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Nick Cunningham

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.

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U.S. Shale’s Glory Days Are Numbered

There are some early signs that the U.S. shale industry is starting to show its age, with depletion rates on the rise.

A study from Wood Mackenzie found that some wells in the Permian Wolfcamp were suffering from decline rates at or above 15 percent after five years, much higher than the 5 to 10 percent originally anticipated. “If you were expecting a well to hit the normal 6 or 8 percent after five years, and you start seeing a 12 percent decline, this becomes more of a reserves issue than an economics issue,” said R.T. Dukes, a director at industry consultant Wood Mackenzie Ltd., according to Bloomberg. As a result, “you have to grow activity year over year, or it gets harder and harder to offset declines.”

Moreover, shale wells fizzle out much faster than major offshore oil fields, which is significant because the boom in shale drilling over the past few years means that there is more depletion in absolute terms than ever before. A slowdown in drilling will mean that depletion starts to become a serious problem.

A separate study from Goldman Sachs takes a deep look at whether or not the shale industry is starting to see the effects of age. The investment bank says the average life span for “the most transformative areas of global oil supply” is between 7 and 15 years.

Examples of these rapid growth periods include the USSR in the 1960s-1970s, Mexico and the North Sea in the late 1970s-1980s, Venezuela’s heavy oil production in the 1990s, Brazil in the early 2000s, and U.S. shale and Canada’s oil sands in the 2010s. Each had their period in the limelight, but ultimately many of them plateaued and entered an extended period of decline, though some suffering steeper declines than others. Related: Oil Prices Under Pressure As U.S. Shale Supply Soars

U.S. shale is entering the lower end of this range at about 7 years. While shale is still growing, there are some signs that the “Shale Tail,” which Goldman says is “the phase when shale becomes a less meaningful driver of global oil supply,” may not be that far off.

Goldman lays out the five signals to watch out for, which would indicate that the glory days of shale are over. Although Goldman says the real trouble may be a few years off, there is some evidence that some of those dynamics are beginning to occur. The investment bank offers a breakdown as follows:

1. When inventory is being revised down, not up. This is already occurring in some areas, such as the Eagle Ford. Goldman notes that EOG Resources’ inventory fell in the Eagle Ford in the second quarter, with the company having drilled more wells than it added in new areas.

2. When well productivity stops improving. This one is inconclusive although perhaps it is beginning to become a concern. Goldman notes that the industry posed explosive productivity gains in 2017, but those gains slowed this year. Decline rates have accelerated in the Eagle Ford and Delaware Basin, but in the aggregate, there may still be some room for improvement for a little while.

3. When supply cost rises for structural reasons. Costs have climbed recently, but largely because of cyclical reasons, Goldman argues. High rates of drilling have created bottlenecks and pushed up costs, but those would come down if the cycle soured. It is still early for this metric.

4. When capital shifts to other regions. This looks the least threatening of the five warning signs. U.S. shale remains a top priority and the oil majors have stepped up their spending in shale, pivoting out of other regions. Spending on non-OPEC non-shale crashed post-2014 and hasn’t recovered. There has been some shifting of capital within shale plays – such as from the Permian to the Eagle Ford and the Bakken – but this is mostly due to pipeline constraints.

5. When growth is no longer impactful/meaningful (lagging indicator). Goldman Sachs still sees U.S. shale adding 1 million bpd+ at least through 2020. This indicator won’t become clear until the production gains actually start slowing down. Related: Are Natural Gas Prices Set To Spike?

The investment bank says that shale-focused companies are still a solid bet through the early 2020s, and it singles out companies like Concho Resources or Pioneer Natural Resources, two large Permian drillers. But by 2025, shale E&Ps will begin to see their stars fade.

At that point, Goldman warns investors to pivot out of shale pure-play companies and focus either on diversified companies that have assets outside of shale, or on the integrated oil majors. “[W]e believe future resource additions outside shale deemed low on the cost curve will likely be positively received by investors,” Goldman stated, citing Hess Corp. as a company that might fit this description because of the huge oil fields it is developing with ExxonMobil in offshore Guyana.

Put another way, depletion will become “a greater theme” in the future, so companies that are sitting on assets that deplete quickly will fall out of favor. Those that can stave off declines will fare much better.

The investment bank still expects U.S. shale to add around 1 million barrels per day each year through 2021 at least. But with early signs of strain, limits on productivity and steeper decline rates, it is clear that the industry’s glory days are numbered.

By Nick Cunningham of Oilprice.com

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  • Hayes on October 16 2018 said:
    This has to be the most ridiculous title for an article I have seen in a long time. How are the glory days over when shale is supposed to grow 1 million barrels per year for several years?
  • Douglas Houck on October 16 2018 said:
    Hayes,

    Reread the title and closing sentence. "...industry’s glory days are numbered.". Numbered, not over.

    Still, 3-5 years before peaking is not that long away. Can the Iranians hold out till then?
  • David Jones on October 17 2018 said:
    So let's see. Shale is the big darling of the oil industry, it's supposed to produce the future supply of oil for the world, after all this is where the growth is apparently. Now it's fizzling out after less than a decade which suggests it's actual lifespan is about half of the traditional wells. Is this the bright future the oil industry has in mind for the world?

    Another half a century of "glorious" oil availability, then a potential economic catastrophe as supply starts to run dry and our ability to transition away from this limited fuel becomes constrained by shortages, assuming we are still dependent on fossil fuels for most of our development. Not to mention the fact that by then we will be dealing with the more serious consequences of greenhouse gas emissions.

    The oil industry should consider writing a book with the following title: "how best to develop and then destroy a world so that next to no overall gain remains for civilization". It would seem they have already generated most of the content for such a publication.
  • Brandon Johnson on October 17 2018 said:
    Informative article, many thanks. Also worth mentioning environmental impacts of wastewater disposal (earthquakes and ground water pollution) and consequently the class action against francking in Oklahoma.
  • Dougie Jones on October 17 2018 said:
    Predictions are by definition always wrong, just as models always fail to represent reality adequately.

    A better title for this piece would be "Speculations on One of Many Possible Futures for US Shale".
  • Dan on October 17 2018 said:
    This explains the move by many car companies to develop natural gas cars by 2025. Batteries are a major pollution issue and poison to a sustainable ecosystem for our earth. Electric cars could destroy all life on our world.
  • Randy Verret on October 18 2018 said:
    One question for David Jones...So, what CLEAN, sustainable, SCALABLE alternative do you propose to REPLACE the oil & gas industry? Don't say "100% renewables by 2050" because there is NO scientific evidence that is REMOTELY possible, despite what the Sierra Club, et al, "spew out" on their websites. Might as well suggest we openly defy gravity, as well. If oil, gas & coal have done SO LITTLE for modern civilization as you appear to claim, then how do explain the fact that fossil fuels provide 95% of our transportation fuels & 65%+ of our electrical power generation? These are PREMMINENT energy sources because they are REALLY GOOD, reliable sources compared to less energy dense alternatives. Just PHYSICS. If you choose to look at the facts & development of the oil & gas industry since 1900, I'd respectfully submit it's POSITIVE contributions to modern society far OUTWEIGH any negative impacts associated with CO2 and any attendant climate change. Instead of jumping on the ongoing VILLIFICATION band wagon, provide constructive SOLUTIONS. THAT would be a refreshing & a much needed change in this critically important discussion on how we transition away from fossil fuels over the rest of this century...
  • Aghast on October 18 2018 said:
    We are the number one producer in the world and will expand our production as needed while recoverable reserves under the feet of private citizens be increased by 10s of billions barrels over the next three to five years.

    The oil is not just coming out of the ground faster, there is far more recoverable than is publicly acknowledged, so let them run up the prices we can handle higher oil prices better than anytime in history.

    MAGANOMICS 101 - don't let the Russians fool yah.

    Strategy: Sell the encapsulated and forgotten natural resources roped off by past administrations which are owned by the citizens, mined by the citizens, taxed by the government. Use retained capital to invest in research and development.

    Nobody can compete today with the USA, nobody.
  • Disgruntled on October 18 2018 said:
    The "Glory Days" probably are numbered but those wells will last for decades, producing at much lower rates of course. At some point in the not-too-distant future, the original operators won't be able to operate them at a profit, due to their enormous overhead, so they'll bundle them up into lots and sell them at auctions to smaller operators with the ability to operate them at a profit.
  • Amvet on October 24 2018 said:
    Many studies show there were no glory days for shale. The most recent study shows that even with higher oil prices the 33 shale companies listed on stock exchanges together had a negative cash flow of $3.9 billion during the first half of 2018. For the period 2010- 2014 the negative cash flow was $200 billion. The total debt of shale companies is such that they probably can never repay it.

    This reminds me of the retail store joke about the store that lost 10 cents on each item sold and the owner planed to solve the problem by increasing sales.

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