An Old Formula May Overstate U.S. Oil Supplies

By Asjylyn Loder

Watford City, N.D.

Jan Arps is the most influential oilman you’ve never heard of. In 1945, Arps, then a 33-year-old petroleum engineer for British-American Oil Producing Co., published a formula to predict how much crude a well will produce and when it will run dry. The Arps method has become one of the most widely used measures in the industry. Companies rely on it to gauge the profitability of drilling, secure loans, and report reserves to regulators. When Representative Ed Royce (R-Calif.) said at a March 26 hearing that the U.S. should start exporting its oil to undermine Russian influence, his forecast of “increasing U.S. energy production” could be traced back to Arps.

The problem is the Arps equation has been twisted to apply to shale technology, which didn’t exist when Arps died in 1976. John Lee, a University of Houston engineering professor and an authority on reserves, says billions of barrels of untapped shale oil are counted by companies relying on limited drilling history and tweaks to Arps’s formula that exaggerate future production. “Things could turn out more pessimistic than people project,” says Lee. “The long-term production of some of those oil-rich wells may be overstated.”

Lee’s criticisms have opened a rift in the industry about how to measure the stores of oil trapped within rock formations thousands of feet below the earth’s surface. In a newsletter published this year by Ryder Scott, which helps drillers calculate reserves, Lee called for an industry conference to address what he says are inconsistent approaches. The Arps method is particularly open to abuse, he says.

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U.S. oil production has increased 40 percent since the end of 2011 as drillers target layers of oil-bearing rock such as the Bakken shale in North Dakota, the Eagle Ford in Texas, and the Mississippi Lime in Kansas and Oklahoma, according to the Energy Information Administration. The U.S. is on track to become the world’s largest oil producer by 2015, says the Paris-based International Energy Agency. A report from consultants Wood Mackenzie says that by 2020 the Bakken’s output will be 1.7 million barrels a day, up from 1.1 million now.

Rising reserve estimates give the U.S. a false sense of security, says Tad Patzek, chairman of the department of petroleum and geosystems engineering at the University of Texas at Austin. “We have deceived ourselves into thinking that since we have an infinite resource, we don’t need to worry,” he says. “We are stumbling like blind people into a future which is not as pretty as we think.”

The Arps formula is only as good as the data a company puts into it, Patzek says. Estimates can be inflated when Arps relies on limited drilling history for data or on a few high-performing wells to predict performance across a wide swath of acreage. Forecasts can also be skewed higher by assuming slower production declines than Arps observed.

Culled from Bloomberg.com