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Unstoppable Shale Revolution: How OPEC’s Strategy Is Backfiring

Sam Ori, The Wall Street Journal

New shale wells in the Bakken are pumping up to 50% more oil than those drilled at the beginning of 2015. Operators are finding ways to do more with less.

The biggest number in oil markets this week was 30—as in, the price of a barrel of U.S. benchmark oil dipped into the 30s on Thursday, a symbolic indicator of the serious financial pain being felt by producers around the world.

With this latest dip in prices, we can expect to see continued signs that OPEC’s market share strategy announced last November is having an impact.

Global oil demand growth is on pace for its third strongest year of this century. American motorists have taken to the roads in record numbers—increasingly in pickup trucks and SUVs. And global upstream oil investment has plummeted for two consecutive years, something not seen since the early 1980s.

Despite all this, it is the latest data out of the U.S. shale patch that markets should be focused on.

And contrary to what you might expect, it should have OPEC—Saudi Arabia in particular—beginning to worry. Despite a 63% drop in rigs drilling for oil in the three key shale regions since last November, oil production in those regions has barely budged from peak levels in 2015.

In fact, new wells in the Bakken are pumping up to 50% more oil than those drilled at the beginning of 2015. Operators are finding ways to do more with less.

A debate is raging among oil watchers about whether these efficiency gains are permanent or simply a result of focusing on the best drilling locations.

But evidence suggests that there is still enormous room for improvements in shale industry economics. Consider this: a recently released working paper that examined industry practices across more than 4,000 wells suggests that the shale oil industry in North Dakota alone might have left as much as $36 billion in profits on the table between 2005 and 2012.


It turns out that most operators didn’t systematically experiment with their fracking techniques. Instead, innovation occurred somewhat randomly and almost exclusively after companies started to see something new working over a period. In other words, firms were risk averse with their technology choices.

With oil prices at $100 per barrel, they had that luxury.

So here is a prediction: the current price environment will force the U.S. shale oil industry to get its act together to focus on more purposeful—and longer lasting—innovation. As a result, U.S. oil production will be stronger for longer than most people expect, pushing the oil price recovery back by several years.

If you think this kind of resilience is without precedent, just look at natural gas. There are 199 rigs drilling for natural gas today, down from more than 1,600 in 2008. During the period when low natural gas prices were reshaping that industry, we heard a lot of the same talk we now hear about shale oil: high marginal costs and unsustainable investment needs were supposed to lead to plummeting production. And yet, U.S. shale gas production today is at record levels even as prices test new lows.

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