The multi-year campaign to boost efficiency and productivity in the U.S. shale patch could be nearing its limits.
Output in the Permian basin is already starting to slowdown, largely due to pipeline constraints. However, there is also a series of other data points that suggests that shale drillers are bumping up against a ceiling in terms of productivity and efficiency.
New data from the EIA shows a rather startling slowdown in the amount of oil that the average rig can produce from a new well in the Permian. In September, the EIA expects new-well production per rig to fall by 10,000 barrels per day (bpd) in the Permian, compared to August levels. That means that when a company deploys a rig to drill a new well, that rig will produce a little less oil than it did compared to the average rig did a month earlier.
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New-well productivity has seesawed a bit over the years, spiking in 2016 when the industry scrapped inefficient rigs during the market downturn. Indeed, some of the recent decline in new-well productivity can be chalked up to the industry rushing to drill more. In this sense, it isn’t that the rigs are necessarily less productive, just that there are so many of them out there in the Permian, that the productivity figures fall because the denominator is larger.
But it’s also a reflection of the fact that drillers are being forced into less desirable locations with the field so crowded. Related: Oil Prices Jump As Saudis Cap Oil Supply
“We believe that the short-cycle nature of shale exploitation and the intensity of activity in the Permian means that production from Tier 1 geological locations (e.g., those with the best pay, the optimum pressure) is starting to move to Tier 2, which is unable to achieve the same rates of productivity,” Standard Chartered wrote in a note. “Off-take bottlenecks for both oil and associated gas have caused low localised prices (the discount for WTI at Midland versus Cushing was USD 15.50/bbl on 13 August), affecting company cash flows. Rising costs are also likely causing operators to choose less expensive and less productive completion techniques.”
One caveat to note is the rising backlog of drilled but uncompleted wells (DUCs), which could also help explain the drop in new-well productivity. The DUC list continues to rise, with the backlog in the Permian expected to have jumped by 167 wells in July compared to June, rising to a total of 3,470. There is little to no space left on the region’s pipelines, plus a growing number of bottlenecks are cropping up for other services like completion services, rigs, labor, sand, water, etc. That means that companies may drill a well but leave it uncompleted for the time being. As a result, the rig count reflects the drilling, but there is no actual oil production that shows up in the data, which may give off the appearance of low productivity.
In absolute numbers, production is also growing, but growing much more slowly. The EIA expects output in the Permian to rise by 34,000 bpd from August to September, an increase that is half as large as the monthly increases that the basin routinely posted earlier this year.
Another drag on the basin is the fact that the legacy decline rate deepens with each passing month. Shale wells suffer from precipitous decline rates – around 80 percent of a well’s lifetime production occurs in the first two years. As a result, every month, thousands of existing wells in the basin lose output, which is collectively described as “legacy” decline. The number is larger in the Permian than in other places only because overall production is so much larger.
But there is a bit of treadmill aspect to drilling – you have to drill more to keep output flat. The sheer size of the Permian means that the drilling needs to continue at a high rate to maintain overall output. So, the unfolding slowdown in drilling, largely because of pipeline constraints, could threaten output levels. Related: LNG: China’s Biggest Weapon In The Trade War
In September, the Permian is set to lose an estimated 229,000 bpd to legacy decline. That 229,000-bpd figure is more than twice as large as the monthly declines seen as recently as two years ago, which means that the industry has to continue to bring huge volumes of new supply online to offset that figure. In September, the EIA expects shale drillers to add 263,000 bpd of new supply, which nets out to a 34,000-bpd increase for the basin.
“We have analysed the number of completions required in the Permian Basin to maintain flat output, effectively arresting legacy declines with new production,” Standard Chartered wrote in a note. “The number of Permian completions required just to keep output level is currently 415, 18 higher m/m, and 112 higher y/y.”
In other words, much of the industry’s frenzied effort these days is simply to keep production from falling. “The EIA put the number of completions in June at 434, i.e., 95% of completions were needed to combat declines, and net growth came from just 5% of completions,” Standard Chartered concluded.
The problem will become easier for the industry to overcome when new pipelines come online at the end of 2019, but until then, the challenges will remain formidable.
By Nick Cunningham of Oilprice.com
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I suggest saving oil for non-transportation uses, and going electric for transport. We're in a transition away from burning oil. The only question is how quickly to effect that transition. We need to transition for health, energy price stability and even national security.
It has been known in the global oil industry that production management is an essential part of the long-term health of oil wells’ reservoirs. A case in point is that Iran’s oil industry is still paying the price in terms of low productivity from the excessive production practices during the Shah days in the 1970s when Iran's production jumped from 2 million barrels a day (mbd) to 6 mbd causing considerable damage to the reservoirs.
This is not different from what the US shale industry is currently doing, namely continuing to overproduce just to remain 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.
In addition to the above, the US shale oil industry suffers from 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 US Energy Information Administration (EIA) expects well production per rig 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 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.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
(2) What IS the actual decline per well, for IPs or legacy wells ? I suspect it's not that bad. Yes, it makes sense for some aspects of productivity to decline -- logic says that you don't drill the 2nd-tier or worst-performing wells first.
(3) Shale is most definitely NOT a Ponzi Scheme any more than Amazon.com is. Both had/have the ability to generate earnings and cash flow from operations once CAPX and growth plateau. Amazon spooked investors for 15 years before generating free cash. Shale is ahead of that target.
(4) Iran's problems have nothing to do with reservoir's, it has to do with the mullahs destroying an industry that was once 2nd to Saudi Arabia by prioritizing terrorism and being a global pariah. Iraq is on the way to producing 6 MMboe/d after years of producing 1/3rd that level or less. Iran's problems are nothing that a few billion in Western CAPX can't fix IF the nuts running that country will let common sense dictate.