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Pedro Vergel

Pedro Vergel

Pedro Vergel has more than thirty-six years of experience in global oil and gas exploration and production operations. Pedro advises Schlumberger on process optimization and…

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Shale Industry May Need A Complete Rethink To Survive

Shale Industry May Need A Complete Rethink To Survive

Shale reservoirs have become an important part of North American oil and gas supply and their development has begun a new era of oil and gas production worldwide. Advances in well drilling and completion technologies supported the rapid development of shale resources which contributed to the almost overwhelming success of U.S. shale in recent years.

Globally, Argentina’s Neuquén Basin and China’s Sichuan Basin are the two front-runners to emulate the successes of the United States, with Poland, Algeria, Australia, Colombia, Russia, and Mexico still in earlier phases of exploration and evaluation, while Saudi Arabia also has plans for domestic shale investment and development. Many more countries have yet to fully review their potential shale strategy and policies.

The Current State Of Affairs

Shale developments have added yet another layer of complexity to the global oil markets, with record oil production during 2015 forcing WTI prices to collapse by about 60 percent from $107 per barrel in June 2014 to $43 per barrel in March 2015. The industry is looking increasingly vulnerable as a result, with companies becoming more distressed as hedges expire. As a result they are forced to significantly reduce operating costs and capital investment, stop drilling, defer completions of already drilled wells, and await better market conditions. Although drillers have been able to achieve significant price reductions from oilfield service providers, it has not been enough, and drilling activity has dropped substantially.

Global oil consumption, according to BP’s Statistical Review 2015, has been rising annually at a compound growth rate of 1 percent during the last 10 years – despite several years of slow global economic growth, a trend that is forecasted to continue. The industry has to produce more to meet this increasing demand, but it also needs to produce more to overcome rapid well production decline rates present in the shale industry which are estimated around 5 percent to 6 percent annually – more wells and actions are needed to keep up with demand. Related: OPEC, Get Ready For The Second U.S. Oil Boom

Price, however, has been very volatile, experiencing wide swings in reaction to a barrage of seemingly conflicting data – gluts, shortages, geopolitical events, and fluctuations in supply and demand – market conditions that all producers try to incorporate into their long term strategies.

Despite this low oil price situation, the U.S. shale boom will likely not end anytime soon as the industry is adapting to find a new equilibrium. Companies are looking for more financial protection, as their hedging positions end, potentially reconsidering their asset portfolio, with some considering extensive consolidation, mergers and acquisitions.

This situation also creates opportunities for further improvement, exploring new areas and projects that, due to their nature, do not depend on current oil prices.

The Future State Of Affairs

If the shale industry is to survive, it must become even more competitive through better efficiency and massively reduced costs.

Achieving this will largely depend upon the attitudes and abilities of all parties to produce incremental productivity gains sector-wide. Partnership among all sectors of the industry is essential. Operators must be prepared to maintain and increase the use of data-driven advanced analytical studies and methodologies. Service providers need to understand and rapidly adapt to new market conditions while continuing to invest in developing new and more efficient technologies and processes for current and future production and recovery. These things will help extend the economic life of reserves and guarantee survival in the long-term.

Implementing the right approaches to lower the cost per barrel produced, shale production will become increasingly competitive with other competing alternatives.

Shale economics require a much larger upfront investment, for a return that involves time, initial production, rate at which production declines over time and finally lifetime accumulated production per well. Their capital intensive nature and the investment needed to maintain production is an important burden. Related: The Multi-Trillion Dollar Oil Market Swindle

Oil producers have realized a key difference between unconventional and conventional production: the rate of decline for a conventional reservoir is between 2 to 5 percent per year, helping to support periods of price volatility. Shale does not have that stability, suffering from steep decline rates within the first few months.

Developing shale resources is an evolving scenario with distinct life-cycle phases: prospect evaluation, exploration, delineation, pilot, development and production, and finally decline and abandonment. Unlike conventional resources, for shale, the transition between each phase is far less discrete, presenting a higher subsurface risk that requires an extended pilot drilling program, to effectively support a de-risking strategy.

Shale reservoirs are more complex, requiring more accurate resource analysis and interpretation combined with sophisticated operations. Characterizing a shale reservoir, estimating reserves and predicting production has been a challenge. The complexity or scarcity of data, combined with limited analytical insights, and the time it takes to produce may limit the understanding and possibilities of performing an accurate resource analysis and interpretation. Initial production, rate of decline, accumulated production, understanding the estimated ultimate recovery (EUR) and economic life of the resource must remain as a key objective for producers hoping to drill as effectively and efficiently as possible.

The industry is constantly striving to improve the acquisition of data. An important challenge found in exploiting shale resources is finding and mapping the most productive zone – the sweet spots – within a large resource and mapping their mineralogy, petrophysical and geomechanical characteristics. Since the characteristics of these reservoirs vary over short distances, it is critical to understand which information is needed to be able to perform a detailed analysis to select the well location, perform a well engineering and design a successful completion program. Related: Oil Price Rebound Looking Unlikely

The capital intensity (capital investment needed for unit of production) required to grow and sustain production for shale resources is very high compared with producing other onshore assets. On average, since the 80s, capital intensity has more than tripled from less than 10$/boe to 30 to 40$/boe.

Shale will continue to be an important resource, and is here to stay. While currently limited in its capacity to influence the markets as a result of overreliance on junk bonds to fund operations, the next shale cycle will surely depend on what can be done in partnership to increase productivity, continue to reshape operations.

Continued success depends on constant gains in productivity and innovation in an investment climate that is markedly different from years past.

By Pedro Vergel for Oilprice.com

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  • Jill James on July 20 2015 said:
    Oil sands producers are also reducing costs, and oil sands mining production has no decline rate. Oil sands mining production is essentially steady for the duration of the life of the deposit, which in the cases of Syncrude and Suncor is more than 50 years. Shale should be viewed as the swing producer, coming into play when high prices and low supply make it feasible. Spending great amounts of energy and capital to devise methods to reduce costs and create a perpetual condition of over-supply and low prices is self-defeating! The thesis of this article does not hold.

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