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?)

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