The Latest Red Flag For U.S. Shale

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

The U.S. shale industry has had a rough few weeks, with a growing number of reports suggesting that the industry is facing much more financial trouble than many analysts had expected. Now, a new report adds further evidence to the notion that shale is losing its luster in a $50 per barrel market, with producers forgoing shale in favor of older wells.

U.S. shale was thought to be the most competitive source of oil out there, and indeed the industry appears to be ramping up production at today’s prices. Shale had adapted to a $50 per barrel market, producers had streamlined operations to make them almost resemble an assembly line, and in a volatile and unpredictable market, the short-cycle nature of shale drilling made it one of the least risky options for drillers.

But in just a few weeks’ time, investors are starting to ask major questions about the viability of shale drilling at such a large scale.

A couple of notable things have occurred in the past month or so. Pioneer Natural Resources, a top Permian producer, raised concerns when it told investors that its Permian shale wells were coming up with a higher natural gas-to-oil ratio than expected, a potentially worrying sign. The company also reported that it had trouble with some of its wells, forcing it to delay some completions.

Separately, Goldman Sachs reported that top investors are souring on U.S. shale E&Ps, with poor performances leading investors to search for ways to “reallocate capital” elsewhere in the energy space. That is big red flag for the shale industry, which is still struggling to consistently post profits despite the highly-touted cost reductions over the past few years.

But the newest sign of trouble comes from the Wall Street Journal, which just reported that more oil producers are shunning shale drilling and using their scarce dollars to reinvest in older conventional wells. “As crude prices languish under $50 a barrel, and with increasing costs for land, labor and infrastructure, some shale fracking operations are starting to look expensive,” the WSJ reported.

The WSJ says that although Wall Street has showered the shale industry with billions of dollars in capital, and although that has led to a surge in oil production, shale producers by and large are still not profitable. At today’s prices, the WSJ says, “most producers are losing money on every barrel they pump.”

As a result, some oil companies are returning to conventional wells – long thought to be much less attractive today than new shale drilling – and trying to tap them again to squeeze out more oil. The cost to drill a conventional well is a fraction of that for a shale well – $1 million per well versus upwards of $8 million. But those types of wells, in many cases, were taken offline decades ago during periods of low oil prices and declining production.

However, technology has advanced quite a bit since some of these older wells were last online. A couple of companies profiled by the WSJ are tapping old wells outside of Los Angeles, Fresno, and in Oklahoma, Louisiana and parts of Texas. These wells produced a handful of barrels per day, but tapping them again with new drilling techniques allow drillers to squeeze out something like 100 barrels per day, a profitable play considering the low investment required.

One company told the WSJ that the old well essentially breaks even at $15 per barrel.

Part of the problem for U.S. shale is that it is showing some bubble-like symptoms. Land prices have soared in the Permian as so many top shale producers shifted their resources to West Texas in the past few years. Even the oil majors started to scale down their billion-dollar investments in places like Canada’s oil sands, or major LNG export terminals, or offshore drilling, instead reallocating capital to the Permian.

While land prices are inflated, the supply of oilfield services has also tightened significantly. A shortage of fracking crews and other equipment and services has also contributed to higher production costs as well as delays.

The result is rising costs for shale at a time when production problems are also starting to crop up. All the while a long list of companies are still not profitable, despite succeeding in boosting production.

The contrarian strategy, then, seems to be returning to old conventional wells, even small ones, and trying to eke out a few more barrels.

With all of that said, retapping old wells probably won’t lead to a rush of new supply since we are stilling talking about relatively small numbers. But it’s a striking development that some ancient wells are getting a second look by companies falling out of love with U.S. shale.

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So Close's picture

people have been predicting the death of shale for how long now?

skbull44's picture

Alas, diminishing returns.

johnnycanuck's picture

Probably because it never was viable and has only continued to exist due to QE + ZIRP life support and Wall St. bubble blowers.

But worry not, reputable firms like Cheatem, Fleecem and Moore will be along with another batch of Magic Beans for you to invest in shortly.

bankbob's picture

And the production price just keeps falling.  All in pricing in the Permian Basin is now roughly $30 a barrel.

jus_lite_reading's picture

Shale won't die out entirely but will stay depressed. Buy deep water drillers. Just saying.

BandGap's picture

Color me shocked.

Pull.The.Fucking.Pin

Trivictus's picture

Have we Peaked Oil yet?  

Are we there yet?

Are we there yet?

How 'bout now?

BetterRalph's picture

I have to say, I really don't understand the whole thing. Shale. Help me visualize is the problem like getting gold out of certain kinds of rock? Where it's so tough of rock and the little speckles of gold are there for all to see, but it would be so expensive to get the gold out of it it just ain't worth it.

bankbob's picture

Just remember that shale contains both ail and natgas.  The oil has not been moving around in porous rock picking up impurities like mercury and lead.  So, it is lighter,  cleaner and sweeter than any other oil on the planet. 

Also, remember that shale uses 4D seismic technology to determine where to drill.  It has been over 20 months since there has been a dry hole drilled in the Shale Patch.

Also, understand that some shale deposits are laid down in multiple layers.  One platform with one set of roads and one set of water tanks can drill one layer and then drill the layer below and the one below, etc, etc.  Some Permian Basin shales are 10 drillable layers deep.

So, all in costs in the Permian Basin are now below $30 a barrel.

BetterRalph's picture

I never knew that about this source of oil being clean like that. I probably should have looked up the basic definition of Shale. Sedimentary rock composed of mud mix of clay and other minerals.

I get it now you said the layers (boom that helped, I think like a giant long pit) where one layer might be higher quality of return ratio than another.

$30 sounds pretty good to me. I remember 25 cent gallons of gas, my first lawn mowing job came from this.

cougar_w's picture

Rolling over into contraction.

falak pema's picture

The Shale bubble in US earthquake swamp-land to feed LNG plants in Poland vs Qatar/Iran-- LNG/pipelines and Putin's North Field Siberian guzzler...

I have a feeling I know who is gonna win the global gas challenge !

DarthVaderMentor's picture

The Deep State does not want shale to be viable. Energy Independence is a problem to keep the flyover middle class fully msupporting wars in the Middle East. Therefore, the Deep State will wipe out shale and coal as soon as they can fool Trump into a deal to do it.

ReturnOfDaMac's picture

Won't be hard.  Screwing flyover is what he does best, and they like it.  Bring home the troops?  Ha! 

GooseShtepping Moron's picture

Actually, it's precisely the opposite. Shale never would have been profitable at all had it not been for QE and ZIRP. This was all part of the Obama/Deep State plot to put the screws to Russia.

PenGun's picture

And now Putin is conspiring with the Saudis to keep oil at right around $45 to keep the frackers trying. It's like that. ;)

Augustus's picture

The original economics of the shale wells gave 18 month or less full cost recovery. The real good ones did it in six months.  Even a tool pusher could figure out they were profitable.

Hkan's picture

All red flags U.S. starting to look like Chinese new year.

One of We's picture

How come a quart of 10w-30 at NAPA cost $.99 when oil was $150/bl and now it costs $3.50 with oil sub-$50/bl?

roadhazard's picture

Shale can sit there not operating and keep prices down.

Iconoclast421's picture

Go back in time 15 years and try telling people that dozens of drilling companies would be unable to actually turn a profit with oil at $50 a barrel. They'd say you're smoking crack. And yet peak oil isnt a thing? Pull the other one.

sinbad2's picture

BHP spent $40 billion on US shale, it is now selling for $10 billion, if it can find someone to buy.

Sapere aude's picture

What a surprise. U.S. shale is not viable. Whoever would have thought that!!

 

Roadhazard. NO it can't. It has to keep drilling and drilling just to stand still. Red Queen Syndrome. Look it up and learn something

Sapere aude's picture

Bankbob. FAKE FACTS. There have been plenty of dry holes in Shale, and completions that have failed....You are literally making it up.

Call up the Well reports, and see for yourself. Look at Pantheon Resources, problems with rubble in the wells. Look up the accounts of all the big players in shale, THEN FIND ONE THAT ACTUALLY MAKES A PROFIT ON SHALE?

Likewise you all in price of $30 is bullshit, prime bullshit, as none of the companies are making a dime even at $50.

 

They might talk the talk of $30 to get mugs like you onboard to tap up for ever increasing amounts of ponzi schemes, but making money they certainly are not.

 

The CEO's talk about how lucrative it is (and it is FOR THEM), but for stockholders and bondholders its hell. Look up how many of them and services have gone bust leaving investors fleeced.

F1le's picture

I havent found any shale oil company studing their reports that makes money since 2012. No matter if the price of oil is 120$ or 45$, this breakeven point on 35$ is a fraud, as maybe it is right, but nobody tells that shale oil drill works 2-3 years and another huge CapEx expenditure is needed.