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The Permian Craze Is Fizzling … But Shale Oil Production Isn’t

The Shale Boom Is About To Go Bust

The shale industry faces an uncertain future as drillers try to outrun the treadmill of precipitous well declines.

For years, companies have deployed an array of drilling techniques to extract more oil and gas out of their wells, steadily intensifying each stage of the operation. Longer laterals, more water, more frac sand, closer spacing of wells – pushing each of these to their limits, for the most part, led to more production. Higher output allowed the industry to outpace the infamous decline rates from shale wells.

In fact, since 2012, average lateral lengths have increased 44 percent to over 7,000 feet and the volume of water used in drilling has surged more than 250 percent, according to a new report for the Post Carbon Institute. Taken together, longer laterals and more prodigious use of water and sand means that a well drilled in 2018 can reach 2.6 times as much reservoir rock as a well drilled in 2012, the report says.

That sounds impressive, but the industry may simply be frontloading production. The suite of drilling techniques “have lowered costs and allowed the resource to be extracted with fewer wells, but have not significantly increased the ultimate recoverable resource,” J. David Hughes, an earth scientist, and author of the Post Carbon report, warned. Technological improvements “don’t change the fundamental characteristics of shale production, they only speed up the boom-to-bust life cycle,” he said.

For a while, there was enough acreage to allow for a blistering growth rate, but the boom days eventually have to come to an end. There are already some signs of strain in the shale patch, where intensification of drilling techniques has begun to see diminishing returns. Putting wells too close together can lead to less reservoir pressure, reducing overall production. The industry is only now reckoning with this so-called “parent-child” well interference problem. Related: Oil Slips Despite Bullish OPEC Report

Also, more water and more sand and longer laterals all have their limits. Last year, major shale gas driller EQT drilled a lateral that exceeded 18,000 feet. The company boasted that it would continue to ratchet up the length to as long as 20,000 feet. But EQT quickly found out that it had problems when it exceeded 15,000 feet. “The decision to drill some of the longest horizontal wells ever in shale rocks turned into a costly misstep costing hundreds of millions of dollars,” the Wall Street Journal reported earlier this year.

Ultimately, precipitous decline rates mean that huge volumes of capital are needed just to keep output from declining. In 2018, the industry spent $70 billion on drilling 9,975 wells, according to Hughes, with $54 billion going specifically to oil. “Of the $54 billion spent on tight oil plays in 2018, 70% served to offset field declines and 30% to increase production,” Hughes wrote.

As the shale play matures, the field gets crowded, the sweet spots are all drilled, and some of these operational problems begin to mushroom. “Declining well productivity in some plays, despite application of better technology, are a prelude to what will eventually happen in all plays: production will fall as costs rise,” Hughes said. “Assuming shale production can grow forever based on ever-improving technology is a mistake—geology will ultimately dictate the costs and quantity of resources that can be recovered.”

There are already examples of this scenario unfolding. The Eagle Ford and Bakken, for instance, are both “mature plays,” Hughes argues, in which the best acreage has been picked over. Better technology and an intensification of drilling techniques have arrested decline, and even led to a renewed increase in production. But ultimate recovery won’t be any higher; drilling techniques merely allow “the play to be drained with fewer wells,” Hughes said. And in the case of the Eagle Ford, “there appears to be significant deterioration in longer-term well productivity through overcrowding of wells in sweet spots, resulting in well interference and/or drilling in more marginal areas that are outside of sweet-spots within counties.” Related: Exxon Presents Its Very Own Solution To Climate Change

In other words, a more aggressive drilling approach just frontloads production, and leads to exhaustion sooner. “Technology improvements appear to have hit the law of diminishing returns in terms of increasing production—they cannot reverse the realities of over-crowded wells and geology,” Hughes said.

The story is not all that different in the Permian, save for the much higher levels of spending and drilling. Post Carbon estimates that it the Permian requires 2,121 new wells each year just to keep production flat, and in 2018 the industry drilled 4,133 wells, leading to a big jump in output. At such frenzied levels of drilling, the Permian could continue to see production growth in the years ahead, but the steady increase in water and frac sand “have reached their limits.” As a result, “declining well productivity as sweet-spots are exhausted will require higher drilling rates and expenditures in the future to maintain growth and offset field decline,” Hughes warned.

By Nick Cunningham of Oilprice.com

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Nick Cunningham

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

Comments

  • Ruben Chekhov - 9th May 2019 at 11:03pm:
    I have read these exact articles for years now. All the while Shale grows. The oil majors plan to triple production in the next 48 months. So who do you put your faith in. Oil price author or oil majors engineers.
  • Lee James - 10th May 2019 at 12:41am:
    The dream of U.S. energy independence is inspiring. That'll work out better if we slow our rate of burning fossil fuel.

    Hopefully, by using energy more efficiently and effectively, we can compound technological progress in clean energy production.

    An attitude of stewardship and appreciation of Earth's finite resources should guide us.
  • Peter B - 10th May 2019 at 2:52am:
    I would take anything from the Post Carbon Institute with a big grain of salt. They are an anti fossil fuel environmentalist group and cannot be trusted to make an objective study.
  • Mamdouh Salameh - 10th May 2019 at 3:08am:
    This is inevitable given the steep depletion decline in US shale oil wells estimated at 70%-90% in the first year of production, declining well productivity, rising cost of production and declining acreage to allow for growth.

    And despite impressive technological improvements, the US shale oil industry is already seeing diminishing returns.

    The report by Post Carbon Institute, one of many authoritative reports of recent times, highlights the fact that technological improvements don’t change the fundamental characteristics of shale production, they only speed up the boom-to-bust life cycle. The report points out that in 2018 the US shale oil industry spent $54 bn on tight oil plays, 70% of which served to offset field declines and 30% to increase production.

    The US shale oil industry has seen its best performance over the last few years but it is now in a state of decline with real (not the hyped one) production projected to slow down to 11 million barrels a day (mbd) in 2019 and 10 mbd or even less in 2020.

    US shale oil industry could be no more in less than 10 years.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Steve Ackeret - 10th May 2019 at 7:01am:
    In 50 years, oil as a propulsion fuel will be all but extinct. The raging argument then will be, who is responsible for capping and maintaining the seal on all these rotting well heads? Just as I must now explain the operation of a rotary phone to my grandchildren, my great, great grandchildren will be mystified by steering wheels and ancient gasoline pumps.
  • R Nutter - 10th May 2019 at 8:06am:
    Excellent article.
  • Sky Pilot - 10th May 2019 at 10:50am:
    Notice no timeline is given for this decline. The author fails to mention this to create a sense of urgency. Not likely to happen in the near future. I'm boots on the ground in the Permian. Services companies are booked for the next 25 years. Typical fake news.
  • Hereticus Perfectus - 12th May 2019 at 6:24am:
    The first oil well was established in Titusville, Pennsylvania in 1859, and people have repeatedly been declaring peak oil since 1860.
  • L Hildebrand - 12th May 2019 at 11:35am:
    WoW
    I see so many arm chair experts here with big brimend glasses.
    Now i live in the middle of the patch in Saskatchewan where a pad of 15 wells using thermal recovery methods take a min of 5 years to get near peak production. They avg near 15000 bpd at 3 years and are exceding production estimates. Expected life of each pad is on the order of 25 years as the heating expands they get more oil with less input costs. Future plans in this area from 5 test pads that are now full operational are to expand to near 50 in the future.
    As for saying were in a decline is pure hype by market speculatiors. I watched this heavy oil recovery here for 40 years with test plant developing this tech and it was only suposed to be a test site but after 20 years in they were over exceding their goals and the test plant was giving back millions in profit and they moth balled the project as it was never to make money but only study heavy oil recovery.
    Now this tech will be used for the next 50 years and beyond giving man much time to develope alternate energy sources.
  • Mike Schwarzmann - 15th May 2019 at 8:39am:
    Is any of this decline in yield attributable to the move to inferior local sand?
  • Mark Robinowitz - 3rd Jun 2019 at 1:53am:
    Hughes and Post Carbon got the USGS and DOE to downsize estimates for Monterey Shale by 99%. It's also incorrect to pigeon hold Post Carbon Institute as an environmentalist group - they are more interdisciplinary than that. PCI focuses on community resilient approaches to depletion, climate and other limits to growth. Most environmental groups are focused on politics, protests, lobbying -- not practicalities like how to relocalize food as fossils deplete and glaciers retreat.

    As geologist Colin Campbell said, all estimates of oil supplies are wrong. The only correct numbers in reports of what's left are the page numbers.

    There's no question that shale wells rise and fall far faster than conventional wells. Fracking also postponed oil and gas rationing. We'll see how increasing efforts to extract can bridge the gap of the decline of conventional fossils. Entropy is not a good idea, it's the law.
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