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New Study: Unravelling the US Shale Productivity Gains

Trisha Curtis, Oxford Institute for Energy Studies

Microsoft Word – Unravelling the US Shale Productivity Gains – WPM 69


Why are US shale basins astonishingly productive despite of a low oil price environment in which operators and service companies alike are cutting costs, laying off employees, and reducing activity levels?

Introduction: Several US shale and tight oil plays have exhibited robust well productivity gains over the past two years, even as oil prices enter a third consecutive year under $60 per barrel. The Permian, Williston (Bakken), and Powder River basins have produced the most significant gains over this period. Estimated ultimate recovery factors (EUR)2 are one measurement of well productivity. Initial 12-month oil EURs (the cumulative amount of oil a well will produce in its first 12 months) for the three plays, in aggregate, have grown by 41 per cent from 2014 to 2016, while 60-month EURs have grown by 22 per cent over that same period (see Figure 1). This begets the question, how can such strides be made in a low oil price environment in which operators and service companies alike are cutting costs, laying off employees, and reducing activity levels?

Figure 1: EUR growth in the Permian, Williston (Bakken), and Powder River basins (2014–16)


Notes: Year-on-year 12 and 60-month EUR growth rates for oil producing wells brought online in a given year in the Permain, Williston, and Powder River basins (individual well data has been combined across the three plays). Source: DrillingInfo Data, PetroNerds Calculations and Estimates

Figure 2 illustrates the decline curve, or average well performance, for all active horizontal wells in the Permian, Williston, and Powder River basins combined, brought online in specified years. The horizontal axis shows the age of these wells in months, and the vertical axis shows the average daily oil production of these wells. Each line represents the performance of wells brought online in a given year. The orange line represents the performance of wells brought online in 2016, the light dark blue represents wells brought online in 2015, and so on. Notice how the curve shifts upward in the past three years indicating improvement in well productivity.3 Note that productivity gains are most apparent in the first two years of a well’s life. After the two-year mark, performance tends to standardize across all well years (the tails overlap).

Figure 2: Aggregated oil decline curve for horizontal Permian, Williston, and Powder River wells (2011–16)

Many US shale and tight oil producers have stated that they have become both leaner and more efficient, while also achieving technological and scientific gains that will persist when the oil market improves and, inevitably, service costs rise. However, leading oilfield service providers have stated publicly that oil producers have made few, if any, lasting technological strides or efficiency gains. Rather, they contend that producers have simply benefited from cuts in service costs (such as cost savings in drilling and completion) and that any gains or improvements will not persist when costs rise. Schlumberger stated the following in their Second Quarter, July 2016 earnings call (Seeking Alpha):

The operators have reacted to this crisis by initiating a massive reduction in oilfield activity and by sending unsustainable pricing shock throughout the entire oil industry supply chain. In addition, there is currently also a widespread high-grading of activity taking place in the industry aimed at maximizing short-term production and cash flow.

Adding up all of this, the current cost per barrel for the oil producers now appears to be significantly lower than what was the case seven quarters ago. However, this should not be confused with a permanent improvement in the underlying industry performance as there has been little to no fundamental change in technology, quality or efficiency, no major step change in industry collaboration and no general transformation of the industry business model.

… technology has to play a very important role in this. We’ve said in many foras that if you look at the cost per well, I think we are in late innings, but in terms of production per well, we are in very early innings. And if you want to drive down cost per barrel, we have to look at ways of getting more production out of each well. But – although utilization will help … given the pain that the entire industry value chain is in, there’s going to be a mounting wave of cost inflation from every supplier in that chain, which I think is going to put significant pressure on how quickly activity can recover.

While Schlumberger’s tone has moderated in their most recent earnings call, their words in July serve as a harsh rebuttal to conflicting statements from a number of operators. Oasis Petroleum discussed several Bakken-related developments that are leading to increased oil recovery – specifically completion design changes – in their Second Quarter, August 2016, earnings call (Seeking Alpha):

Equally important to cycle times are job design and implementation. Last quarter, we spoke about many of the completion designs that we are testing this year. These tests fall into two camps: higher proppant loadings and proppant placement efficiency.4 For high-proppant loads, we have completed multiple 10 million pound and 20 million pound fracs in Indian Hills and Wild Basin. For proppant placement, we have completed several 50-stage slickwater jobs and have also tested both diverters and precision proppant placement techniques … it’s simply too early to draw definitive conclusions. However…we believe these designs and techniques have the potential to further enhance both EURs and returns for Oasis.

In their Second Quarter, August 2015 call, EOG discussed the customization of well completion designs and the resulting effects on decline rates, and the uplift in well productivity (Seeking Alpha):

… we continue to drill our laterals in better rock … we are taking a lot of time and effort, picking out the best quality rock in each one of these plays and keeping the lateral in that longer … we now are doing a much better job with these high density fracs and better distributing the frac along the lateral, connecting up more of that good rock.5 And it [is] certainly lowering our decline rates over time and that makes it easier to grow production…No two wells are exactly the same. We always customize the completion job based on the geology…. But, we are seeing a tremendous uplift in the productivity of the wells.

Notable here is that EOG mentions the major step changes taking place in completions design. These changes include deeper assessment of rock quality, the importance of keeping the well lateral in higher quality rock or reservoir, and also optimizing the placement fracks along the lateral, as opposed to the common practice of placing frack stages at pre-defined, standard intervals. These and many of the other completion changes will be explained throughout the course of this paper.

This paper seeks to assess the level of well productivity changes and well production improvements in the US shale and tight oil space since the collapse of oil prices in 2014. This paper also seeks to analyse the nature of these productivity changes through an assessment of the role of cost cuts, efficiency gains, and technology advances on the performance of recently developed shale and tight oil wells. This assessment is performed through the analysis of individual well data and research into company behaviour through earning calls, press releases, and meetings with key shale companies.


Full paper