Shale drillers uncertain as US output dwindles

Oil drilling operations in West Texas|Getty Images

Oil drilling operations in West Texas|Getty Images

Since oil prices slumped 16 months ago, shale producers have increased production by about 30 percent. It grew mainly by shifting crews and high-speed rigs to places with more oil, idling slower rigs and refined production techniques. Though recently, stagnating rig productivity seems to indicate that the shale oil producer’s bag of tricks is running empty. New data shows that rig productivity has stabilized, and this might help rebalance global output.

Ted Harper, fund manager and senior research analyst at Frost Investment Advisors in Houston said, “We believe that the majority of the uplift from high-grading is beginning to wane. As a result, we expect North American production volumes to post accelerating declines through year-end.”

According to Drillinginfo production in the Permian Basin, Eagle Ford of Texas and the Bakken of North Dakota – the top three US shale fields – has dropped or flatlined since July or August.
It is not just private data that points to this production. The U.S. Energy Information Administration is forecasting November’s production per rig to stay at the levels for October, which are about 465 barrels per day per rig. A production difference of 10 percent is expected between the level of last April and August 2016.

Shale oil wells have particular production issues since well output tends to drop off quickly, often by more than 70 percent, within the first year. Therefore, producers need to keep their rigs drilling, squeezing oil out of new wells to compensate for the dropoff in production from older wells. Producers are also hesitant to add more rigs because of the low price of crude and very little certainty in the future. That is why future production is poised to sink, as older wells drag overall production down. Production from these legacy wells fell by 145,485 barrels per day (bpd) last month, a drop that was 23 times larger than the 6,293 bpd lost in September of 2010, before the fracking boom brought thousands more wells online. Chip Davis, the managing partner at energy venture capital firm Houston Ventures, put it this way: “The boulder that is decline is much bigger in size and rolling much faster than before. We’ve got very few rigs to buttress the rate of decline.”

On top of all that, the cash crunch caused by the low price of crude and how producers are coping with this are adding to the production woes. Shorter vertical wells are being drilled and long horizontal wells, typically multi-million-dollar hydraulic fracturing jobs, are being cut back. This will impact the average amount of oil being added from new wells. It remains hard to predict how much US production will fall in the longer run as lower production could bump prices, enticing producers to redeploy idle rigs, which would then increase production again. At the moment, the rig count has dropped to 595 and most companies are budgeting less for drilling for next year.

Since the price of oil tumbled more than 50 percent, production gains have all come from increased efficiency and not from technological innovation; what is needed to boost production.

New wells also have lower initial production rates based on peak rate analysis going back to 2009. This should translate into higher oil prices. Or as analysts at Bernstein Research stated: “Shale efficiencies will be unable to overcome rig count collapse, leading to a roll in production which is bullish for oil price.”

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