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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