Shale Shock: Plummeting Productivity Threatens U.S. Oil Dominance

THE DECLINING PRODUCTIVITY OF SHALE

I have a suspicion that we talked about the article below late last year. If we have, then a bit of repetition won’t hurt. And if we haven’t, then take note.

One of the big fundamental reasons as to why we believe the oil price will move higher over the coming months and years is a failure of US shale production to live up to expectations of increasing output. Remember, US shale production has accounted for about 75% of the increase in global oil production over the last 15 or so years.

Evidence seems to be gathering that US shale production is encountering productivity issues.

From the article:

Production from the average US shale oil well is declining more rapidly every year, with the biggest losses by far in the Delaware Basin, according to a report from Enverus.

Increasing rapid declines by many thousands of older wells are obscured by the rise in total production from new wells as the industry engineers completions to maximize early production.

On a chart comparing average decline curves by year, each year begins higher and plunges at a steeper rate than the previous year.

“The US shale industry has been massively successful, roughly doubling the production out of the average oil well over the last decade, but that trend has slowed in recent years,” said Dane Gregoris, report author and managing director at Enverus Intelligence Research.

The production decline rate has grown steeper at a rate of more than 0.5% annually since 2010, the report said.

“We’ve observed that decline curves, meaning the rate at which production falls over time, are getting steeper as well density increases. Summed up, the industry’s treadmill is speeding up and this will make production growth more difficult than it was in the past,” Gregoris said.

The steepest declines are seen the Permian’s Delaware Basin, where the annual drop is nearly triple the 0.4% rate in the Midland Basin.

The report predicts declines will continue to accelerate because every well added within a section significantly steepens the decline rate for wells in that area.

The fact that new wells produce less than older ones is not a surprise. Historically, infill wells are less productive than the initial ones.

But if the decline curves on these already short-lived wells gets steeper, that will magnify the challenge of drilling and fracturing enough wells to deliver on predictions of continued growth.

More-intensive fracturing and tighter spacing can maximize the initial rate of production which represents much of the ultimate production of these short-lived wells.

After years of intensive development, the vast majority of the wells drilled now are near older ones that have depleted the surrounding reservoir, reducing the production from new wells.

I think the last sentence is rather telling!

We continue to believe that there will be negative productivity surprises coming from US shale and the Permian in particular. This is likely to put upward pressure on the oil price. All we gotta do is be patient.

THINKING ON ENERGY MARKETS

Sometimes you come across a podcast that takes the words right out of your mouth.