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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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Big Oil Could Spark A Renaissance In U.S. Shale

Fracking

The collapse of oil prices has killed off any appetite that the oil industry had for megaprojects that cost tens of billions of dollars. With scarce resources, oil companies have shifted their focus, pouring resources into short-cycle projects, which often means shale drilling.

Liam Denning over at Bloomberg Gadfly put some numbers to the phenomenon, using data from Oslo-based Rystad Energy. The data is revealing, painting a portrait of an industry that has scaled down the size of new oil projects. Intriguingly, the focus on smaller oil fields began before the plunge in oil prices, although the price crash is accelerating that trend.

Spending on oil fields that hold more than 1 billion barrels of reserves rose by 12.5 percent annually between 2000 and 2014. However, spending on oil fields between 30 million and 1 billion barrels increased by 15 and 16 percent each year. Moreover, spending on these smaller fields will grow by 12.5 percent per year through the rest of the decade, double the rate of investment in the mega oil fields.

There are several reasons that the oil industry have shifted resources into smaller oil plays. One is that there just are not that many massive oil fields left to develop that are not under national control. Also, with so many megaprojects suffering from cost inflation, delays, and technical problems, they are no longer attractive to either oil executives or their shareholders. Just a few days ago Chevron said that it was forced to once again temporarily shutter its gargantuan $54 billion Gorgon LNG export facility in Australia because of more equipment problems. That is not the first time that the facility had to be idled since starting up operations earlier this year. And that came after the project was years overdue and billions of dollars over budget.

Another reason that oil investment has backed out of megaprojects is the rise of shale drilling, which opened up a tidal wave of investment into smaller fields. Low oil prices will likely ensure this trend continues. Arctic drilling is now off the table in most parts of the world aside from a few exceptions; deepwater projects will likely be deferred for several years; and expensive forms of oil such as oil sands will also see investment dry up.

Of course, shale drilling has its own set of problems, not the least of which is the very steep decline rates and high breakeven costs. But there is a potential unfolding development in the shale patch could result in improved economics. Reuters found that the shale industry is succeeding in slowing the dramatic initial decline rates from shale wells. “The trend, if sustained, would help ameliorate the industry’s most glaring weakness and cement its importance for worldwide production in years to come,” Reuters says. Related: U.S. Sees Largest Monthly Production Decline Since The Downturn Begun

The Reuters analysis found that wells in the Permian Basin in West Texas had decline rates of 18 percent between their point of peak production and the fourth month of operation. That decline rate may seem substantial when compared to conventional wells, but it is way down from 2012 when Permian wells suffered from a 31 percent decline rate over the same period. More staggering were the decline rates in early stages of the shale revolution a decade ago, which saw output decline by upwards of 90 percent in just a few months.

A more modest drop off in output will put a lot of marginal wells into profitable territory. It also means that shale drillers can cycle cash more quickly. "You can have cash flow without having to expend a lot of capital,” Mukul Sharma, a professor of petroleum engineering at the University of Texas at Austin, told Reuters.

Drillers seem to be able to slow decline rates by keeping up high surface pressure, which slows initial production but extends the life of the well, ultimately leading to more overall output. Years ago, companies did the reverse – squeezing out as much oil as possible in the first few weeks, which ended up leading to sharp decline rates and less oil recovered in total.

In short, shale companies continue to tweak drilling practices, which should improve well economics. That will ensure that fracking shale wells continues to see more interest from oil companies than the megaprojects of years past.

By Nick Cunningham of Oilprice.com

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  • Kr55 on July 03 2016 said:
    I think it is good news that shale and tight oil producers are making the effort to slow declines by dropping initial output. Having the extremely high initial output is what turned shale into such a crazy ponzi scheme that producers and lenders were throwing money at to keep getting production rates higher and higher. Now, producers can calm down and start to act more responsibly closer to what conventional producers do. Overall US production will continue to fall because every well isn't turned into a crazy gusher that the producer is trying to get as much money out of ASAP, but the companies will be healthier by having more managable and stable cash flows.

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