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US Shale Dealt a Blow as Oil Majors Struggle to Turn a Profit

Newly exploited tight oil formations account for more than 100% of the increase in U.S. field production of crude oil since 2005. But that doesn't mean it's easy to make money getting oil out of the ground this way.

US Tight Oil Production
Source: EIA.

The Wall Street Journal reported last week:

Royal Dutch Shell (RDSA) plans to sell its stake in the Eagle Ford Shale in South Texas, following a $2 billion write-down of North American assets that the company announced in August.

Shell's sale of leases on 106,000 acres in the oil-and-gas-rich region illustrates the struggles major oil companies have had in places where smaller energy firms have thrived.

Shell said the Eagle Ford holdings didn't meet the company's targets for size and profitability.

Related article: This Week in Energy: Welcome to the US Shale Reshuffle

An August analysis by Reuters of the company's write-downs cautioned:

However, write downs by Shell and some other majors are a sign they came to the shale boom late in the day, overpaying for lower-quality and less well-explored assets-- not that the shale revolution is stuttering.

The most successful company in the Eagle Ford has been EOG, which produced 94,000 barrels a day from the Eagle Ford in 2012. That's almost a quarter of the 399,000 b/d that the Texas Railroad Commission reported was produced by all the Eagle Ford producers put together in 2012, and a 150% increase over EOG's 2011 Eagle Ford production. But it's interesting that even though EOG reported an average price received around $98/barrel in 2012 compared to $93 in 2011, the company's operating income for the year was down 30% from 2011. Gains in revenue were outweighed by increases in marketing and depletion charges.

Conoco Phillips (COP) produced 89,000 b/d from the Eagle Ford in 2012:Q4, almost as much as EOG, and a 144% increase over what the company produced from Eagle Ford in 2011. Although there are lots of other factors besides Eagle Ford that matter for COP's bottom line, operating income was basically flat year-to-year despite the success in the Eagle Ford. Chesapeake (CHK), another key Eagle Ford producer, reported a big operating loss for 2012.

Tight Oil Production by Company
Source: Jason Stevens, 2012 Symposium on Oil Supply and Demand.

To be sure, other companies are still doing well with the Eagle Ford and other tight formations. But among the challenges to making on-going profits at this game are the very rapid rates at which production flows decline after peaking and the fact that the vast majority of wells produce very little compared to those that receive the most publicity.

Related article: Debate Over US Natural Gas Exports Heats Up

Type well decline curve for Eagle Ford liquids production
Type well decline curve for Eagle Ford liquids production. Source: Hughes (2013).

Distribution of well quality in the Eagle Ford play, as defined by the highest one-month rate of production over well life.
Distribution of well quality in the Eagle Ford play, as defined by the highest one-month rate of production over well life. Source: Hughes (2013).

Getting oil from these sources is critical for America's energy future. That makes it all the more sobering that a savvy company like Shell has decided it wants no part in it.

By. James Hamilton

Source: Econbrowser

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Leave a comment
  • Drew Reil on October 09 2013 said:
    It's not like this is a surprise, a shale formation is not a reservoir and continuous drilling to maintain production has very little if any profit margin. This fact was apparent three years ago at least.
  • Nony on April 04 2016 said:
    Whole lot of nothing in this article. Just some boogeyman since Shell left a play. Basically soundbite, peak oil lite sentiment. Shale grew very fast (with oil at 100+). It didn't turn because it didn't work at 100. It was ACCELERATING. It turned because the world price dropped, to a large extent because of shale itself.

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