There are more signs of a drilling slowdown in U.S. shale.
The EIA said that the U.S. will add 30,000 barrels per day (bpd) between December and January, down by half or two-thirds from routine monthly increases last year. Within that number, the Permian is still expected to grow by a sizable 48,000 bpd in January, but that is offset by outright declines in the Anadarko basin (-15,000 bpd) and the Eagle Ford (-9,000 bpd).
As the numbers suggest, the Permian is really the only place where U.S. shale is still growing, but there are questions over how long that can continue. The rig count in the Permian is down to 400, off by almost 100 rigs from a year ago. Spending cuts are taking hold and the pace of drilling has slowed. There tends to be a lag of several months between shifts in rig counts and the effects on production.
More importantly, there are several headwinds facing the industry that are beyond mere cyclical swings. First, the industry has lost substantial access to capital. The glory days of debt-fueled drilling are long gone.
Second, the industry is running into more and more operational problems. And while restricted access to capital has become more well-known, the problems below ground are still relatively murky.
For instance, investment bank Standard Chartered called out the EIA on its data regarding constant improvements in initial well productivity. “We cannot find a source from shale oil and gas companies that supports an 18% y/y rise in initial well productivity. The talk among companies is of initial well productivity at best stalling, and at worst falling, due to a variety of technological and geological constraints, particularly in the move from tier one to tier two acreage,” Standard Chartered analysts wrote. Related: US Proved Oil & Gas Reserves Hit New Record High
The bank said that because of a lag in reporting and other data mix-ups, the number of completed wells might be understated. If more wells were actually completed, then the production figures are less impressive. “If that is true, then the slowdown in shale output could prove even sharper than the DPR methodology currently implies,” Standard Chartered said.
Meanwhile, the problem of parent-child well interference is not going away, and might be worse than previously thought. As DeSmog reports, analysts at Wood Mackenzie said on a recent online presentation that “We know we’re on the cusp of a child-well world,” referring to the fact that child wells make up a majority and growing percentage of all wells.
It will take time before the significance of this problem is fully known, but the one thing that is for sure is that there is a slowdown in activity. According to Rystad Energy, shale investment is set to fall by 6 percent in 2019 and by another 12 percent in 2020. Related: Lukoil: Russia’s Output Could Surpass 12 Million Bpd By 2035
The slowdown is starting to hit the local and regional economy in West Texas. Houston could lose 4,000 jobs in 2020 related to the downturn, and the Greater Houston Partnership said that the city is seeing a rise in vacant corporate office space. A recent Dallas Fed survey said that Texas on the whole could lose 8,100 jobs in the oil and gas sector, double what the bank thought previously. Median home prices in the Permian have slid 2.6 percent since August.
The newly-confirmed U.S. Secretary of Energy Dan Brouillette dismissed the slowdown as something ordinary and also temporary. “Maybe there are some folks who -- for whatever reason -- thought they could make some quick money in this and they are learning that production is not as easy as you might think,” Brouillette said in a Bloomberg interview. “You may see some of them go by the wayside.” But the problems are temporary hiccups, he insisted.
That remains to be seen. The U.S. is closing out the decade as the largest oil and gas producer in the world, but the cracks in the shale industry are arguably more pronounced than ever.
By Nick Cunningham of Oilprice.com
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