I am tired of hearing about the unbelievable impact of technology on collapsing U.S. shale production costs. The truth is that these claims are unbelievable. The savings are real but only about 10 percent is from advances in technology. About 90 percent is because the oil industry is in a depression and oil field service companies have slashed prices to survive.
Zero Hedge posted an article yesterday called How OPEC Lost The War Against Shale, In One Chart that featured the chart shown below from a Goldman Sachs note.
(Click to enlarge)
Figure 1. Short-cycle shale has engendered a structural deflationary cycle. Source: Zero Hedge and Labyrinth Consulting Services, Inc.
Zero Hedge (and/or Goldman Sachs) erroneously states that "the cost curve has massively flattened and extended as a result of shale productivity." If I read the chart correctly, the flat portion attributed to "shale" represents ~ 10 mmb/d but tight oil only produces ~3 mmb/d.
This little arithmetic problem and the fact that the entire 2017 cost curve has shifted downward ~$15/barrel from the 2014 curve indicates that the true point and message of the graph is that break-even costs for all producers have fallen almost 25 percent.
My business is working with clients who drill onshore U.S. oil and gas wells. Rig rates have fallen 40 percent since the oil-price collapse. One client had a bid for a drilling rig in September 2014 for $27,000 per day. By the time he signed the contract in March 2015, the rate was only $17,000 per day. Another client recently ran a special high-tech log in a well whose list price was $75,000 but he only paid $15,000 after discounts were applied. Related: Busting A Myth: U.S. Dollar Impact On WTI
Most of the celebration of efficiency and productivity is really about a depression in the oil industry that has resulted in massive price deflation. I estimate that only about 10-12% of the cost reduction is because of technology and most of that was a one-time benefit in the first year or so it was used. Going forward, efficiency gains are a few percent at most.
"Our forecast assumes that productivity declines 8% by the end of 2018…We believe a significant portion of the productivity gains being experienced by the sector outside of the Permian are the result of high grading and will revert in future years. Cost pressures are already surfacing in the Permian, which will dampen capital efficiency going forward."
-Bernstein E&Ps ( 10 March 2017)
Break-even price is mostly a function of well cost, flow rate and EUR.
I have already addressed well cost. Most companies and analysts routinely exclude G&A (General and Administrative costs or overhead), royalty payments, federal income taxes, depreciation and amortization ("EBITDAX") from their costs. Excluding cost is an excellent way to reduce break-even price except that it does not accurately represent break-even price.
Even if we accept these break-even prices, does anyone knowingly invest in things that don't make any money? Sorry, I forgot about negative interest rate European bonds.
The EUR used for break-even prices in charts like Goldman Sachs' are largely unknown but bigger EUR means lower break-even prices.
Companies routinely report EUR in barrels of oil equivalent (BOE) that use a natural gas-to-BOE conversion of 6:1 based on energy content but a value-based conversion including natural gas liquids is 15:1.
For gassy plays like the Eagle Ford and Permian basin, this conversion sleight-of-hand produces ~35 percent inflation in EUR. It is perfectly legal for reserve reporting but it is a dishonest way to represent break-even price since companies are getting ~$2.50/mmBtu for gas and not the $6.25/mmBtu implied by the 6:1 conversion. Related: OPEC Out Of Moves As Goldman Sachs Expects Another Oil Glut In 2018
Advances in technology have resulted in higher early production rates increasing net present value. In many cases, however, these are accompanied by increased decline rates and lower EUR. Figure 2 shows an example from the Bakken Shale play.
(Click to enlarge)
Figure 2. Comparison of 20-mMonth cumulative production and normalized decline rates for the Bakken Shale play. Source: North Dakota Pipeline Authority, Drilling Info and Labyrinth Consulting Services, Inc.
The chart above shows 20-month cumulative production data suggesting that well performance has improved every year. The chart on the right shows decline rates for the same years of production. It shows that, in fact, well performance is decreasing from 2014 through 2016 because of higher decline rates.
Technology does not create energy. The effect of better technology is a bigger spigot that produces the energy faster. The downside of the technology is that it increases the rate of resource depletion.
Costs have come down for all oil and gas producers since the oil-price collapse in 2014. Most of the savings are because of lower oil field service costs and not so much because of improved technology.
By Art Berman for Oilprice.com
More Top Reads From Oilprice.com:
Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and… More
Comments
Trouble is, there's nothing cheap or easy about bringing in diffusely-held oil in source rock deep underground where the best indicator of what's in store for you is how well the guy next to you did with his expensive deep and long well.
We may need a better energy railroad. Is there a transition that we need to be looking at?
thanks
This is obviously incorrect. It is technology which has made possible every energy source in the last couple of hundred years. At one point we were running out of whales for oil. Then drilling for shallow petroleum deposits was invented.
A hundred years ago it was thought we would run out of petroleum within the next couple of decades, but advances in technology have opened up new energy sources on land, under the ocean, in oil sands, and now in shale, so reserves have continued to grow after many decades of production at higher and higher levels. As has been said, we don't just find resources, we invent them using technology.
In my business (abrasives) this has been going on for thirty years.
Many of us have long said that the the old "BOE" measurement was very misleading. You are dead-on with that analysis. Many, many of these horizontals, even some with impressive initial potentials, are never going to payout.
Arts information, again, is from an expert professional Geologist that is still working as well as giving presentations to numerous Geological Societies and other groups associated with the oil & gas business. His work is on par, and no one wants to hear his answers. Our country needs to wake up because what wall street is telling folks in order to get more equity to give to the shale oil producers is absolutely wrong. Art doesn't deal in opinions, he deals in factual data. Regards.
He's knowledgeable for sure, but his analyses should be taken with a grain of salt.
Return on investment is the ultimate demand, to the point that no one person or service company is no expendable.
There is a physical limit to all technologies, eventually it becomes counter productive to "BEAT THE CURVE" and places serious safety implications on performance.
The service contractors will eventually say "Enough" and as they have done in the past, refuse work which is losing money. This goes full circle with all "Contractors".
Then what happens? Skyrocketing production cost. Feast or famine.
The Petroleum industry is the worst ran industry in the world, that is fact. People whine of D.C Cronyism, they ain't seen anything like the oilfield "Buddy System" kick backs galore, old as prostituiton...well almost......
Oil Tech Miracle?
At magneticwaterscience.com you can ask nicely and be given the password to videos showing water being turned into oil and burnt. Its so pure it doesnt need refined to pour into a VW Golf Diesel car's tank. Apparatus: water, 12V car battery and some stainless steel pipes.
All we did/do is understand the Earth's magnetic Fields and duplicate its Field interaction with underground water. If left to dry out our 'oil' becomes 'coal'.
Its unfortunate the alphabet agencies have a vested interest in fossil geology for stealing your hard earned work. The above fake shale oil tech proves it.
Shabahat - you might have read the article, but you didn't understand it. 80% of the savings have come from lower rig/service co' rates. As things improve and rates go up, that saving will disappear.
Shale is the single reason that OPEC has been brought to its knees in the last few years. Yes, some shale plays are not profitable or economic but the vast majority are. And when you cut the time-to-complete a well from 50 days to 20 days, that is a real cost-saving regardless of the labor and input costs to drill that well.
The Permian is an Elephant-sized field that can produce for decades and might have 75 billion BOE. That's a fact.
Art needs to be more precise and specific with his shale criticisms. He is beginning to look like one of those stock market perma-bears who is bearish for years or decades as the market rises 200% or 300% or 400% and then wants to claim victory after a 25-40% drop -- right before the next big rise.