Why U.S. Shale May Fall Short Of Expectations

The U.S. shale industry may not grow as much, or at least as fast, as everyone thinks it will, according to a top industry executive.

The drilling frenzy in West Texas is not only facing pipeline constraints – an issue that is very well-publicized at this point – but also some operational problems. Schlumberger’s CEO Paal Kibsgaard says that the shale industry is running into some productivity issues that might mean that shale growth ends up undershooting many of the heady growth forecasts.

“[T]the well-established market consensus that the Permian can continue to provide 1.5 million barrels per day of annual production growth for the foreseeable future is starting to be called into question,” Kibsgaard said in an earnings call with analysts. Pipeline woes are indeed causing a slowdown in the Permian, but this isn’t the only problem. “Instead, we believe the main challenge in the Permian going forward is more likely to be reservoir and well performance as the rate of infield drilling continues to accelerate,” Kibsgaard said.

At issue is the density and proximity of the zillions of shale wells drilled in places like the Eagle Ford and the Permian. In recent years, the industry increased the density of shale wells, stacking them closer and closer together. One well pad could host a greater number of wells. Companies also drilled longer laterals, used more sand and more water, and the improved returns seemed obvious.

However, more recently, this intensification is bumping up against their limits. In the Eagle Ford, there is evidence to suggest that packing too many wells too close together actually reduces productivity, as wells interfere with each other. It’s a problem known as “parent-child” well interference, or “well-to-well” interference, as each additional well shooting off from a main “parent” well adds productivity, but only up to a certain limit. Beyond that threshold, additional wells start to reduce productivity. Related: Oil Steady Despite Major Crude Build

An August report from Rystad Energy found that the shale industry even started to increase spacing between wells in the Eagle Ford, evidence that drillers have already realized the problems with crowding wells too close together. In the Eagle Ford, the percentage of wells drilled less than 400 feet away from each other steadily increased from 2012 through 2016. Since then, these closely-sited wells saw their share of the market drop. In other words, since 2016, the practice of packing wells close together started to fade a bit in the Eagle Ford.

Now those problems are showing up in the Permian. “In the Permian, the percentage of child wells in the Midland Wolfcamp basin has just reached 50% and we are already starting to see a similar reduction in unit well productivity to that already seen in the Eagle Ford suggesting that the Permian growth potential could be lower than earlier expected,” Kibsgaard said.

Kibsgaard also warned that a lot of operators are pushing some of their projects too hard in an effort to squeeze out short-term profits. That helped drive efficiencies in recent years, but those efforts are now running up against a wall. “Since 2014, many of the international operators have focused on maximizing cash flow by producing their fields harder and by prioritizing short-term actions at the expense of the required full cycle investments,” Kibsgaard told analysts. “This short-term investment focus offers a finite set of opportunities over a limited period of time and this period is now clearly coming to an end as seen by accelerating decline rates in many countries around the world.” Related: The Quiet Swing Producers: Iraq, Libya, Nigeria

An acceleration in decline rates becomes an even greater problem after taking into account the supply gap that might emerge in the coming years. After the oil market downturn in 2014, the industry slashed spending and cancelled projects. Several years on from those decisions, the effect on the market is just starting to come into focus. “[R]educed production tailwind from new projects that were sanctioned and largely funded prior to 2014, are now uncovering the underlying weakness in the international production base,” Kibsgaard said.

After taking into account the sharp losses in Venezuela and Iran, it is clear that the oil market could be in for some supply trouble, he argues. “[I] our view, after 4 years of low activity, the international production base now needs significant growth in investments for the foreseeable future simply to maintain production flat at current levels,” Kibsgaard said.

The operational problems in the U.S. shale patch should raise some alarm for oil forecasters, who are counting on aggressive growth from Texas. Kibsgaard, who heads the world’s largest oilfield services company in the world, is essentially saying that U.S. shale may not come to the rescue in the years ahead.

By Nick Cunningham of Oilprice.com

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