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Are Shale Producers Out of Tricks?

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The American Interest

America’s oil benchmark—the West Texas Intermediate—is now trading just above $45 per barrel, and those heady days of $90 or even $100+ crude are a distant memory. But while fracking companies have thus far managed to keep the oil coming, they may be reaching the limits of their ability to survive at bargain prices.

Reuters reports:

[R]ecent government and private data show output per rig is now flatlining as the industry reaches the limits of what existing tools, technology and strategies can accomplish.

“We believe that the majority of the uplift from high-grading is beginning to wane,” said Ted Harper, fund manager and senior research analyst at Frost Investment Advisors in Houston. “As a result, we expect North American production volumes to post accelerating declines through year-end.”Drillinginfo, a consultancy with proprietary data, told Reuters well productivity has fallen or stabilized in the top three U.S. shale fields – the Permian Basin and Eagle Ford of Texas and the Bakken of North Dakota – since July or August.

So not only is output tailing off—something we’ve known since this summer, when production started to drop from a high water mark in April—but, more importantly, drilling productivity is plateauing. For months now, shale producers have defied expectations with their ability to keep the crude flowing, even as prices have fallen more than 50 percent since a high of $117 per barrel in June of 2014. The industry resilience comes down to innovation, as companies have employed a variety of new methods to stay afloat in this bearish market, including employing “walking” rigs, leveraging big data, upgrading systems, drilling more wells per pad, “supersizing” drilling processes, focusing on the most productive plays, “refracking” wells previously thought to be spent, fracking with sewage water, and taking advantage of falling costs in the oil services industry.

But now, it seems that analysts believe producers have reached the end of their creativity. Yet just last October, the thinking went that the majority of U.S. shale companies needed an oil price above $70 per barrel to stay profitable—and here we are a full $20 below that level and production hasn’t fallen off a cliff.There remains a danger in every sort of forecasting of predicting the future based on the conditions of the present. On the one hand this is just common sense—we can’t make up outlandish numbers based on a hypothetical technological breakthrough or devastating global crisis—but on the other it should caution us not to place too much faith in the prognosticators. No one predicted the shale boom, just as no one expected it to prove so resilient to price pressures.

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