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U.S. Shale Drillers Running Out Of Options

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Much has been made about the impressive gains in efficiency and productivity in the shale patch, as new drilling techniques squeeze ever more oil and gas out of new wells. But the limits to such an approach are becoming increasingly visible. The U.S. shale revolution is running out of steam.

The collapse of oil prices has forced drillers to become more efficient, adding more wells per well pad, drilling longer laterals, adding more sand per frac job, etc. That allowed companies to continue to post gains in output despite using fewer and fewer rigs.

However, the efficiency gains may have been illusory, or at best, incremental progress instead of revolutionary change. Rather than huge innovations in drilling performance, companies were likely just trimming down on staff, squeezing suppliers, and drilling in the best spots – perhaps all sensible stuff for companies dealing with shrinking revenues, but nothing to suggest that drilling has leaped to a new level of efficiency. Reuters outlined this phenomenon in detail in a great October 21 article.

For evidence that the productivity gains have run their course, take a look at the latest Drilling Productivity Report from the EIA. Production gains from new rigs – which have increased steadily over the past three years – have run into a wall in the major U.S. shale basins. Drillers are starting to run out of ways to squeeze more oil out of wells from their rigs. Take a look at the below charts, which show drilling productivity flat lining in the Bakken, the Eagle Ford, and the Permian.


For oil companies to add new production at this point it would require hiring new workers and new rigs and simply expanding the drilling footprint. That is something that few companies are doing because of low prices. In fact, most exploration companies are doing the opposite – rig counts continue to decline and the layoffs continue to mount.

With productivity at the end of the road, and new drilling not taking place, absolute production levels are in decline. The EIA expects U.S. shale basins to lose 93,000 barrels per day between October and November, led by a 71,000 barrel-per-day loss from the Eagle Ford in South Texas.

The losses are occurring because of the huge drop off in shale production that new wells suffer from almost immediately after going into service. Take a look at the chart below that shows the “legacy” production from the Eagle Ford (i.e., old wells that are declining), which is overwhelming all the new production. The net result is a fall in oil output in South Texas.

As time goes on, that legacy figure will continue to swell, and the amount of oil flowing from new wells will decline. This is exactly why overall U.S. oil production is declining and will continue to decline through next year. The only way to turn things around is for drillers to drill new wells.

Refining Hurt Too

The fall in U.S. oil production is starting to affect the downstream sector. Refineries have performed well from the downturn in oil prices, as they use crude as an input to produce refined products such as gasoline, diesel, jet fuel, and more. Integrated oil companies, such as the oil majors, saw their losses shielded from an upturn in refining profits.

But now that oil production is falling – down from a peak of 9.6 million barrels per day to somewhere around 9.1 mb/d currently – refining margins are shrinking. Refineries benefited from a glut of crude sloshing around in the U.S., unable to be exported because of the export ban. WTI crude, a benchmark for U.S. oil, began trading at a discount relative to international benchmarks such as Brent. Refiners would buy cheap WTI and process it into refined products and sell them abroad at prices more closely correlated with Brent, pocketing a nice profit.

However, the fall in upstream production has trimmed some of that excess crude. As a result, the WTI-Brent discount has narrowed and so have refining margins. Bloomberg reported that profits from refining crude into gasoline recently hit its lowest level since 2010. Citigroup downgraded a series of refining stocks this week as the outlook for the downstream sector worsens.

For integrated oil companies, this development isn’t great either. Oil prices are still down, production is down, and now refining margins are down.

7 Comments on "U.S. Shale Drillers Running Out Of Options"

  1. eugene on Fri, 23rd Oct 2015 12:03 pm 

    You mean there isn’t a white knight in shining armor riding to safe our sorry ass.

  2. bs on Fri, 23rd Oct 2015 12:41 pm 

    The # of wells completed in the Bakken has been declining steadily (at least according to NDIC). The count in Sept was 113. The current count is 50 for Oct with 5 days left to report. If this holds, it will be significant.

  3. rockman on Fri, 23rd Oct 2015 1:23 pm 

    Productivity per well is a totally meaningless metric. Just compare two wells drilled by the same rig with identical equipment. Well A has a 1,000′ lateral and has 4 frac stages pumped down it. Well B has a 5,000′ lateral that has 36 frac stages pumped down it. So is B more productive than A…probably. Will B ultimately produce more oil than A…probably. Did B cost a hell of a lot more to drill then A…absolutely. Does B create a better return on investment then A…who knows…none of the info just provided gives even a clue as to which well is more profitable.

    So now define what “more efficient” means. Does it mean that a rig drilling a well that initially produces oil at a higher rate and ultimately recovers more oil more efficient than a well that doesn’t even if the first wells barely beaks even while the second makes a decent ROR? Bottom line: comparing “efficiencies” over a period of time when you don’t take into account how radically well design changed over that period provides no indications of how the overall dynamics and economics have evolved these last 5 years.

    So let’s just look at what’s been happening just this year. Nothing, and I mean nothing, has changed on the technology side. Not since January. 2015 and not since January 2014. Of course lots of chatter about how companies have cut back and are focusing on just the remaining sweet spots. As I already posted elsewhere the initial flow rate of wells drill this year has only increased about 15% above those of a year ago.

    But the companies are only drilling all winners now thanks to the better efficiencies, right? Consider what has happened in the Eagle Ford play since last May…long after oil prices dropped and operators began to “high grade” their efforts: 221 new wells drilled. The five best leases had an average initial production rate of 1,527 bopd. By the following August, just 4 months later, they averaged 998 bopd per well…a 34% decline in just 4 months. And how did the worst of those “high graded manufacturing projects” do? Those lower 48 wells had an average initial production rate of 309 bopd. And by August half of those wells (24) were averaging just 181 bopd. And the worse 10 wells: an average of 80 bopd. So after just 4 months the better wells were doing 998 bopd and the worse were doing 80 bopd.

    Maybe even after 40 years of doing this sh*t I still don’t have a good handle on it because I’m just not seeing a hell of a lot of efficiency from last summer. Especially since the wells drilled this summer produced only 2/3rds of the oil produced by new EFS over the same period last summer. Apparent “more efficient” doesn’t translate to more production. So while some companies might be “more efficient” they aren’t making more money and, more important, the US isn’t seeing as much of an increase in oil production as it had been.

  4. Kenz300 on Sat, 24th Oct 2015 8:55 am 

    Banks have stopped lending money……..

  5. Silicon Valley Observer on Sat, 24th Oct 2015 11:38 am 

    Rock, thanks as always for the insight. I don’t see how this can’t end badly by middle of next year. The extend and pretend strategy can’t last, can it? Or do oil drillers live in a different reality?

    Let’s say production collapses and prices go back up towards $100, will the banks and lenders jump back in with the same enthusiasm as in the past?

  6. rockman on Sat, 24th Oct 2015 1:57 pm 

    SVO – We don’t have wait until next year to see a really bad ending. There is a tremenfous amount of blood running in the oil patch streets today. You won’t hear about it from pubco management …shareholders are panicked enough already. And the privcos like the Rockman: we really don’t give a sh*t what the public knows because it doesn’t effect us…so why bother saying anything? I mean except for the Rockman who thrives on the attention he gets here. LOL.

  7. Need a job on Sat, 24th Oct 2015 7:16 pm 

    This is not looking good something has to happen. I live in NE Iowa the Company that my husband works for just cut more jobs it has this sand that they need.He was one of the workers that has no job now. Thank you for the Information

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