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Page added on September 10, 2018

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The Biggest Challenge Facing Shale Oil Could Be Overcoming Its Own Success


If you follow energy markets at all, you know that prices on the Brent global oil benchmark have traded within a robust band of $70 to $80 a barrel for the last five months. But such prices are a pipe dream – literally – for U.S. shale producers, particularly those in the prolific Permian Basin which accounts for more than a third of all domestic production at nearly 3.4 million barrels a day.

Permian producers are fetching closer to $50 a barrel due to the lack of takeaway capacity – pipelines and associated infrastructure – that would allow them to efficiently export oil from the Gulf of Mexico coast to global markets. Producers are instead being forced to use less efficient railways and trucks or worse put it in storage. With prices for oil in future months cheaper than prompt or “spot” crude orders – a situation known as “backwardation” – this play is a money loser for producers who must also pay storage fees.

Meanwhile, production costs are on the rise. Prices for oil services, for drilling and fracking wells, were not going to stay depressed forever, and with the massive job cuts in response to the oil price collapse of 2014, the industry now finds itself in a tight and increasingly expensive labor market. The upshot is a glut of Permian crude at Midland, Texas and a record number of drilled-but-uncompleted (DUC) wells in the region – estimated around 3,500 DUCs. The Trump administration’s tariffs on imported steel and aluminum, materials the industry uses to drill wells and build pipelines and other infrastructure, are adding further cost pressure.

Despite all this, domestic crude oil production – driven by the prolific Permian – is expected to grow by 1.3 million barrels-a-day this year, effectively satisfying growth in global oil demand. But such explosive growth rates can no longer be taken for granted in future years, and there’s a genuine risk that the great shale machine could bog down, a victim of its success in many ways. A growing number of oil industry executives have spoken out about the potential for transportation bottlenecks to derail America’s energy boom.

Schlumberger CEO Paal Kibsgaard recently warned that bottlenecks in the Permian, which have pushed the local price of oil to four-year lows, could have a “dampening effect” on production growth and investment levels in the coming year. Kibsgaard, head of the world’s largest oilfield services provider, also said the market consensus that Permian output will continue to grow by nearly 1.5 million barrels a day is “starting to be called into question.”

The good news is that additional pipeline capacity of nearly 2 million barrels a day is expected to come online by the end of 2019. However, this does not necessarily mean that the days of heavily discounted Permian oil will end. Refiners along the Gulf Coast have no use for more light, sweet shale oil, which means these incremental barrels must be exported. Additional pipeline capacity helps, but port facilities also play a huge role in the efficient movement of America’s current oil output.

Most Gulf Coast ports are in inland waterways that lack access to the open ocean. This reality means they can’t handle the new class of large tankers that are the most efficient and preferred method for shipping the growing volumes of shale export oil. Presently, the Louisiana Offshore Oil Port (LOOP) is the only facility deep enough to load the biggest tankers. A massive undertaking of building out the port at Corpus Christi is needed but efforts there have been slow.

Shale oil production also comes with large amounts of associated natural gas. Associated gas often does not have a commercial market. Some of it is flared but environmental regulations dictate that only a small portion can be burned off at the wellhead. The issue of associated gas is already emerging as a problem for shale players, particularly in North Dakota’s Bakken. Shale operators in the Bakken have started to shut down rigs and scale back well completions to avoid violating the state’s 85% gas-capture target. In the Permian, an estimated $1 million of gas is burned off every day because there aren’t enough pipelines to get it to market.

Global crude oil prices, OPEC and investor demand for greater capital efficiency were once seen as the biggest threats to continued growth in the shale fields. No more. The sector has managed to clear all of those hurdles. With the upstream resource proven to be of world-class quality, the most significant challenges lie further “downstream” with pipelines, ports, infrastructure and in dealing with associated gas efficiently and in an environmentally responsible manner.

Given the scale of these challenges, it’s no surprise to see major oil companies seizing bigger positions in shale fields, most recently with BP’s $10 billion acquisition of BHP-Billiton’s U.S. onshore assets. Exxon Mobil, Chevron and Royal Dutch Shell are also moving more aggressively into American shale. The independents who pioneered shale production will always have a place in the sector, but it may take the financial strength and integrated solutions that only the big majors can offer to keep shale on the long-term growth path.

I am CEO of Canary, one of the largest privately-owned oilfield services companies in the United States. I’ve served as a consultant to the energy industry in North America, Asia and Africa. My commentaries have been published in The Hill, Real Clear Energy, and the Economis…


10 Comments on "The Biggest Challenge Facing Shale Oil Could Be Overcoming Its Own Success"

  1. makati1 on Mon, 10th Sep 2018 7:19 pm 

    “…Overcoming Its Own Success” Do you mean overcoming the fact that it has never made a profit and is deeply in debt? LMAO

  2. dave thompson on Mon, 10th Sep 2018 8:49 pm 

    Flaring off NG WTF?

  3. Boat on Mon, 10th Sep 2018 11:47 pm 

    If you boys read the EIA drilling productivity report you would know completions have been stagnet for 5 months. These posts are old news by “experts” Production growth will resume when several pipelines are completed along with nat gas infrastructure which is also close to being maxed out per regulations. Trump has yet to dump those restrictions.

  4. deadly on Tue, 11th Sep 2018 12:38 am 

    More oil is always better, prevents collapse, economic devastation.

    If you want oil to power civilization, you have to have it all of the time. People prefer to use oil for transportation, industry, farming, it never stops, lots of stuff can get done when oil is available.

    It is the lifeblood of moving goods hither and yon.

    Can’t be any other way if you want your post-modern world to function like it should.

    Have to repeat the information constantly.

    Florence is headed straight for the east coast of North America and has probably a thousand miles to go before landfall somewhere between the Carolinas and Virginia.

    It’s going to be a whale of a hurricane.

  5. makati1 on Tue, 11th Sep 2018 12:59 am 

    “…EIA drilling productivity report…” should begin: “Once upon a time in the land of make-believe (America)…” LMAO

  6. makati1 on Tue, 11th Sep 2018 1:04 am 

    deadly, the ones following will likely also follow a similar path. The ocean is warm all the way to Nova Scotia now. Nothing to prevent them going north all along the East Coast.,11.32,429

    I have been watching them and the typhoons in the Pacific. They all seem to be going north this year. Many have hit some part of Japan. So far, none near the Philippines.,9.64,429

    Interesting how warmer temps can change the direction of such powerful storms.

  7. makati1 on Tue, 11th Sep 2018 1:38 am 

    Ah, but the modern world is not functioning like it should. It is being destroyed by the US’ addiction to power and waste. The sooner the US goes down, the better for the rest of the world.

    Where will it begin? The Stock Market Casino? The Fed raising rates and removing liquidity? Trump’s delusional activities? Civil War? A series of cat 5 hurricanes hitting one after another until November? November’s elections? Iraq? Afghanistan? Syria? An “accident” on Russia’s border? So many black swans, you cannot see the sun over America. It cannot end well for Americans.

  8. twocats on Tue, 11th Sep 2018 7:34 am 

    gotta hurry up and finish those stranded asse– sorry pipelines

  9. deadly on Tue, 11th Sep 2018 8:47 am 

    Have to burn off the excess natural gas to prevent the earth from cooling too much at night. It is a blessing in disguise.

    CO2 Quantum Physics

  10. Sissyfuss on Tue, 11th Sep 2018 10:58 am 

    ” I an CEO of Canary, one of the largest privately-owned oilfield services companies in the United States.” And unaware of his role as canary in the coal mine.

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