jay Cheatham, Pantheon CEO
Shale plays have fallen on hard times but they are not going away and will remain an important component of U.S. production. The U.S. oil industry has, however, failed to maintain a diversified portfolio. It has put all of its eggs in one proverbial basket for many years. That will have serious consequences: we will have to import more oil, jobs will be lost, and American geopolitical power will be weakened.
Nothing can be done about the past but something can be done about the future. There are few places left in the U.S. where large, low-cost reserves can still be found. To be sure, there will be more risk than there was in the shale plays but risk and reward go hand-in-hand. As the oil companies that survive ponder the future, I suggest that they look to Alaska.
I have consulted for Pantheon Resources.
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