During the last shale oil boom when producers were racing to see who could pump the most the fastest, some experts warned that shale oil had a flaw that would come to haunt these producers: wells were quick to start producing but also quick to deplete. Now, industry data suggests that the depletion is advancing. The Wall Street Journal’s Colin Eaton cited reserve inventory data from the shale patch in a recent analysis that pointed to a stable decline that may be irreversible. Eaton also quoted industry executives as making plans for such an irreversible development.
That fossil fuels are finite is no news. It was one of the main arguments in previous renewable energy pushes before emissions became the number-one priority. Technologically, oil and gas resources can be stretched to near infinity as drilling technology advances further and further. Yet this happens at a cost, and it seems that for the time being, the U.S. shale oil industry is not convinced it’s worth paying that cost.
It is this decline in cheaply available oil that is forcing U.S. shale drillers to stay disciplined, the WSJ’s Eaton wrote, despite rising oil prices: West Texas Intermediate is trading at over $90 per barrel for the first time since 2014.
“You just can’t keep growing 15% to 20% a year,” Pioneer Natural Resources Scott Sheffield told Eaton. “You’ll drill up your inventories. Even the good companies.”
Despite this, Chevron and Exxon are planning a substantial boost in the Permian—the most prolific play in the U.S. shale patch and the focus of much industry attention—amid higher prices.
Both supermajors said at the release of their 2021 results they had plans for double-digit growth in Permian oil output, with Exxon eyeing an increase of as much as 25 percent and Chevron seeking to raise Permian production by 10 percent this year.
Bloomberg commented that these plans indicate the U.S. shale industry is back into growth mode. In a separate report, Bloomberg wrote that shale oil production this year was going to add 1 million bpd, according to a forecast by data analysis provider Lium.
“Field level datapoints in recent weeks have highlighted a surge in frac activity, which we believe will translate into a production inflection by mid-year,” Lium wrote in a research note last week. “The industry is finding (and we think will continue to find) a way to put plenty of service activity into the field.”
This may well be the case for this year, but over the longer term, things may look different based on the Wall Street Journal’s data review. Pioneer, after the acquisition of Parsley Energy and DoublePoint Energy, has drilling inventory for another 15 to 20 years, according to CEO Sheffield. Sheffield warned fellow drillers that ramping up production by a lot would bring a quicker end to these inventories. Related: Low Cushing Inventories Could Lead To Higher Oil Prices
Data from another analytics firm, Flow, that the WSJ’ Eaton cited in the analysis suggests that five of the biggest shale patch players, including Marathon Oil, Devon Energy, and EOG Resources, have about ten years or a bit more of profitable well sites left. And that’s the big players. For smaller companies, inventory would probably run out sooner.
A few years ago, oil expert Art Berman warned that drillers in the Permian were running out of sweet spots. The WSJ again reported three years ago that many wells were underperforming, putting lenders on edge as their clients’ projections for well output failed to materialize consistently. The new report suggests things have not changed all that much, but there was a way to make the oil last longer: boost production more slowly.
While this is a straightforward approach, perhaps not all would be able to stick to it, with some opting instead to make the best of high prices while they last. But here is the thing. If the data about drilling inventory and Scott Sheffield are right, higher prices will last longer because of what effectively amounts to limited—and falling—production capacity in the shale patch.
Just a few years ago considered the biggest threat to OPEC’s global dominance, now the shale patch appears to be in a situation similar to that of many OPEC members: drillers might want to drill more, but there is only so much they can actually drill before it becomes prohibitively expensive.
Short-term forecasts remain upbeat, not just from data analytics providers but from the EIA as well. It is the long term that might need to be paid a bit more attention, not just in the shale patch. Underinvestment within OPEC and the nature of shale oil extraction might combine to play a really bad joke on the world before we have managed—if we ever do manage—to wean ourselves off fossil fuels.
By Irina Slav for Oilprice.com
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