Cracking the Shale Code

Geology of Shale Oil, Mitchell Energy’s Pioneering, and the Economic Future of Three Major Shale Producers

Sep 30, 2025

Introduction

It is an understatement to say the revolution in shale oil production is a modern-day miracle. Hydraulic Fracturing and Horizontal Drilling advancements have propelled the US to the top spot in world energy production and has provided low-cost energy for billions of people, improving quality of life in a near immeasurable way. Starting in 1970 US oil production declined on an annual basis from 10 mb/d in 1970 to a trough of 4.9mb/d in 2007.

Energy security became a real issue and OPEC, led by Saudi Arabia, controlled the marginal barrel of supply in oil markets and used that lever to push prices higher and enact pain on the west broadly through the decade of the 70s. On the back of the Shale Revolution, US production moved from a state of decline to oil production doubling from 2007 to 2020 in the US and continued to expand even in the present day.

Not only did this mean high paying jobs and tax revenues here in the US, but it also fundamentally tipped oil markets on its head. From the 1980s to 2005 OPEC, led by Saudi Arabia controlled the marginal barrel of supply therefore, controlled prices to a large extent along side smaller OPEC production contributors like Kuwait, the United Arab Emirates, and Qatar. In 2005 shale oil made up roughly 1% of world supply, growing to 10% by the end of 2018 which started a trend toward Non-Opec supply controlling the incremental barrel of supply which is what ultimately drives price in an inelastic commodity such as oil. When Non-OPEC controls a large market share prices are typically low and in times of OPEC and now OPEC+ controlling the dominant market share, oil prices tend to rise substantially as they did in the 1970s, the early 2000s, and potentially the dynamic is at play yet again.

We are not here to convince anyone that US Shale is dying or that we are running out of cheap hydrocarbons around the world, to do so would be foolish. There is an abundant amount of resource to be developed around the world and ultimately we will meet our base energy needs and grow oil and gas production. The intent of this piece is to make investors aware that in times of extreme concentration in production to a single basin(s), in the past this had led to oil prices grinding roughly 10x higher over the next decade.

We saw it with US conventional production in 1970, and in the early 2000s the North Sea and the Cantarell Basin in Mexico were the dominant growth markets in hydrocarbons. The issue was then and is now, that hydrocarbons are a constantly declining resource base and must be continuously invested in just to keep production flat and when prices are set on a marginal barrel of supply and demand and that marginal barrel is so highly concentrated any prudent investor or market analyst should take note.

“No quota is allocated to the Kingdom of Saudi Arabia, which will act as a swing producer to supply the balancing quantities to meet market requirements.” New York Times 1983

Mitchell Energy

The miracle of shale oil production started with George Mitchell of Mithell Energy in 1981 who spent 17 years trying to find the right combination of chemicals to produce hydrocarbons in the Barnett Shale. The early days of Mitchell Energy’s attempts to crack the code of tight production came from a thick gelled fluid and a massive amount of pressure and yielded almost no production. By the mid-1990s 250 wells had been drilled with poor results and right before the funds to drill these wells dried up, there was a break through. In 1997 engineer Nick Steinsberger used a slickwater frack solution that pumped mostly water and sand into the basin rather than thick gels. The results were exactly what Mitchell Energy had been waiting for. Not only was production better, but the slickwater frack was cheaper and used far less additives. By 1998 Mitchell Energy had switched to slickwater fracturing and cut well completion times by roughly 60%.

As a result of Mitchell’s persistence gas production in the Barnett increased 20x in the 1990s. Having solved one major problem, Mitchell moved on to horizontal drilling which had also been underwhelming to date. Mitchell Energy was acquired by Devon Energy in 2002 and Devon drilled the first Horizontal wells in the Barnett. Those wells Devon drilled in the early 2000s yielded 3x higher than the prior rate of vertical wells. The code had been officially cracked and in the mid-2000s shifted to oil production with small independent companies trying their hand in North Dakota and Texas proving that tight oil could be produced on a commercial scale. By 2010 fracking was the standard of arc for all oil production in the United States and has totally transformed oil production domestically and flipped world energy markets on its collective head.

Shale Geology

Shale Oil is an oil resource that is produced from fine grained source rock like organic rich shales and or mudstones that are low in permeability. The oil comes in liquid form and is fundamentally different from what is known as conventional production which dominated US supply before peaking in the 1970s. Conventional production sees oil migrate into a porous reservoir rock that is held in a discrete trap. By contrast, Unconventional oil production also known as tight oil production the source rock itself acts as the seal and reservoir and demands very specific geological conditions and advanced extraction techniques like horizontal drilling and hydraulic fracturing to obtain the resource.

The fine-grained sedimentary rocks that allow for shale production was originally deposited in low energy environments like marine basins and or lake bottoms that allowed for the accumulation of mud and organic matter to build over time. Many shales are not pure clay rich shales but instead have a high carbonate content that makes the rock more brittle as is demonstrated in the Eagle Ford basin. The Eagle Ford in Texas is a calcareous mudstone with carbonate content of 70% which makes it easy to fracture the source rock and extract the oil. The brittleness of the source rock is essential whereas ductile shales may have a harder time fracturing and may simply close back up.

Shale oil is referred to as “tight” to describe its low porosity and exceedingly low permeability. The porosity of a given formation references the amount of the rock itself that is pore space whereas the permeability is the measure of how well those pores allow for fluids to pass through the source rock. Porosity is measured in percentage terms and for reference the Wolfcamp Shale in the Permian has an average of 6% while the lower Cretaceous Cline Shale which is lower in the Wolfcamp unit has between 6-12% for what is known as its oil-bearing zones. Permeability in the Wolfcamp is exceptionally poor averaging 0.01 millidarcies or less which means fluids cannot flow through source rock without significant assistance. This is where hydraulic fracturing is so indispensable. Through fracking a sort of artificial pathway is formed that connects to the wellbore and allows for oil to flow.

Organic Matter

Organic matter is a fundamental component in all shale formations and provides the source for the oil itself. Organic material originating from algae or plant debris that is deposited into sediments is converted overtime into kerogen and hydrocarbons. Total Organic Carbon or TOC is the measure of a given rocks richness and is reported as a percentage of the rocks weight. A common rule of thumb is that anything with a TOC >2% is good source rock and anything >5% is considered very rich. The Bakken boasts 11% TOC with values exceeding 20% in the most organic rich layers. TOC rates are essential to flush production and if kerogen levels are too low they will not offer enough oil in situ to produce effectively. High organic content also allows for more porosity in the rock itself making extraction simpler.

Thermal Maturity

Thermal maturity is also essential to flush production and is a measure of how far the organic matter has progressed through out the heat driven process within the Earths internal process. Shale must reside in the “oil window” estimated at 60-120 Celsius for many kerogens to transform into liquid oil. If the oil is too immature the kerogens will remain in a bitumen like state and will behave like oil shale requiring additional heating from artificial sources to produce oil. In the shales we know and love today the source rock has reached at least early oil maturity so much so that significant oil volumes have been generated and are residing in the rock’s pores. If, on the other hand, the rock is too mature the oil will break down into gas. It is similar to the goldilocks story, not too hot (oil breaks down into gas) and not too cold (kerogens have not broken down into oil) but just right has produced the production profile of the shales today.

Conventional vs Tight Production

Conventional production has three main elements, source, reservoir and trap and are typically separate. Oil is generated from a rich source rock and migrates upward into a porous reservoir rock like sandstone or limestone where it is held in place by an impermeable seal. This allows the oil to pool up and be extracted once penetrated by vertical means. Conversely, shale systems are unique in that the impermeable seal is the source rock. The oil in situ never traveled through a to a new rock but remained trapped inside the pores of the source rock.

The Bakken

The Bakken is a late Devonian / early Mississippian unit in the Williston Basin that is located in North Dakota, Montana and parts of Canada. The Bakken has three main pieces to it which are a silty dolomite/sandstone layer that is sandwiched with an upper and lower black shale formation as well that is organic rich and acts as source rock. The shale layers are 10-30ft thick and the middle piece is 20-50ft thick varying throughout the basin. Under the Bakken lies the Three Forks formation which is another tight oil basin grouped in with the Bakken. Bakken source rock is low porosity (5-6% average) and permeability measured at roughly 0.04 milidarcies. The oil itself is high quality light crude. The Bakken presents some interesting challenges given its remote location that forced 70% of its oil to be moved by train however, in 2017 pipelines like Dakota Access Pipeline (DAPL) eased transport costs and reduced reliance on rail. The Bakken introduces safety issues caused by high pressure as was demonstrated in the 2013 Lac-Megantic Rail accident that involved the Bakken crude that possesses vapor pressure volatility.

Oil in the Bakken was first discovered in 1951 on the Nesson Anticline in North Dakota. In the early days vertical wells presented challenges as operators knew the oil was there but would not readily flow which meant for decades that production in the basin was marginal at best. The first horizontal well in the basin was drilled in 1987 with the true turning point in the basin coming in 2000 in Montana when a producer in the region used horizontal drilling at the Elm Coulee Field that eventually reached 50K boe/d by 2007. Around the same time, inspired by recent success in the basin EOG Resources drilled a well in the Parshall Field in Mountrail County North Dakota that hit an oil rich piece of the Bakken. In 2008 the US Geological Survey updated recoverable reserves in the basin to 3.7B from what was basically nothing just 12 months prior to this. Major players in the basin include Hess Corporation prior to it being purchased by Chevron, with Marathon and Conoco also operating in the region. The Bakken is a more expensive basin given its depth of over 10K+ feet and as a result well costs are typically higher. Production has rolled over in the basin, however it went from 1500 boe/d to 1M in a decade, proving just how prolific the asset has been.

The Eagle Ford

The Eagle Ford shale is a late cretaceous formation that spans across the south of Texas some 400 miles from the Mexican border near Laredo heading northwest toward the gulf. The formation is organic rich with interbedded limestone layers. The Eagle Ford ranges from 4,000 to 14,000 feet underground with porosity ranging from 2-12% and also possess extremely low permeability that is measured in nanodarcies. The potential of the Eagle Ford was demonstrated beginning in 2008 when a Houston based independent oil company called Petrohawk Energy announced two high flowing gas wells in La Salle County Texas. At the time of the discovery announcement the CEO Floyd Wilson had amassed 300K acres and a land rush was set off overnight. The Texas Railroad commission shows drilling permits in the Eagle Ford running from 26 in 2008 to 1,000 by 2010 and peaked at 5,614 in 2014. Oil production surged in the basin from almost none at the start of 2008 to 60K boe/d by the end of the year.

The Eagle Ford hit peak production in 2015 at 1.72M boe/d and natural gas production ran from 1.7BCF/d in 2008 to 7.4BCF/d by the 2015. The impact on the local economy cannot be understated. In the peak of the Eagle Ford 15 counties were supported by 130K jobs and $1.6B in tax revenues and the total economic impact in 2014 was estimated to be just shy of $100B. Petrohawk Energy, the pioneer of the Eagle Ford was bought by BHP Billiton for $15B in 2011 with other entrants to the basin including EOG Resources, Chesapeake Energy, Pioneer, Marathon, Conoco and a host of other operators. Production in the basin today has rolled over hard following its 2014-2015 peak with sweet spots for production in Karnes, DeWitt, Gonzales and La Salle counties. From an economic perspective breakeven prices are in the $45-$55 historically while 2024 data shows Eagle Ford breakeven prices for new wells in the mid $60 per barrel range similar to the Midland formation in the Permian. Completion costs in the basin range from $6-$9M per well.

The Permian

The growth in shale oil production in the US is a miracle but among all of these prolific energy discoveries and developments The Permian Basin is by far the most important of them all. The Permian spans 75K square miles throughout Texas and New Mexico and has been producing oil for over a century. The first wells were drilled in the 1920s with the Permian dominating conventional oil production for decades producing over 40B barrels of hydrocarbons by the end of the 20^th century. Conventional production in the Permian peaked in 1973 with its second life, brought on by fracking and horizontal drilling beganing in the mid-2000s. In 2005 the Midland sub basin Spraberry was introduced to multistage fracturing which boosted output and reversed declines in the basin. By 2010 horizontal drilling and fracking were commonplace throughout the Permian and in 2011 a land sale in the Delaware Basin saw per acre bids jump 4x in an attempt to capture a piece of this prolific energy hub. Pioneer Natural Resources, Apache and others like it began experimenting with wells in Wolfcamp and Bone Springs and the results were surging oil and by 2013-2014 field declines were reversed.

The Permian is not a single formation but rather a stacked formation made up of shallow sandstones and carbonates as well as deep shale carbonate intervals. The Permian gets its name from the Permian Age which produced a substantial amount of geologic formations that are 250-300M years old. Some of the most prolific formations within Permian are the Wolfcamp Shale and the Delaware Basin. The areas with the most flush production in the basin are organic rich shales that have carbonates intertwined throughout the layers but have extremely low levels of permeability with the Wolfcamp shale having porosity in the range of 2-12% and permeability measured in microdarcies which means it is impermeable without artificial fracture.

In the early 2000s production had fallen to less than 1M boe/d but had climbed to roughly 2M by the 2010s before ramping to 4M boe/d in 2018-2019 with the Permian accounting for roughly half of all US based production by the end of 2024. Along with the oil is an incredible amount of natural gas and not gas liquids (NGLs) that are produced as a function of the oil extraction being performed.

As of late, acquisition activity has picked up in the Permian as the major players jockey for lease rights in the lowest cost areas of the Permian. ExxonMobil in 2023 purchased Pioneer Natural Resources for $60B to become the largest producer in the basin. Chevron and Occidental Petroleum also own significant stakes in the Permian with two major transactions taking place in 2019 – Chevron’s purchase in 2020 acquisition of Noble Energy have it a massive footprint in the Denver Basin. Occidental also has a large stake in the basin having outbid Chevron in 2019 for Anadarko assets.

Though cost per barrel in the Permian have began to inflect higher it still offers a favorable production profile. Production breakeven in the Permian is clocking in at $56 in the Delaware sub-basin with the Midland sub-basin offering mid $60 break evens. Drilling and Completion costs in the Permian are running around $9-$10M for long horizontals but once the well is up and running lifting costs are relatively low with the large producers reporting existing well breakeven of $30-$40 a barrel.

Concluding Thoughts

Shale oil production has been the most important story in hydrocarbon production since the dawn of man and if its rise was the most important deflationary story then it is only reasonable to assume its decline will be the most damning story in the other direction as well. It is basic science that geological formations producing hydrocarbons are a depleting resource and a peak in production is a law of nature. The Permian is the last man standing and the question that is on the mind of world energy analysts is how long can the basin continue to grow? It appears that we have hit the limit to production growth in The Permian as Tier 1 acreage is worked through and decline takes hold.

I am not a shale bug who has been calling for the fall in shale for a decade, and I do not think the decline in shale production is a particularly good thing either. Having the marginal supply of oil in Non-OPEC hands is incredibly valuable and has led to prosperity for billions of people around the world. Given the reliance that OPEC producers have on their oil production, and that those dollars are usually being spent in ways that are not in the interest of the United States and the West broadly, I do not write these words without a certainty amount of anxiety on what the next decade is likely to look like as the marginal barrel of supply and demand that is price setting in nature goes from a western country back to Saudi Arabia and OPEC producers.

In times of market share dominance by OPEC prices are higher and the world is more volatile, not less and we think that is the set up for the next decade. It is not to say the Permian and other shale plays will not be important or continue to produce large amounts of hydrocarbons, the issue is growth in these fields which is becoming more expensive and yielding worse results as time goes on. We think investors should take note and at least consider that reality as it will drastically change who the winners are through the 2030s.

Exhibits

A. Map of US Shale