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U.S. Shale Drillers Running Out Of Options, Fast
Submitted by James Stafford via OilPrice.com,
Much has been made about the impressive gains in efficiency and productivity in the shale patch, as new drilling techniques squeeze ever more oil and gas out of new wells. But the limits to such an approach are becoming increasingly visible. The U.S. shale revolution is running out of steam.
The collapse of oil prices has forced drillers to become more efficient, adding more wells per well pad, drilling longer laterals, adding more sand per frac job, etc. That allowed companies to continue to post gains in output despite using fewer and fewer rigs.
However, the efficiency gains may have been illusory, or at best, incremental progress instead of revolutionary change. Rather than huge innovations in drilling performance, companies were likely just trimming down on staff, squeezing suppliers, and drilling in the best spots – perhaps all sensible stuff for companies dealing with shrinking revenues, but nothing to suggest that drilling has leaped to a new level of efficiency. Reuters outlined this phenomenon in detail in a great October 21 article.
For evidence that the productivity gains have run their course, take a look at the latest Drilling Productivity Report from the EIA. Production gains from new rigs – which have increased steadily over the past three years – have run into a wall in the major U.S. shale basins. Drillers are starting to run out of ways to squeeze more oil out of wells from their rigs. Take a look at the below charts, which show drilling productivity flat lining in the Bakken, the Eagle Ford, and the Permian.
For oil companies to add new production at this point it would require hiring new workers and new rigs and simply expanding the drilling footprint. That is something that few companies are doing because of low prices. In fact, most exploration companies are doing the opposite – rig counts continue to decline and the layoffs continue to mount.
With productivity at the end of the road, and new drilling not taking place, absolute production levels are in decline. The EIA expects U.S. shale basins to lose 93,000 barrels per day between October and November, led by a 71,000 barrel-per-day loss from the Eagle Ford in South Texas.
The losses are occurring because of the huge drop off in shale production that new wells suffer from almost immediately after going into service. Take a look at the chart below that shows the “legacy” production from the Eagle Ford (i.e., old wells that are declining), which is overwhelming all the new production. The net result is a fall in oil output in South Texas.
As time goes on, that legacy figure will continue to swell, and the amount of oil flowing from new wells will decline. This is exactly why overall U.S. oil production is declining and will continue to decline through next year. The only way to turn things around is for drillers to drill new wells.
Refining Hurt Too
The fall in U.S. oil production is starting to affect the downstream sector. Refineries have performed well from the downturn in oil prices, as they use crude as an input to produce refined products such as gasoline, diesel, jet fuel, and more. Integrated oil companies, such as the oil majors, saw their losses shielded from an upturn in refining profits.
But now that oil production is falling – down from a peak of 9.6 million barrels per day to somewhere around 9.1 mb/d currently – refining margins are shrinking. Refineries benefited from a glut of crude sloshing around in the U.S., unable to be exported because of the export ban. WTI crude, a benchmark for U.S. oil, began trading at a discount relative to international benchmarks such as Brent. Refiners would buy cheap WTI and process it into refined products and sell them abroad at prices more closely correlated with Brent, pocketing a nice profit.
However, the fall in upstream production has trimmed some of that excess crude. As a result, the WTI-Brent discount has narrowed and so have refining margins. Bloomberg reported that profits from refining crude into gasoline recently hit its lowest level since 2010. Citigroup downgraded a series of refining stocks this week as the outlook for the downstream sector worsens.
For integrated oil companies, this development isn’t great either. Oil prices are still down, production is down, and now refining margins are down.
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Been hearing this for a year now.Lets see the list of bankruptcies
I can no longer cling to reality, whatever reality is.
I am shocked to hear that there are problems in this sector. Who could have predicted such a thing?
Oh, the humanity!
The shalies are making it down on volume.
The more they drill the faster they lose. Unfortunately that was true back with oil at $100, now it's just a sad farce.
We are waiting to see the volume.
I work in the oil and gas business. Unfortunately, I would categorize this as an accurate statement. I knew it in 2008 and I knew it in 2014. People looked at me like I was crazy when I bought year out puts on certain names.
We're coming to the end of easy money for the optimists in the oil patch. The bond market is falling apart and the big banks are getting ready to cover their butts and the sheep will be slaughtered. Tulip mania strikes again.....
Dbl Pst.
Frakcking awesome technology that these people are using. Sadly, it only goes so far... http://zhc0.com
(so does shale oil rely on fracking - not a lot of mention here?)
>(so does shale oil rely on fracking - not a lot of mention here?)
I'm not sure if this is rhetorical or not. I'll approach it as a real question. Shale oil most certainly relies on fracing. It is pretty amazing technology (along with the ability to drill sideways for 3 miles) and it is also true that it can only do so much before the reality of geology sets in.
I'm not sold on all this talk about drilling efficiency. Obviously, it is better/more economic to be more efficient. Still, the biggest issue that I see is the steep decline rates. If you want to continually grow your production, then you will need to continually grow the number and rate of wells you are drilling. Like any reality-based system, however, you can't have infinite growth. There are real limits. We will always hit them...that's what we do.
The efficiencies were illusory; after the drillers tapped the most recent cohort of wells they fired most of the workers and closed off the least efficient bores. Costs fell instantly and production remained about the same, but that was a tactical position not a strategic one. Eventually the lack of any new production sources in the pipeline (so to speak) meant their ponzi was going to starve, and so it is.
There will be no discussion of this. The banks who hold shale-patch revolving credit are rapidly converting this to corporate bonds for more general (ie, bagholder) consumption. No news is for them great news. They'll be out in time before their analytical branches (so far, being vewy vewy quiet -- shhhhhh) erupt in a deafening chorus of how bad it suddenly has become. Meanwhile they will have taken out CDS and short positions against the entire industry (again, knowing how bad it really is) at which point their sudden dower assessment of things will profit them even more than the original credit business did.
The drillers are of course complicit in all this. Their ponzi has already paid off, they got theirs. All they have to do is hand off the junk (ie, those bagholders) in a way that doesn't look like a financial crime, skip town, and scheme of other schemes.
Capitalism as we know it.
No way out for shale producers. The more they produce, the lower the price goes, the less they produce, the less revenue they earn. Lenders starting to figure that out, their money is loooong gone....
15horses1donkey.
IF ZERO HEDGE HAD A FUCKING CURRENCY OF IT'S OWN, IT WOULD BE MINTED IN INCORRUPTABLE NON HYPOTHECATED NON DERIVATIVE NON MARGIN ABLE SILVER OR GOLD.
Jesus, fucking kids these days. You all think technology is a miracle. All it is is electrons that can be made to go poof any fucking minute now.
Crypto currency is just a fancy name for digital fractional reserve banking - without the reserve, or the bank.
If I blew up your phone right now, you would look like a cow at the slaughterhouse just at the moment the bolt gun goes off - " How could you do this to me ? What'll I do now ? "
Improvise. Adapt. Overcome. Triumph over adversity.
And, transform your idea into minting a fucking physical coin out of noble metals, with Tyler's permission before he copyright lawyers your ass into bankruptcy.
Crypto currency is exactly like fracking - get people to pile on the investemnt bandwagon, lie about production results, drive the price to the moon, then take your profit just before the top, watch the market collapse for the product, and wander about through the news conferences, wailing the familiar refrain......... " Who Knew ? "
Shove your crypto currency up your Marmite lubed arse, Aussie boy.
pesky fckers ruined the oil production suppression cartel of nyc.saud
true scarcity requires no cartel
For frack's sake! The solution should be rather obvious: Hire the ISIS Desperados!
New mission: Chop off the well-heads in KSA.
This way, the US has Plausible Deniability for bringing down the House of Saud.
Frack, yeah!
Don't hear much about peak oil anymore? Why's that?
Maybe because your fingers are in your ears?
You might want to consider what is happening to the North Sea production. http://www.nytimes.com/2015/06/03/business/energy-environment/north-sea-...
You clearly don't understand Peak Oil, as a theory, if you don't know what the "Rocky Plateau" is - something Hubbert described DECADES ago.
(this drop in oil prices)
(this doesn't mean oil suddenly became abundant)
(this drop in prices coincides with copper, iron-ore, coal, etc.)
(look at the Aussie economy)
(clean out your ears)
Because we are in the thick peak period lasting maybe 10-20 years, so it looks like BAU to anyone without inside knowledge of the industry.
Banksters bought all the Shaling paper. Bailouts will commence shortly.
That was last year's news. The banksters saw the train wreck coming (they caused it, so they would) and got out. Now fund managers are holding junk-grade shale-patch bonds. Everyone who got in on the ponzi early is made whole, suitable bag-holders have been found for the shitty debt, and the entire circus is now set to fold up and vanish into the night.
There will be some noise from the Repugnicans about "preserving our energy independence", this coming from the same pukes who coined the idea of "Saudi America". But it will just be them trying to shovel some more pork into their districts. The show is over. Everyone knows this. There will be no bailouts.
Americans are not going to understand. I guess they'll blame environmental regulations. I know most of the ZH crowd will. Memories are short and besides nobody likes to remember being tooled.
This could flip 180 if Russia makes a play in the mid east
Exactly right!! I feel its about time someone gets desperate and does an oilfield (terrorist) attack to triple the oil price overnight.
I thought to find oil, you just needed to be "shootin' at some food"...
up from the ground came a bubblin' crude...oil that is...black gold...Texas Tea
Back in the early '80's the new rage in the Appalachian Basin was the Devonian shale play in W. Va. Liquid Nitrogen, high pressure fracking via Halliburton. Quite the dog and pony show. Lot's of money headed down the hole. Risk of the drill pipe coming loose. Great story from a crew we spoke with on one occassion of 2,500' headed into the air to the height it looked like a toothpick. "RUN!!!!" These wells came in like gangbusters, but production dropped off quickly, as well.
Good. Gas is $1.68 in some places here in Houston.
Good thing the tight oil plays all hedged their future sales for the next 18 months at $50 a barrel last month. They are still alive and kicking with their creditors at bay for a bit.
Financial magic to keep their ponzi rolling for another couple quarters. Doesn't put oil in the pipeline. "Saudi America" is toast.
Don't tell the pension fund getting some of the energy debt that Goldman is selling
It's like some kind of stealth NIRP; your 401K is about to shrink. This in order to enrich the bankerster class and their buddies at Halliburton.
Nobody will ever know. It will be Russia's fault, or something. If anything.
Unless a big producer like Saudi Arabia finally decides to cut production for the sake of the rest of oil producers, its likely next year's increase from Iran will soon replace the drop off in fracker oil leaving the US with a fair amount of extra oil anyway. Of course, Iranian crude won't be headed to the US, but its a world oil market. Whoever consumes that Iranian oil will likely reduce their supply from other nations, who in turn, will seek to hold onto their own share of world oil production by selling it into new channels.
Not according to some ZH posters. One in particular has corrected my opnion on fracking. Making clear that new recovery methods are super cheap and old wells spring right back to life. The cost of production is on a steep curve down, making shale a profitable long term play. The new drilling methods also allow more productive wells to spring up for lower and lower costs. In short, "Jack Burton doesn't know shit". Anyways, I still hold with the article above, Shale was always a bubble built on free Fed money. Take away record low borrowing costs, and shale is in trouble. The miracle of shale is only in some people's minds. Usually those with a direct interest in the Shale Play. Just like the Tar Sand's guy who ripped in to me three years ago. He had all the arguments for Tar's profitable long term future. And the fact he worked in the Tar Play had nothing to do with his opnion.
People believe what their job or income tell them to believe. Those of us with no direct connection can stand back from a distance and judge on the numbers, not the dream, or the paycheck.
And the massive Frack Sand Mines a few hours north of here just completed on the bet Fracking was here to stay? I am eager to go have a look next spring and see how production there looks. The mines and processing and loading and rail facilities are all packed together in a five mine complex. Lots of capital investment. And several very rich farmers!
Jack
You know that nobody's going nowhere unless demand/consumption picks up and all job gains aren't in hamburger flipping/waiting tables.
Hewlett Packard, Schlumberger, and A&P laid off 60,000 this year and the US Army another 60,000. Who knows, perhaps all those refugees in Eastern Europe will boost world wide demand for crude.
I wish there was better understanding of the difference between crude oil wells and the fracking wells into which perforated pipes are laid to slowly capture the pools of oil which, not being under pressure, rise slowly to the surface.
In the 50's drillers would not even bother with wells that produced 300 barrels a day.
The large, integrated oil companies will continue to thrive. Most of them have converted from LIFO TO FIFO by now. The value of their inventories have taken a hit but they continue to be very profitable.
Here is one new frak productivity gain not yet in use:
""From an economic standpoint we and our partner Schlumberger believe that we can materially reduce the cost per barrel to frac a well by virtue of going from the existing pump model to the new pump model," said the executive.
Those savings for the product, which has been tested in the oilfield but is not yet ready for commercial deployment, could be as high at $5 a barrel. VorTeq will also cut the number of pumps needed for a frac job to as few as four from 20, he said."
http://finance.yahoo.com/news/energy-recovery-lands-125-mln-200001884.html
Here we are giving our opinions, while not knowing anything about fracking costs or results.
It occurs to me that a "rig" can be reused. It also occurs to me that 'muricans are very clever.
So, unlike a typical Hollywood movie, where all of the white guys are morons, they ain't.
All the white guys might not be morons, but you are... The rig is not the problem; the yield of any fracking well is... Here, have some fun:
http://www.bloomberg.com/bw/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power
We've been hearing about how Saudi and Russian drilling and well efficiency was going to drown out the shale patch as long as we've known about the shale patch.
Of course, Saudi Arabia is now running a 25% deficit, and Russia looks shaky too.
A low and dropping price indicates a supply glut.
Cutting capacity is what you'd expect drillers to do, just as you'd expect carmakers to make fewer cars, phone makers to make fewer phones, widget makers to make fewer widgets, in similar circumstances.
All in all, it is the health of the US oil patch at prices that drive the Saudi deep into deficit spending, and the Russians to economic distress that should be suprising...not the fact that they hurt when the other major producers hurt.
This is just plain stupid.
The U.S. sits atop a shit-ton and a half of clean coal.
We live in "Global Warming" times. Coal is the enemy of humanity. Even the Pope said so...
I believe the correct expression is shitload - foul and dangerous goods were always marked Store High in Transit. This was changed to Ship On Deck which gave us another nautical expletive.
I agree with your point and the only problem is exhaust pollution which can be dealt with using modern technology.Same goes for the trillion tons of global waste that we bury instead of using as fuel. Shale oil is a ponzi scheme that destoys the environment
All shale cos. are gonna bust
Their lenders will again cry for QE
and the cycle repeats (they assume)
But hey , what if all crashes