Oil producers in shale and oil sands are finding it tough to make a buck and keep production levels rising. While the oil trade has been betting on ever-rising shale production the truth is that production has leveled off. Some are saying there is a “shale band” at $60 basis Brent crude, that the market cannot cross without getting a flood of shale oil. The truth is that even if oil prices go up the market will be disappointed with increases in shale oil production. That goes for oil sands as well. In the short-term oil will be focused on the resurgent U.S. dollar and oil inventories that may show another big oil supply drawdown but big picture oil fortunes may be driven by the markets misreading of shale oil production and production projections.
While we have pointed out before the problems with shale oil early on and now others are starting to see what we are talking about. The Financial Times covers the points we have covered before in an article “In charts: has the U.S. shale drilling revolution peaked? Data shows a slowdown in rig productivity and drilling time improvements leveling off.” The paper reports that the market is seeing shale productivity gains leveling off and pointing out that the production per shale oil well is declining.
The FT Writes” Yarrows, a Paris-based energy research firm, has done that exercise for the Permian Basin of west Texas, the hottest area for investment in the U.S. oil industry recently. Its conclusion is that productivity adjusted on a good note stopped growing last year, and may even have fallen a little in 2017. As the industry has recovered since last year, companies have moved from drilling in only the most productive “sweet spots” and started to produce from more difficult rocks, creating a natural drag on productivity. Improvements in production techniques have to fight against that drag, and it seems that in the Permian recently they have been losing.”
They also point to the reality of the logistics of shale drilling. The FT says “One issue is the time it takes to drill the wells. The recorded efficiency of rigs improved dramatically over 2013-16, in part because of the spread of pad drilling: running multiple horizontal wells off from a single site, or pad, to cut down the time spent moving the rigs. Recently, however, the rate of improvement appears to have slowed, especially in the Eagle Ford shale and the Williston Basin, which includes the Bakken formation. Wells are generally getting longer, so companies may still be going faster in terms of feet per day, even if they take the same time to drill each well. But it does look as though that particular source of productivity gains is not what it was.”
