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Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Spending Boost Fails To Raise Production In The Permian

Midland

The U.S. shale industry is gearing up to spend more this year, despite assurances to maintain capital discipline.

In the second quarter, shale companies signaled their intention to lift capex. Part of the reason is that costs are on the rise, so some drillers have to spend more to produce the same amount of oil and gas. That was an unexpected development, and one that shareholders are not happy about.

A survey of 33 shale companies by Rystad Energy found that while the group revised up spending by about 8 percent, they only increased their expected production levels for this year by 1.4 percent. “This disconnect might suggest that the shale industry requires more capital than before to achieve healthy production growth,” Rystad said in a new report.

There are some signs that the Permian, for instance, is running into some productivity problems, raising the possibility that the highly touted “efficiency gains” over the past few years are reaching their limit.

On the other hand, the industry is also spending more because they have plans to increase drilling activity, which could lead to higher output next year. “[W]hile a part of increased spending is due to service cost inflation, a significant part of the incremental budget is also planned to be used for additional drilling throughout 2H 2018 to support more intensive completion activity and production growth in 2019,” Rystad Energy said in its report. Related: Venezuela Takes Unprecedented Action To Stabilize Currency

The largest spending increase came from companies focused on the Permian basin, which is not surprising given both the frenzied pace of drilling in West Texas as well as the reports that the basin is suffering from bouts of cost inflation. Occidental Petroleum stood out from the bunch, with an announced increase in spending by $900 million. Occidental said it was going to deploy two additional rigs, as well as “pre-build facilities for 2019 activity,” Rystad says, “supporting higher production in the short to medium term.”

Pioneer Natural Resources was another notable upward revision in spending from the second quarter. The Texas-focused shale company hiked spending guidance by $400 million with a plan to add four more rigs for 2019. The higher spending is also the result of a plan to increase completion activity, plus cost inflation.

But it wasn’t just the Permian that is attracting higher levels of spending. Anadarko Petroleum said it would hike capex by $450 million across the DJ Basin and the Permian. Anadarko cited cost inflation, longer laterals, and higher non-operating activity. Meanwhile, the Bakken and Oklahoma-focused Continental Resources increased spending by $400 million for higher completion levels and additional drilling.

With so much additional spending pouring into the shale patch, one would think that the industry would revise up its expected volumes of oil and gas. But collectively, the group is only expecting to produce an additional 1.4 percent.

Some small companies reported the largest jump in output, including Jagged Peak Energy (+12 percent), Matador Resources (+9 percent), and QEP Resources (+8 percent). Their success is the result of “greater than planned performance of wells, underpinned by continued increase in drilling and completion efficiency,” Rystad Energy concluded. They are also growing from a relatively small base.

Those upward revisions were offset by the disappointing results from a handful of other companies. Resolute Energy rounded out the bottom of the survey, revising down expected production by 5 percent, “due to less than expected oil content” from its wells so far this year. Noble Energy revised its forecasted production down by 3 percent, as it decided to defer completion on some of its drilled wells, the result of “industry constraints” in the Permian.

Related: The “Weakest” EIA Report In Years

Notably, however, “none of the well-established Permian operators reported a planned decrease in completion activity in the basin this year,” Rystad said.

Overall, cost inflation is playing a pivotal role in driving up spending budgets, but Rystad cautioned not to take that conclusion too far. Much of the spending increase is also laying the groundwork for higher production down the road. “While higher cost inflation played a role in the uptick in investment budgets, as evident from 2Q earnings reports, the majority of incremental capital expenditure is still planned to be directed to a larger number of intensive long-lateral completions and facility build-outs,” Rystad said.

The reason that the revisions to the guidance for 2018 look so unimpressive is that these investments may only result in production increases next year. That approach makes sense given that pipeline constraints in the Permian won’t be resolved until late next year. A lot of companies are doing the upfront work on drilling, but deferring completions until 2019 when new pipelines come online and Midland differentials rise. In other words, shareholders may groan at some of the figures that came out of second quarter earnings reports, but most shale executives expect things to improve next year.

By Nick Cunningham of Oilprice.com

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  • Cowpoke on August 21 2018 said:
    Ask yourself, WHY would any company desire to "RAISE" production when it's to costly to get it to market via TRUCKS.
    Wait until the pipeline is in and then the Permian will be milked dry.
  • Kr55 on August 22 2018 said:
    Service costs are only going up from here. And the decline rate just keeps piling up and making that treadmill run faster.

    Another unfortunate turn of events is that many of the DUCs are being found to have been drilled too close to other wells and are being deemed useless. EIA likely won't scratch them off the list any time soon, but to the people that matter, it's lost money drilling useless wells that will never be fracked.
  • Mamdouh G Salameh on August 22 2018 said:
    No amount of spending could overcome the productivity problems in the Permian. These problems are symptoms of bigger problems in the whole US shale oil industry. It is an industry which will probably never become profitable and is currently facing diminishing returns. It is also a reflection of the fact that shale drillers have exhausted the rich spots and are now being forced to move into less productive locations.

    The US shale oil industry suffers from two crucial aspects. The first is the high depletion rate ranging from 70%-90% in the first year of production. This necessitates the continuous drilling of new wells to prevent production falling. It is estimated that the US shale oil industry needs to drill up to 10,000 wells annually at a cost of some $50 bn.

    The other aspect is that the US shale oil industry finds itself in a vicious circle. It can keep its costs in check if it reduces production. But in so doing it will not attract the investment funds it needs to keep afloat and pay part of the growing debts. In other words, the shale industry will continue “to rob peter to pay Paul” for the foreseeable future, perhaps even for ever. This means that in the long-term, many shale drillers will drop out and only companies with financial clout like ExxonMobil and Chevron could stay in the business.

    The projected increase in spending has more to do with rising costs of drilling and far much less with lifting production of oil and gas. While spending is revised up by about 8%, production is projected to rise only by 1.4%.

    The US Energy Information Administration (EIA) expects well production per rig in the Permian to fall by 10,000 barrels a day (b/d). With 480 rigs currently operating in the Permian, it means that overall daily production in the Permian is projected to fall by 2.4 mbd. This contradicts claims by the EIA and the International Energy Agency (IEA) that US shale oil production will reach 11 mbd by the end of this year and that the US will overtake Russia and Saudi Arabia by the end of the year or early 2019 to become the world’s largest oil producer.

    No amount of hype by the EIA and the IEA will make the US shale oil profitable now or in the future.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Eric M Staib on August 22 2018 said:
    I look forward to the article predicting $150 oil by year's end based on this same information.
  • Steve on August 22 2018 said:
    It looks as though EIA is over estimating weekly oil production again this year. May's actual production came in at 10,442,000 BOPD and their weekly estimate was 10,720,000. Almost 300,000 BOPD more than actually produced. This may be a sign that the Permian is flattening.

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