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This Is Why A Serious Decline In U.S Shale Plays Is Not Far Away


The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn’t be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise–until early June when it stalled and then dropped slightly.

Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015–even as the number of rigs operating plummeted.

Shale drillers who are in debt–and most of the independents are heavily in debt–simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies–who don’t have huge debt loads related to their tight oil wells–have the luxury of waiting for higher prices before completing those wells.

The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA). Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.

What this first sighting of a decline suggests is that glowing analyses of how much costs have come down for tight oil drillers and how much more efficient the drillers have become with their rigs are off the mark. It was inevitable that oil service companies would be forced to discount their services to tight oil drillers in the wake of the price and drilling bust or simply go without work. And, it makes sense that the most inefficient uses of drilling rigs would be halted.

But the idea that these changes would somehow allow tight oil drillers to continue without missing a beat were always promoted by an industry sinking into a mire of over indebtedness in the face of lower prices. In order to maintain the flow of capital to the industry–which has consistently spent more cash than it generates–the illusion of profitability had desperately to be maintained. A recent renewed slump in the oil price may finally pierce that illusion among investors.

As Iranian oil exports start to ramp up in the wake of an agreement on nuclear weapons–the Iranians aren’t allowed to have any–and the resulting end of economic sanctions, the oil price is likely to fall further, putting even more pressure on U.S. domestic drillers.

OPEC, which has refused to reduce output in the face of slackening world oil demand growth, continues to say that others–such as U.S. tight oil drillers–will have to “balance the market,” a euphemism for cutting production in order to push up prices.

It looks as if U.S. drillers may finally be doing just that. Who knew that 45 years after abandoning the role of the world’s swing producers–that is, producers who adjust production up or down to maintain stable world oil prices–U.S. oil companies would be forced into that role again entirely against their will?

By Kurt Cobb

19 Comments on "This Is Why A Serious Decline In U.S Shale Plays Is Not Far Away"

  1. BobInget on Sat, 25th Jul 2015 6:24 pm 

    With numerous bankruptcies horizoning it’s no wonder making payroll by losing money on every barrel had to end someday.

    Mideast and African conflicts just keeps heating up without letup. In NA we can see dozens of old E&P’s cancel dividends they’ve paid for decades, sell off non key properties for cheap,
    lay off workers for lack of payroll funds, cancel
    ‘hot’ drilling prospects etc.

    On top of all this, we see Congress willing to sell-off SPR to fund highway construction.
    Talk about foxes and hen-houses! Talk of selling off SPR brought oil prices down yet another notch.

    Reliable deliveries of Shale or Tight oil is constant drilling dependent. There is NOTHING on the back burners to replace NA shale.

    In point of fact, ultra deep ocean drilling has all but halted being in itself the most expensive way to find and deliver oil. Oil sands projects in Canada, Venezuela and Argentina will soon be attracting attention as our last battle to hold onto oil as transport fuel.

    We threaten to sell off our little island of security (SPR). We close off any chance of quick restarts once oil prices ‘normalize’
    Here, like deer in headlights, we stand frozen.
    The greatest economy in history totally dependent on seven million barrels of imported
    oil that could vanish, almost overnight,
    1) If a few suicide bombers or MERVED missiles successfully target Saudi Choke Points.
    2) Ghawar delivers tons of seawater, no oil.
    3) Civil war break out inside KSA as it has in Syria, Libya, Iraq, Sudan.
    4) China ‘calls-in’ loans to Venezuela payable with crude oil.
    5) Canada’s East bound pipeline gets final approval.
    6) August and September mark beginning of
    strong hurricane season. GOM waters, at record hotness.
    7) Israel goes a step too far sparking casus belli with Iran. ( Iran is daring Israel to bomb)
    8) Turkey and possibly Egypt devolve into civil unrest because of millions of Syrian refugees in country.
    9) Most likely, Islamic State and dozen of other ‘terrorist groups’ battles continue, no end in sight, sapping enormous resources, lives.

  2. BC on Sat, 25th Jul 2015 6:40 pm 

    @Bob, I’ve been called a doomer more often than I’d prefer, but you make me blush with the quality and quantity of your doom porn. 😀

  3. Makati1 on Sat, 25th Jul 2015 9:23 pm 

    Bob, many here assume that the US is NOT trying to take down the US economy. Again, looking at the trees and not the forest. lol

    The Elite are trying to get it all before the collapse. They don’t give a damn about the peasants.

  4. Nony on Sat, 25th Jul 2015 9:50 pm 

    I think we’ll see a decline in second half of the year, but it would not surprise me if we are a little higher in JAN16 than we were in JAN15. (i.e. growth over the course of the year.) And certainly 2015 average will be higher than 2014 average. I.e. any declines over the course of 2015 will be less than the growth we had in 2014.

  5. dn32844 on Sun, 26th Jul 2015 7:35 am 

    Anybody with brain of pigeon knows, with so much oil in the market shale oil can’t be profitable. Saudi Arabia, our government’s “close ally” stabbed in the back of shale oil so hard that it can’t recover again.

  6. Makati1 on Sun, 26th Jul 2015 7:37 am 

    dn, it’s only good business … nothing personal. lol

  7. Kenz300 on Sun, 26th Jul 2015 8:31 am 

    No more WARS for oil…..

    It is time to end the oil monopoly on transportation fuels.

    Bring on the competition……

    Electric, flex-fuel, biofuel, biodiesel, CNG, LNG and hydrogen vehicles are all growing in popularity.

    Better yet buy a bicycle and just pass the fueling station and wave.

  8. dennis on Sun, 26th Jul 2015 8:51 am 

    Until we take the fight to the rest of the world we will be the ugly step child. we have to end the export ban and take the price war to the saudis and russia. the commenter who said the saudis stabbed us in the back has a biased view of the situation. the saudis feel they were screwed by us and only did what they had to do. our appeasement of the iranians is a big mistake.

  9. JC on Sun, 26th Jul 2015 9:50 am 

    Politics. The USA will sell her future today for a cheaper price per barrel, regardless of the future financial consequences. Our nation as a whole thinks the only industry impacted is that of the major oil companies and collaterally their employees.
    Until every USA voter understands the positive impact a healthy domestic energy industry has on our whole nation,this destructive cycle created and sustained by an imbalance of foreign oil imports will continue.
    Solution is an educated nation understanding the positive benefits of a healthy thriving domestic energy industry. Example, I couldn’t imagine all of the professional energy jobs and positions I see held by engineers etc. of other nationalities.

  10. Cassie on Sun, 26th Jul 2015 10:02 am 

    “Until we take the fight to the rest of the world we will be the ugly step child.”

    Mmmmm. I wonder how that is going to work out? Pretty much a linear trajectory, straight to the end.

    And, yes, all our assessments are off – fuelled by normalcy bias, by the myths we paint like rainbows and unicorns on our glasses, by the sociopaths we have allowed to engage our affairs and by the lies we tell ourselves to pretend they are them and we are us.

    Things will totter a bit longer, but the center of economic and environmental system is not stable. An event or events will occur, it will cascade and there you go.

    When? I suspect soon. We are insane.

  11. Mike989 on Sun, 26th Jul 2015 10:10 am 

    Bob Inget great list.

    Now I want a plugin hybrid, or an EV.

  12. rockman on Sun, 26th Jul 2015 10:49 am 

    Dennis – What oil export ban??? According to the EIA just last April the US was exporting oil at the rate of 200+ million bbls per year. But even that has less of an impact on the global market the the 1+ BILLION BBLS OF OIL that are refined in the US and is exported to foreign markets. Despite the spin the MSM and some useful fools try to spin the US is a dominant factor in the global hydrocarbon market

  13. Apneaman on Sun, 26th Jul 2015 11:33 am 

    dennis, there is no “we” in 1%

  14. Boat on Mon, 27th Jul 2015 12:36 am 

    dn32844 on Sun, 26th Jul 2015 7:35 am

    Anybody with brain of pigeon knows, with so much oil in the market shale oil can’t be profitable.

    Until the 2 1/2 billion barrels per day glut gets smaller it doesn’t matter who takes oil off the market. If Iran can produce oil cheaper than another driller they might have some market impact. The good news for consumers is they will continue to save money. The other good news is all the oil taken off the market because of low prices is like a reserve to to be produced when prices go higher. This simply buys the world more time to develop alternatives. Anybody heard of the hybrid and electrical car?
    Only time will tell but peak oil might happen because eventually there will be a carbon tax turning most of our energy into an electric world. Nat Gas and oil will always have a role of course, just a smaller one. We have to be patient of course.
    A current example is how Nat Gas is replacing coal. In 15 years it will be a different world energy outlook. Solar and Wind will create head winds for coal and Nat Gas. This is BAU and for once it’s getting smarter and cleaner.

  15. Boat on Mon, 27th Jul 2015 12:44 am 

    rockman on Sun, 26th Jul 2015 10:49 am

    Dennis – What oil export ban???

    Yes Rock there is one. From what I read refineries are configured differently and they want more choice in handling product mix. For example a few of the refineries in Texas made the mistake of spending billions on refineries to refine crude from Venezuela and tar sand from Canada {heavy oil}. Now they lose refinery utilization and efficiency because of the plethora of {light sweet crude} from the fracking boom.

  16. Nony on Mon, 27th Jul 2015 12:58 am 

    Brent and WTI several dollar spread is proof of the impact of US crude export restrictions.

  17. rockman on Mon, 27th Jul 2015 6:40 am 

    Boat – “What oil export ban???…Yes Rock there is one”. Apparently you missed the fact that the US is currently EXPORTING OIL AT A RATE OF OVER 200 MILLION BBLS OF OIL PER YEAR. Or does the meaning of the term “export” confuse you. LOL.

    “From what I read refineries are configured differently”. You should really try to find more accurate resources to read. Those poor little US refineries are cracking over 1 BILION BBLS OF OIL PER YEAR and exporting those products overseas. The US has become the leading supplier of refinery products to the world…refining oil in the US. What’s the difference between the US refineries cracking 1 billion bbls of oil per year and exporting those products and the US exporting 1 billion bbls of oil per year? The US refineries capture that portion of the revenue stream which measures in the tens of $BILLIONS. So it would be a good thing for the US economy to give up that piece of the pie? The refineries are running at record utilization and are now making record profits. That really doesn’t paint a picture of a distressed industry, does it?

    BTW virtually no US refinery is configured to run Venezuelan heavy, Eagle Ford condensate or Canadian crappola. They are designed to crack a very narrow range of gravity (29 API to 31 API) and have done so for many decades. They blend any and all the oil available to them to reach the composite gravity they ARE DESIGNED to refine.

  18. Nony on Mon, 27th Jul 2015 3:30 pm 

    1. The current exports are minor in amount, Rock. Convert the breathy millions to percents.

    2. Exorts allowed are minor exceptions. General exports are NOT ALLOWED. Try selling a cargo of EF-47 to a German refiner. You will go to jail. It is not allowed!

    3. The Brent-WTI spread is PROOF of the economic impact of import restrictions. Follow the money, Rock, follow the money.

    4. Refined products are NOT oil, Rock. So sales of them is not the same as allowing sales of crude. US (and Canadian) refiners are minting money right now on their crack spreads. That money is not going to producers. Not going to retail gasoline buyers. But Valero and even crappy refiners like Delta(!) are “living in the tall cotton”.

    [I have pointed all this out to you before. For a while, I thought you were dishonest, but lately, I think you are just clueless. You get a bunch of social satisfaction at mouthing off on these forums that you could not get in the real world. I really wonder how competitive you would be finding another job if the largesse of your current company with the “billionaire owner” was cut off. I think you would find real quick that “I know all about the shale since I drilled the Austin Chalk” would get you laughed out of EOG or CLR or COP. The interaction with Rockdoc was fascinating. You had no comeback to him citing 5 good papers on matrix flow. You’re just a bullshitter. Not a reader. Not a thinker.]

  19. Nony on Mon, 27th Jul 2015 3:49 pm 

    US refineries are built to use a heavier blend of oil than anywhere else. More cokers from Corpus to Pascagoula than rest of the planet. YEs, they like to use 29 API and yes they get it by blending heavy and light. But we are running out of room for the light. The imported light has been backed out. Where do you put the rest of the light. For producers they would RIGHT NOW get $6 more in London selling as Brent than at Cushing. It only cost $3 to ship a cargo. That spread is PROOF of the impact of export restrictions.

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