Shale Efficiency Has Peaked For Now As Rig Count Surges For 22nd Straight Week

Tyler Durden's picture

For the 22nd week in a row, the number of US oil rigs rose (up 6 to 747) to the highest since April 2015.

Given the historical relationship between lagged prices and rig counts, we suspect the resurgence in rigs may begin to stall...

Oil is headed for the longest run of weekly losses since August 2015 as OPEC member Libya restored production and the surplus in the U.S. shows little sign of abating.

"Inventory levels remain stubbornly high," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

 

"The reality is, the things that have caused this trading range remain in place. Nothing’s changed."

US Crude Production from the Lower 48 rebounded this week (after a modest fall the week before) to new cycle highs...

 

The growth in rigs has been almost entirely in The Permian...

But, as Reuters reports, while cash, people and equipment are pouring into the prolific Permian shale basin in Texas as business booms in the largest U.S. oilfield, one group of investors is heading the other way - concerned that shale may become a victim of its own success.

Eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million, concerned producers are pumping oil so fast they will undo the nascent recovery in the industry after OPEC and some non-OPEC producers agreed to cut supply in November.

 

The funds, with assets of $286 billion and substantial energy holdings, cut exposure to firms that are either pure-play Permian companies or that derive significant revenues from the region, according to an analysis of their investments based on Reuters data.

 

"Margins will continue to be squeezed by a 15 to 20 percent increase in service costs in the Permian basin," said Michael Roomberg, portfolio manager of the Miller/Howard Drill Bit to Burner Tip Fund.

Which, despite the forecasts for increasing production, fits with OilPrice.com's Peter Tertzakian warning that shale efficiency has peaked... for now.

Learning takes time and effort. But a good education pays off.

North America’s oil industry has been in school for the past three years, studying how to become more productive in a fragile $50-a-barrel world. Many companies in the class of 2017 have graduated and are now competing hard for a greater share of global barrels.

Having said that, North America’s education on how to make oilfields more productive appears to be stalling. After a breathtaking uphill sprint, productivity data from the U.S. Energy Information Agency (EIA) shows that the last few thousand oil wells in top-class American plays may have hit a limit—at least for now.

Our Figure this week shows a classic S-curve learning pattern in the mother lode of all oil plays: the Permian Basin. Slow improvements to rig productivity (2012 to 2015) were followed by a steep period of rapid learning (2015 to 2017). Eventually limitations set in and advancement quickly stalled upon mastering new processes (2017 to the present).

(Click to enlarge)

As with many things in life it’s repetition that leads to mastery. Getting to know the rocks better and using progressively better techniques to extract the hydrocarbons facilitate learning in the oil and gas business. Each subsequent well that’s drilled yields a better understanding on how to drill and extract the oil buried several kilometers beneath a prospector’s feet. Trial, error and breakthroughs through repetitive drilling have been a longstanding hallmark of this 150-year-old business.

The “light tight oil” (LTO) revolution began in North America circa 2010. It took about 30,000 wells and three years before the learning in the Permian Basin kicked in. The next 20,000 wells yielded an impressive doubling of productivity. But it was innovation from the following 10,000 wells when mastery set in; by the time the 60 thousandth well was drilled the amount of new oil produced by a single drilling rig (averaged over a month) more than tripled to 700 B/d.

Aside from learning more about the rocks, the following six factors have contributed to the tight oil learning curve:

1. Walking rigs – Assembling and dismantling rigs for each new well used to be an unproductive, time consuming process. Wrenches and bolts are passé; new rigs “walk” on large well pads needling holes in the ground like a sewing machine on a patch.

 

2. Bigger, better gear – From drill bits to motors, pump and electronic sensors, all the gear on a rig is now more powerful and more precise.

 

3. Longer lateral wells – A horizontal well is like a trough that gathers oil in the rock formation. Why stop at one kilometer when you can drill out two or three with the better gear?

 

4. Fracturing with greater intensity – Hydraulic fracturing used to be a one-off, complicated process. Today, liberating tight oil is like unzipping a zipper down the length of a lateral well section.

 

5. Smarter, better logistics – Idle time on well sites can cost tens of thousands of dollars an hour. Modern supply chain management and logistics are helping operators use every hour of the clock more cost effectively.

 

6. ‘High grading’ of prospects – Low oil prices culled the industry’s spreadsheets of uneconomic play areas. Activity migrated to high quality ‘sweet spots’, which are turning out to be more plentiful than originally thought.

How much better can it all get? 

The data in our chart, and from other plays, suggests that the collective learning from these factors may have peaked; ergo a high school conclusion might lead us to believe that the golden geese—tight oil wells drilled into prolific plays like the US Permian and Eagle Ford—may have finally finished laying bigger and bigger eggs.

But it’s not wise to be fooled into that sort of undergraduate thinking. Productivity may have stalled for now, but the learning is paying off. The rate of output growth in the new genre of light tight oil plays isn’t about to lose momentum around the $50/B mark.

Learning is infectious. And what good student starts from the proverbial “square one?” Only fools reinvent the wheel. Knowledge gained from American “tight oil” plays is spreading to other plays and has already spread north into Canada where conditions favour copycat learning. Plays like the Montney and Duvernay are already climbing up their learning curves.

All this learning sounds like bad news for oversupplied oil markets. Yet there is a flip side: The good news for North America is that not everyone is going to the same school. Those on the other side of the world aren’t drilling thousands of wells from which they can learn. They’re relying on OPEC valve closures to save their competitiveness in the old-school way of doing things.

The irony is that OPEC’s artificially supported oil price is tuition for North America’s industry. On their tab we’re learning how to produce more oil at lower prices.

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Drimble Wedge's picture

So basically ~ Permian has lost it's MOJO

Dukes's picture

"Stubbornly high inventory"

That statement rings with irony to me.

Not to beat that same drum that continually shows up in the oil threads...BUT, it is true that oil is consumable calories that are currently required for societies to run.

Drimble Wedge's picture

Shale oil production has reached a PERMIANently high plateau.

PrayingMantis's picture

 

... this "shale efficiency" agenda is all about the latest US sanctions against Russia ... to wrest Russia's monopoly gas business for EU away from Russia ...

... >>> ..." ...Important to note about this issue, this report explains, is that due to what is called “hydraulic fracturing”, the United States has overwhelmed its domestic capacity to store the natural gas it’s now producing—and in order to sell what they are overproducing, they have begun a process to destroy Russia’s longstanding international agreements with the EU [read: US sanctions] that supplies them with cheap energy supplies. ... " ...

more here >>> http://www.whatdoesitmean.com/index2316.htm ... and here >>> https://www.rt.com/news/392483-germany-austria-us-sanctions-russia/

;)

AllOfGood's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

NoWayJose's picture

Would someone please tell Texas and Notth Dakota how all these 'new' wells are being drilled without hiring any employees? Or maybe these numbers are made up by the algos and are bogus too???

just the tip's picture

it's good that they are getting their shit together in the permian, because it's getting ready to go tits up again in north dakota.  as long as there is a judge that doesn't like trump, shit like this is going to continue.

https://finance.yahoo.com/news/judges-ruling-surprises-doesnt-concern-18...

Hohum's picture

Oh yes, 125% rig increase year over year for 9% increase in production.  Very efficient!  Carry on.

WinstonSmith1984's picture

Lots of duc's which means the pipeline is going to be really long even when the number of drilling rigs begins to decline

Cordeezy's picture

Who would build a rig with the inventory and prices where they are? There isn't an increase in demand coming

www.escapeamazon.com

Serfs Up's picture

Possibility #1:  everything I read about new, lower breakevens and super-duper efficienciy gains is correct.

Possibility #2:  this is all manufactured bullshit designed to sell more debt and equity to fools.

Data (from today's WSJ):

"Since 2011, the largest 30 independent U.S. shale producers spent an average of nearly $1.33 for every $1 they made drilling wells, according to a Wall Street Journal analysis.In the past two years, those 30 have lost $130 billion. More than 120 companies have gone bankrupt, and many of those that survived have done so with cash infusions from Wall Street, which rewarded the drillers for their fast growth."

I guess I am just old school.  I still cling to the old idea that if you spend $1.33 to get $1.00 you are a fool.  Further, I cling to the outdated notion that losing $130 billion across an entire sector says that, maybe, that sector ain't doing so hot.  

But that's just me I guess.

Stormtrooper's picture

If you are owner or manager of one of these oil companies, losing money long term on the business isn't important if 1) Suckers on Wall Street keep sending you good money after bad, and 2) You are able to keep drawing a large salary out of the business so that you will be long term solvent.

Secret Weapon's picture

Putrid was right. Read the Reset.

Kreditanstalt's picture

Don't give us this stuff about "US oilfield productivity": if they're NOT MAKING MONEY there is no "productivity".

 

Yes or No: ARE THEY PROFITABLE AT $48 OIL???  Or is this being propped up with borrowed money...

Ignorance is bliss's picture

Permian oil drilling has not made any money. ConocoPhillips and the rest are losing money every quarter. The companies involved in Permian oil exploration are borrowing heavily from regional banks. The oil generates enough cash flow to service the debt and pay dividends to cash starved pensions, insurance companies, and other investors. If the Permian basin was sustainable you wouldn't need to continually grow the number of rigs. Each rig has about a 3 year life span. It ramps up, peaks, and falls off quickly. The oil itself is low quality crude. It doesn't fetch the same price as $50 WTI. I recall reading that $35 was the norm. Have you ever sucked up the last little bit of a milk shake? There is a particular slurping sound as the last bit is sucked through a straw. That's what we are seeing being played out today. Enjoy the last bit, cause there ain't anymore, and in a few years it will play itself out. The same thing is Occuring in Mexico, Canada, and Brazil. Yes..this is some serious shit and the ramifications are huge.

jmack's picture

LOL.  your ignorance is astounding.   You literally have no clue what you are talking about.

fattail's picture

Ok then.  Enlighten us.  Honestly curious.

jmack's picture

enlighten you about what?  The quality of the oil  in texas shale plays?  it can vary from well to well, no one well is exactly like another well, but the closer they are to each other geographically, the closer thier quality of effluents will be.

 

WTI is around 39.6 api gravity  https://en.wikipedia.org/wiki/West_Texas_Intermediate

 

 Most wells I took samples on varied from 41 gravity all the way up to 73 gravity which is essentially a natural gas liquid. 

https://en.wikipedia.org/wiki/API_gravity

 

  The higher the gravity the better the oil,  all other things, such as sulfer content being somewhat equal.

 

 

      oil companies develop a set of wells and they will get a gradient of results from those wells, depending on what the geology is like underneath the leases they have been able to obtain.  Some of them will not get hydrocarbon liquids at all (they all bring back water, except for some swn wells in the fayetteville shale), but just pure natural gas.  some will have higher sulfer content, bad.  some will have higher parafin content, also not desirable. as both those factors either reduce the sale price, or increase the cost of production over time.  but their best well will be profitable at very low prices, I have heard some company men brag that a specific well is economic at $6 a bbl.  While others are not profitable at $50 dollars a bbl.  so when you hear "shale oil is profitable at x dollars per bbl", that is an average of all wells.    But some companies have a better portfolio of wells, they sell off the ones that are marginal to smaller or more desperate firms, and retain the best wells, and retain a profitable business model.  Other companies are less well run, or are just trying to learn and are willing to buy those wells to train their personnel, so they operate at a loss until they learn what they are doing in shale oil. While another group are purely scam artists and are just working the system for "easy" money.    Just as you have well run internet companies like google or amazon, you also have those that hope to become well run internet companies, and those that are just not well run internet companies, the twitters, the ubers, or snaps.    

 

    These people that come in with some kind of overarching conspiracy that we have hit peak oil and the only reason we have oil surpluses is easy money, is just ignorance.  We certainly have excesses due to easy money, that is apparant in every industry, but it does not magically mean that the oil industry is a chimera and will disappear as soon as easy money dries up.  The knowledgable, well managed companies will thrive, and the scammers and overleveraged and stupid will fail.

 

This is not even addressing the schmuck's confusion in what a rig is and a well or his rediculous statement that a rig (well?) has a 3 year life cycle..... laughable.

SummerSausage's picture

But you said they'd all go broke if oil fell below $90 per barrel.

Are they losing 50% on every barrel but making it up on volume?  Calling Crazy Eddie!

NurseRatched's picture

So they decided to drill the most productive wells first? They did not hold back on their best prospects but somehow decided to exploit the most promising opportunities first?
Is anyone shocked by this?

SummerSausage's picture

They told me all these companies would go bankrupt because they dan't operate with oil below $90 a barrel.

When that didn't happen they said breakeven was $70 a barrel.

Then, the were CERTAIN there would be great loan defaults and bankruptices with oil below $50 a barrel.

At some point they should have a correct prediction to point to before more wailing and gnashing of teeth, no?

dunce's picture

The  OPEC producers can only look forward to more competion from more areas of the world that are not under their control. After the embargo back in the seventies they only held prices down enough to restict nuclear power generation. I see them pumping their oil until they run out to maintain their governments and moving to Europe to live their muslim lives.