Yager: I’m a shale oil skeptic and here’s why

Will North American light tight oil, or shale, stop the ongoing oil price recovery at US$60/bbl? Can the battered exploration and production (E&P) and oilfield service (OFS) sectors get back to work quickly and put enough new production on stream to offset what is hoped to be an OPEC production cut plus global decline rates?

That’s what some analysts are saying following OPEC’s decision in September to cap and hopefully reduce output in November.

They claim no matter what OPEC does, U.S. shale is the swing producer to moderate prices. The U.S. shale miracle put four million bbls/d of production on stream in five years and helped collapse crude in late 2014.

Now some are certain the industry will do it again but at much lower prices, thus ensuring the world will never see US$100/bbl oil (notwithstanding a major supply disruption in the Middle East).

This writer doesn’t believe it.

The shale boom caused U.S. crude output to explode from 5.4 million bbls/d in June 2010 to 9.6 million bbls/d in June 2015, reversing decades of decline. During that period, Baker Hughes reported an average 1,205 rigs drilled daily for oil, peaking at 1,609 in October 2014.

The pace of development was frantic. OFS invested billions to meet skyrocketing demand for rigs, frac spreads, fluid handling, proppant and accessories like multistage packer assemblies.

This true modern-era oil boom was no model of efficiency, cost control or fiscal probity. Too many workers and clients trained on the job, but much was learned to perfect the process, something that continues today. Today’s horizontal wells are much longer and use more frac stages and sand. Better wells yield higher flush production and lower decline rates.

By mid-October 2016, the U.S. oil rig count was up to 432, a vast improvement over the May basement of 316 but only one-third of what was required to put four million bbls/d of oil on stream the first time. Operators have become prospect-selective out of economic necessity. The collapse of OFS prices from massive overcapacity has contributed significantly toward helping clients with cash to drill profitably in the better reservoirs.

But the reality of shale is high decline rates. In mid-October, U.S. oil output was down about 1.2 million bbls/d from its May 2015 peak. The U.S. Energy Information Administration disclosed shale output has fallen every month for the past year with another 30,000-bbl/d drop estimated for November alone. ARC Financial reported on October 18 its running estimate for conventional crude output in Canada was 150,000 bbls/d lower than last March.

These output declines have contributed significantly to putting global oil markets into balance making it much easier for OPEC to appear to be capping output without actually having to do very much. Globally, decline rates require the replacement of some nine million bbls/d of production annually.

The Eagle Ford in Texas and Bakken in North Dakota are experiencing the largest declines. The perpetually prolific Permian Basin in western Texas is attracting most of the attention because of its multitude of geological opportunities. But is US$60 oil really going to fire up the North American shale machine and again affect global oil prices?

Most oil price prognosticators don’t understand decline rates or how the drilling and completion machine for North American shale development actually works. It was done with US$100 oil, supportive and strong equity markets, lenders generous to a fault (as many have painfully learned), and an OFS sector with sufficiently healthy balance sheets and access to capital to add massive capacity. Plus the ability to find the people to do the work.

Certainly, shale developers are more efficient than they were. But of the key elements of the past boom listed just above, how many are there today? None.

The service sector is broke, and the hands are doing something else, and if they do come back, they won’t be thrilled about working for much less. If OFS gets the higher prices and margins it needs to feed the machine numerous E&P development opportunities, it still won’t work, even at US$60.

The backlog of drilled-but-uncompleted wells will help offset declines as they are completed. But this won’t be enough to affect world oil supply.

Oil prices have nearly doubled since February. Things look better. Higher prices are inevitable. North America’s OFS is going back to work.

But the conditions creating the shale boom that tanked world oil prices will take more than US$60 oil to replicate and won’t cap prices.

Like this? Check out the latest issue of Oilweek.

David Yager is a long-time industry commentator and an oilfield service management consultant in Calgary.

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