U.S. Shale To Put A Firm Cap On Oil Prices

The latest Drilling Productivity Report released by the Energy Information Administration has shown that crude oil output in the shale patch will continue rising next month, with the Permian accounting for most of the increase.

In February, oil wells in the Permian will yield 53,000 barrels more than thins month, far ahead of the second contributor to the rise, Niobrara, where crude oil output should go up by 13,000 bpd. Just one more play will likely register an increase in oil production, albeit small: the Marcellus shale, where output should rise by 1,000 bpd.

The rest of the shale oil patch will experience declines in production, including Bakken, which will see the greatest decline, at 20,000 bpd; Eagle Ford, where the decline is expected at 3,000 bpd; and Utica, where production is seen to fall by 3,000 bpd. Oil output in Haynesville will see no change in February.

The Permian has been in the spotlight for a few months now, when an ever-increasing number of energy businesses and investment companies became aware that the play offers lower production prices and better acreage than other shale plays.

Long regarded as America's "sleeping giant", the play started drawing attention last year, when it became painfully clear that there will not be a quick rebound in oil prices. At the time, most of the Permian was still profitable, unlike large parts of the other plays.

This profitability only increased after prices started recovering this year, so it's no surprise that the last few days brought us a number of deals in the area.

Last Friday, Anadarko announced it is selling its business in Eagle Ford to focus on higher-return operations elsewhere, such as, yes, the Permian, along with Wyoming and the Gulf of Mexico. Anadarko would get US$2.3 billion for its Eagle Ford assets and is probably already looking for some juicy bits in the Permian's Delaware Basin.

Then, on Tuesday, Noble Energy said it will buy Clayton Williams - a smaller player with operations in the Permian. The US$2.7-billion acquisition, to be funded mostly with Noble Energy stock, will see the buyer gain access to 171,000 net acres in the Permian, to add to its own portfolio of 47,200 acres - quite a substantial addition, in fact. Related: Oil Prices Fall In Spite Of Bullish OPEC Data

What's perhaps more interesting is that Noble Energy's acquisition will also provide it with access to the Wolfcamp Basin - part of the Permian, which last year the U.S. Geological Survey said could hold as much as 20 billion barrels of crude, extractable with current technology. Noble has already identified 2,400 drilling locations in this part of its acreage, so we are soon about to see if Wolfcamp will live up to expectations.

The latest deal was announced yesterday: Exxon has bought a number of Permian-focused oil companies, owned by the Bass family for a total of US$6.6 billion, of which US$5.6 billion in stock and US$1 billion in cash, depending on the performance of the assets. Business in the Permian is thriving.

Now, elsewhere in the shale patch, despite the overall declines in production, Eagle Ford and Niobrara are improving yields from new oil wells, which indicates continuous efforts to boost efficiency, even with higher oil prices.

Source: EIA Drilling Productivity Report

In Eagle Ford, average daily output per rig should rise from 1,395 barrels in January to 1,417 barrels in February. In Niobrara, the increase is about to be more pronounced: from 1,251 barrels this month to 1,280 barrels next month.

So, output from the shale plays is rising and yields are improving - all pointing to a recovery in the industry that may well last longer than higher oil prices. The fact that producers are focusing on improving efficiency - not that they have much of a choice after cutting costs to the bone - is an indicator that they are now thinking more long-term than at the height of the shale revolution.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:

• OPEC's Production Cut: Who Will Cheat First?
• Oil Production Here Is Declining Faster Than Anywhere On Earth
• Oil Stuck After API Reports Huge Gasoline Build