Shale oil production in the United States is rising, making up a significant portion of total domestic production, as the exploration and production industry continues to increase development of these types of plays.

TUTORIAL: Stock Basics

The Energy Information Administration (EIA) reported that oil production from shale formations was approximately 275,000 barrels per day (B/D) in 2010, up from virtually nothing in 2005, and triple the 2008 production level.

The industry is enabling this production by using the same techniques that have been employed in natural gas shale plays, including horizontal drilling and hydraulic fracturing. This production increase was led by developing the Bakken formation in North Dakota and the Eagle Ford Shale in Texas. Other areas producing shale oil include the Barnett, Woodford and Marcellus formations.

Shale Oil Potential

The level at which oil production peaks from these plays, and whether this will have an impact on oil supply and prices, is a contentious source of debate among investors, analysts and the industry.

The EIA estimates that total U.S. crude oil and condensate production will increase to 6.12 million B/D by 2019, up marginally from the 5.51 million B/D produced in 2010, and certainly nowhere near enough to have a significant impact on prices.

Bakken

The Bakken formation has generated the most interest from the industry with both large and small operators rushing to be involved. Linn Energy (Nasdaq:LINE) just entered the play through a $196 million acquisition announced last week.

Continental Resources (NYSE:CLR) is one of the leaders in the Bakken with more than 855,000 net acres under lease. The company's management recently predicted that the Bakken will produce 1 million B/D by 2020.

The industry is planning for this level and looks to increase takeaway capacity in the Williston Basin from the current 400,000 B/D to 1.05 million B/D by 2014. The largest of these expansions is the Keystone XL project, which is being built by TransCanada (NYSE:TRP) to carry oil from Canada to U.S. markets. The company plans an extension into the Bakken that will add significant takeaway capacity in 2013.

Eagle Ford Shale

BENTEK Energy, an energy industry consultant, released a study on productivity of the Eagle Ford Shale and predicted that the area will produce 421,000 B/D by 2015. The Eagle Ford Shale will also produce 260,000 B/D of natural gas liquids and 3.5 billion cubic feet per day of natural gas by 2014.

One company benefiting from this increase in Eagle Ford Shale production is Valero Energy (NYSE:VLO), which operates refineries in the United States. The company reported that it saved $11 per barrel in feedstock costs in the most recent quarter by switching to crude from the Eagle Ford Shale.

Bottom Line

The exploration and production industry is putting more and more capital into shale oil plays in the United States, and this development will lead to a higher level of domestic production from these areas. Whether this production increase will make a difference is still under debate. (Changes in the price of oil aren't arbitrary. Read on to find out what moves them and why. See What Determines Oil Prices?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  2. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  3. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  4. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  5. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  6. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  7. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  8. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
  9. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  10. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center