U.S. Shale Finally Sees Production Rise

The U.S. shale patch is forecast to yield 4.542 million barrels of oil a day in January 2017, according to the latest drilling report of the Energy Information Administration. This represents a 2,000-barrel-per-day increase on December 2016 and is, more importantly, the first overall monthly increase since April 2015.

In December, the shale patch will largely register declines in production, except in the Niobrara, where crude oil output is forecast to be 2,000 bpd higher this month than last, and, hardly surprisingly, the Permian, the star of the shale oil patch, where output this December is forecast to be 27,000 bpd higher than it was in November.

Platts noted that production in the Bakken and Eagle Ford shale plays is set for further decline because of the persistently low number of active drilling rigs, as everyone seems to be drilling in the Permian these days.

The news about the first overall monthly increase in oil production in the shale patch is certainly good for U.S. shale, but the rig count trends so far this year indicate that the increase expected in January is due to developments over several months.

The active rig count has been rising steadily since June. Last week, the number of active oil rigs was again higher, with 21 new rigs added to the total, many of them in the Permian. This increase indicates that shale producers have found a way to deal with lower oil prices and are building production yet again, rather than waiting for OPEC to do something about the market.

But now that OPEC, along with a dozen non-OPEC producers, did indeed do something about the market in the shape of two production cut agreements, shale boomers will hardly waste any time cashing in on the higher prices.

For a number of observers, the undeclared war between Middle Eastern producers and shale boomers has ended with a win for the latter. As Barclays’ head of energy commodities research Michael Cohen told CNBC, shale producers were bracing for the possibility of another year of international prices at US$40-45. Related: Legit OPEC Cuts To End Global Oil Glut In H1 2017

Improvements in drilling and production efficiency, huge discounts from oilfield service providers, and high-quality, low-cost acreage were the factors that helped shale producers work around the oil price crisis. Going forward, according to an Oppenheimer energy industry analyst, Fadel Gheit, further efficiency and yield improvements will lower production costs in the shale patch and enhance the resilience of companies operating there.

It would indeed be smart of shale boomers to continue investing in drilling and production technology improvements, but a recent report from the Post Carbon Institute showed that the quality of shale acreage contributed more to lowering breakeven prices than did technology advancements.

The focus on further technological improvements will become more urgent as oilfield service providers are less inclined to continue to agree to the discounts that have benefited the upstreamers. On the contrary, shale producers are in for higher service prices, and they will have to factor these in their drilling and production costs.

It’s certainly time to make the best of the higher oil prices while they last, before skepticism about OPEC’s ability to keep their word settles in deeper. It’s also time to think about the longer-term prospects for shale oil, taking into account all that’s changed since OPEC agreed to cut output and prop up prices.

By Irina Slav for Oilprice.com

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