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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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Shale Industry May Finally See Some Profits

Oil

Not only is U.S. shale set to grow at a torrid pace, but the industry might actually make some money for once.

Profits have eluded the shale industry for years, and drillers burned through more cash than they generated even when oil prices were above $100 per barrel. Production from shale wells plummets after an initial burst of output, necessitating evermore wells to offset depletion. So, the cash generated from a shale well is quickly pumped back into the ground, creating a spending treadmill that is tricky to navigate. The promise, shale executives have insisted to their shareholders, was that higher debt today would translate into more production growth and eventually profits.

Last year, amid another year red ink, shale executives promised something different, not least because of greater scrutiny from shareholders. They pledged restraint, a more cautious approach to drilling, and an emphasis on profits above all else. That would mean avoiding aggressive drilling in 2018, even if oil prices moved up.

After several reports from the EIA and IEA in the past two weeks predicting massive production gains this year, it is clear that the mantra of restraint has been quickly thrown out of the window. Oil prices have plunged by nearly 10 percent since the end of January as expectations of explosive growth have settled in.

And yet, even as the shale industry ramps up production, it may also finally make money while doing so.

The average shale driller could expand output by 30 percent this year, according to an analysis from Wood Mackenzie, while also turning a profit.

There are several reasons for this. First, WoodMac assumes oil prices will be about 10 percent higher in 2018, with WTI averaging about $61 per barrel. That is above the breakeven price for a lot of shale drillers.

Related: Is History Repeating Itself In Oil Markets?

Second, there has been a huge buildup in the backlog of drilled but uncompleted wells (DUCs). The DUC list has ballooned from 5,660 a year ago to 7,609 as of January 2018. With some of the costs already incurred, the shale industry could complete thousands of wells and bring production online at a lower cost than otherwise would be the case. That means they could post significant production gains and also boost earnings. “All the stars seem aligned for Tight Oil Inc. to generate positive cash flow in 2018, two years earlier than we predicted,” WoodMac said.

All told, WoodMac predicts that U.S. shale will add 2 mb/d by the end of 2019: 1.1 mb/d this year and 0.9 mb/d next year. The consultancy sees shale output rising to 7 mb/d by next year, then to 10 mb/d by 2025 (note: that figure is shale production only, and it excludes conventional and offshore production). In other words, the sky is the limit for the next few years.

But there are several caveats that need to be noted, mitigating factors that could upset that rosy forecast over the long term. The Eagle Ford and Bakken could peak and decline in the early 2020s, putting much more pressure on the Permian to carry the load. But the industry might tap out the sweet spots, and drilling saturation could lower recovery rates. At that point, Permian drillers could be forced into increasingly marginal territory.

Related: U.S. Mandates Biggest Non-Emergency Strategic Oil Selloff

Meanwhile, shale drilling is also “perpetually consuming capital to maintain production,” WoodMac notes. Conventional projects, on the other hand, do not “need ongoing investment once onstream, so cash margins are higher and much more resilient to low prices.”

For now, though, WoodMac says that “the economics support the positive outlook — the Permian continues to look more attractive than most other options for new investment in the global upstream hopper.” That means that at the company level, Permian-focused companies are outperforming shale companies from elsewhere.

The bottom line from WoodMac is that the shale industry, by and large, will become profitable this year if WTI stays at about $60 per barrel. If WTI sinks below $50, however, they will continue to burn through cash.

By Nick Cunningham, Oilprice.com

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  • Him Eberle on February 14 2018 said:
    Doesn’t profitability depend upon EUR’s being vastly higher than the trend lines suggest? As I recall, the industry is expecting EUR’s around 700,000 barrels per well, while extrapolating the production lines outward yields under 300,000 at best.
  • LM on February 15 2018 said:
    So what exactly happens between over $60/bbl and less than $50/bbl. Surely BE is a round about way of saying that above a certain value the business is profitable. So likewise below that same value it's deemed unprofitable, or going/burning through the cash. I think maybe your missing the point though. Shale till now is perpetually unprofitable and has amassed a lot of debt regardless of tech break throughs and squeezing the service providers. But thanks to the efforts of others shale and not "shale alone" are still in business. Now they plan to stick a needle in the eye of their facilitators (opec/nopec) and the question is will that be deemed acceptable by them! My view is that the facilitators have herded shale into the sweet spots and this infact will shorten the lifespan of that industry. Had it been managed as a business with limitations it could have survived but it hasn't. Anyway if they keep up at their current pace 60 won't be an issue or 50 for that matter because 40 will come and that will relieve another bunch of brave investors of their cash. Alas. It's the human failing.
  • IG on February 15 2018 said:
    Just hedge the shit out of all your production, at 70 most of the curve was well above 60, can fix the revenue stream for years.

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