The Fuse

Small Firms Bypass Shale for Older Conventional Oil Fields

by Matt Piotrowski | August 22, 2017

The oil rig count in the U.S. took another hit last week, falling by five. After rising sharply since bottoming out in mid-2016, the rig count has plateaued over the past couple of months, one data point that indicates how the shale industry is having difficulty growing in the current environment. Companies are dealing with a number of issues, including operational bottlenecks, a rangebound oil price, but the biggest factor is rising costs for shale drilling.

Against this backdrop, some small and mid-sized companies are turning more toward conventional plays, in particular older oil fields that can be tapped with new technology and provide quicker paybacks and more predictable long-term returns. In a report by the Wall Street Journal, these companies are looking for “stranded oil” in old conventional wells that can be extracted cheaper than shale plays. Drilling in older fields can cost less than $1 million, versus $6 million-$8 million for shale, the WSJ says. Some firms say that their investments in re-activating older fields in California and Oklahoma are profitable under $30 and some as low as $10. At the same time, oil produced from older fields don’t have to deal with limited means to transport it, unlike in some shale areas that are running up against pipeline and other infrastructure constraints.

While reactivating old fields provides a boon to some companies and can bring about a temporary boost to total U.S. crude production, it may not deliver a longer-term solution for shoring up output growth to meet increases in demand.

While reactivating old fields provides a boon to some companies and can bring about a temporary boost to total U.S. crude production, it may not deliver a longer-term solution for shoring up output growth to meet increases in demand.

Exploration for conventional oil has taken a big hit during the current price downturn that has lasted for more than three years. The downward trend in the conventional oil sector, which makes up more than 80 percent of total global crude supply, shows why this recent shift by smaller companies comes as a surprise. The broader industry problems of cuts in capital expenditures, structural declines at mature fields, and fewer discoveries haven’t gone away as prices remain around the $50 level. The IEA noted: “The volume of conventional resources sanctioned for development last year fell to 4.7 billion barrels, 30 percent lower than the previous year as the number of projects that received a final investment decision dropped to the lowest level since the 1940s.”

Nonetheless, it’s a good thing that some U.S. companies are investing in conventional since it helps diversify the country’s resource base. While shale has a number positives over conventional—including a quicker ramp-up period—it depletes quickly, is more sensitive to price fluctuations, and requires more up-front investment.

While shale has a number positives over conventional—including a quicker ramp-up period—it depletes quickly, is more sensitive to price fluctuations, and requires more up-front investment.

As these firms shift focus, it raises the possibility that they will bring fresh approaches into new recovery methods for conventional oil. Given the innovation that has taken place in the shale patch over the past decade, bringing a similar pioneering spirit to established but near-depleted fields could be the source of the next oil boom. However, such an outcome will depend on backing from Wall Street, oil prices high enough to spur investment, and a certain degree of luck.

Last year, conventional made up more than half of total U.S. production, but based on current projections, shale will dominate growth in coming decades. The EIA, earlier this year in its long-term outlook, said shale development should account for roughly 60 percent of cumulative domestic production between now and 2040. This forecast is obviously highly dependent upon price, technology, and the regulatory environment. But amid the number of risks associated with shale, even more companies may see fit to pivot toward underexplored conventional areas, while a shift in the regulatory environment may open lands and waters previously off limits, giving conventional plays a brighter future than previously thought.

ADD A COMMENT