The Fuse

Is Shale Productivity Bumping Up Against Its Limits?

by Nick Cunningham | June 14, 2017

The U.S. shale industry continues to spoil OPEC’s efforts at rebalancing the oil market, and both the IEA and OPEC acknowledged this week that the drawdown in inventories is happening at a much slower pace than anticipated. The IEA says that U.S. oil production will grow by 920,000 barrels per day (b/d) in 2017 and perhaps by another 780,000 b/d next year.

There are some signs that the U.S. shale industry is bumping up against its productivity limits, which could lead to lower-than-expected output gains or rising drilling costs.

Shale drillers have been tweaking their drilling practices and developing innovative ways to squeeze more oil out of their wells. Against this backdrop, each new rig added into the field has been able to produce more and more oil. Rising productivity, which has accelerated since 2014 as companies cut costs and upgraded to the most attractive locations, allowed the industry to dramatically lower breakeven costs.

There are, however, some signs that the U.S. shale industry is bumping up against its productivity limits. The implications for this development are still uncertain, but it could lead to lower-than-expected output gains from U.S. shale or rising drilling costs, or both.

Drilling productivity grinds to a halt

New-well production per drilling rig has flattened out in the Eagle Ford and the Bakken, and is actually declining in the Permian.

After years of productivity gains, the shale industry could be starting to run into a ceiling. New-well production per drilling rig has flattened out in the Eagle Ford and the Bakken, and is actually declining in the Permian, according to the EIA. For example, in the Eagle Ford, the average rig could expect to produce around 872 barrels of oil per day from a new well in 2015, up more than 40 percent from a year earlier. That figure surged to 1,301 b/d last year. However, the volume of oil that a rig could produce from a new well in the Eagle Ford has remained essentially flat since October 2016 at just over 1,400 b/d. The story is similar in the Bakken. After years of steady growth in productivity—which accelerated between 2014 and 2016—new-well production per rig has plateaued since September 2016 at just over 1,100 b/d.

eagleford

The Permian has seen a more dramatic change in productivity. The upward slope of productivity gains was sharper and more recent than the other two shale basins. But as companies have flocked to West Texas in droves, they are being forced to buy less-than-optimal acreage as the best spots have already been absorbed. New-well production per rig has actually been in decline since last August.

permianproductivity

Output still rising

Flat or falling productivity does not necessarily mean that overall production is declining. In fact, it’s just the opposite. U.S. shale production is still rising sharply. The EIA says that the top shale basins will add 127,000 b/d of new supply in July versus this month. Much of that will come from the Permian, which will add 65,000 b/d, while the Eagle Ford will also contribute 43,000 b/d. In fact, total U.S. oil production has grown by more than 700,000 b/d since the third quarter of 2016, just as the three major shale basins started to see their productivity gains flatten out.

Flat or falling productivity does not necessarily mean that overall production is declining. In fact, it’s just the opposite.

However, the gains are occurring simply because the shale industry is throwing more rigs and capital into the shale patch. Output is rising because inputs are rising, not necessarily because drilling is becoming more productive.

The expectation that drilling costs would increase as demand for rigs tightened the market for oilfield services has been a concern for some time. “The apparent cost reductions seen by the operators over the past 18 months are not linked to a general improvement in efficiency in the service industry. They are simply a result of service-pricing concessions,” Schlumberger Chairman and CEO Paal Kibsgaard said an industry conference in early 2016. He added that “the cost savings from lower service pricing should largely be reversed when activity levels start picking up.” That cost inflation is already underway. Between November 2016 and March 2017, drilling costs jumped by 7 percent, according to Reuters.

Drilling innovations remain

Shale companies in the Bakken are stepping up their refracking efforts, with some promising results.

Of course, declining well productivity is not inevitable. Drillers constantly experiment with new techniques, such as loading up wells with much larger volumes of sand and water, longer laterals, and more precise fracture treatments. One technique that has been in use for some time but has not been applied everywhere is the practice of “refracking.” Drilling technology has advanced substantially over the years. As a result, some companies are returning to older wells to refrack them. The Bismarck Tribune reported that shale companies in the Bakken are stepping up their refracking efforts, with some promising results. The director of the North Dakota Pipeline Authority said that after assessing 140 refractured wells, companies saw production increases of 200,000 to 250,000 barrels. The added benefit of refracking is that the wells already exist, so the environmental impact is less, and the site is likely already located near a pipeline. It is not clear that refracking will do much to halt the decline in new-well production per rig, but it provides an example of the industry being creative to boost returns.

Lower oil prices pose risk

The shale industry is expected to grow production significantly this year, but it will require heavier levels of spending, as productivity gains top out. Overall rising production might also derail the industry’s fortunes if it continues to put downward pressure on crude oil prices. According to Bloomberg, the Bakken and parts of the Eagle Ford and Niobrara will become unprofitable if oil drops below $45 per barrel. The SCOOP play in Oklahoma and even parts of the Permian have breakeven prices at around $40 per barrel—not far from today’s prices. With drilling campaigns already underway, the production increases are probably already a foregone conclusion.

While most analysts still see robust production growth in 2017, the industry’s fortunes next year are a bit more uncertain.

The end result could be much stronger headwinds this year for shale producers even as production increases. Rising drilling costs, flat or declining productivity, and downside oil price risks will put the shale industry to the test. While most analysts still see robust production growth in 2017, the industry’s fortunes next year are a bit more uncertain.

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