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Bankruptcy Rout Looms Despite Impressive Productivity Gains In U.S. Shale

Bankruptcy Rout Looms Despite Impressive Productivity Gains In U.S. Shale

Horizontal fracturing of tight hydrocarbon-bearing formations was responsible for a phenomenal resurgence in U.S. oil production, which rose more than 4 million barrels per day from 2010 levels before peaking in April of last year.

(Click to enlarge)

Monthly U.S. field production of crude oil in thousands of barrels per day, Jan 1973 to Dec 2015. Data source: Monthly Energy Review. Related: Oil Bust Takes Its Toll On Latin-American Oil Output

Only 1/4 of the drilling rigs that were active in the U.S. shale oil producing counties in November 2014 were still on the job this February. Despite this massive cutback in capital spending, total U.S. crude oil production had fallen only 400,000 barrels a day (a 4.5 percent drop) as of December.

(Click to enlarge)

Number of active oil rigs in counties associated with the Permian, Eagle Ford, Bakken, and Niobrara plays, monthly Jan 2007 to Feb 2016. Data source: EIA Drilling Productivity Report.

The reason that U.S. oil production has not fallen more is remarkable efficiency gains. Occidental Petroleum described a series of measures they have taken that have reduced the time it takes to complete a well by up to 50 percent, which could enable it to drill the same number of wells each month using half the number of rigs. Other innovations are allowing much more oil to be produced from each completed well. Decker, Flaaen, and Tito (2016) note that the average new well in the Bakken produced 200 barrels/day in 2007. Last year the number was 400 b/d. However, it remains true as ever that production from an average new well will have fallen off by half within a year of operation. Related: Company Accused Of Bribing Oil Producers Has Offices Raided By Police

(Click to enlarge)

Average Bakken well decline rates by year (production from the well n months after completion). Source: Decker, Flaaen, and Tito (2016).

Drillers have also been able to get deep cost discounts from the companies that sell to them as a result of the market bust. These along with the productivity gains have significantly lowered the price of oil at which the producers would be able to cover their costs (including capital costs). A survey by the Federal Reserve Bank of Kansas City asked operators (primarily working in the Niobrara Shale) what oil price would be needed in order for drilling to be profitable in their area. The median response was $60 a barrel, down significantly from the $79 estimate of a year earlier, but still far above current prices. Many analysts expect a third to a half of U.S. oil companies to file for bankruptcy in 2016.

(Click to enlarge)

Median response (red line) and range of responses (blue rectangles) to price needed for profitability. Source: Decker, Flaaen, and Tito (2016). Related: Why Britain’s Bespoke Nuclear Program Won’t Work

The table below reports operating income for five of the most important companies in the shale oil boom, which, between them, produced almost a million barrels a day in 2014. Between them they lost $32 billion in 2015, a year when the average price of WTI was $49/barrel. So far in 2016 we’ve averaged $33/barrel.

Despite ongoing productivity gains and cost savings, a significant fraction of current world oil production cannot be sustained at current prices.

By James Hamilton

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  • Russian Jew on April 04 2016 said:
    Mr. Hamilton, thank you for very informative piece. I did not get only one word in the whole piece: it is "world" in the last sentence. Is it a typo? Did you mean 'US" - since the whole piece was about US oil? Thank you again.
  • Lee James on April 04 2016 said:
    Like RJ, I too noticed the use of "world" in the last sentence. I think it important to keep in mind the multiple reasons low crude prices are problematic for the oil industry. Sovereign-oil exporting countries of the world once had fat budgets and spending, and now must cut back. The U.S., in contrast, is more concerned with how much it costs to bring up the crude.

    We'll see which nations win the contest. In one corner, we have nations who address low crude prices by paring back national budgets. In the other corner is the U.S. We're focused on reducing the cost of extracting tight-rock crude. World-wide, we need to be competitive with old-fashioned crude -- the stuff of natural, underground reservoirs.

    We'll need to figure out how much reduction in crude extraction cost is possible from techno-efficiency gains, and how much of it is starving out oil service companies who want to work, but ... will they survive?

    All of this suggests that those of us facing increasingly higher extraction prices need to develop alternatives to oil. The future of oil is higher prices, volatility of supply and prices, and conflict among nations. We will also face higher cost for the bountiful pollution found in leaking, burning, flaring and venting -- and blown-up pipelines.

    Don't get me wrong. I like oil. At one time I profitably invested in it.

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