Financial Times: Has The US Shale Revolution Peaked? -- October 18, 2017

Updates

August 12, 2018: a re-look.

October 19, 2017: a reader commented on this (see comments) --

That article is so skewed from reality one wonders how a respected publication ran with it.

Niobrara drill/completions can be done for under $3 million.

Mile-a-day drilling is somewhat routine with 7,000'+ starting to appear.

The precision in targeting the most productive rock is near 100%.

The use of diversion techniques, microproppants, and restricted flowback are all relatively new developments.

EOR efforts are barely beginning.

The decrease in cost - along with MUCH higher production - is expanding economic areas in existing plays and favorably influencing the Uinta, Powder River, Rogersville, possibly the TMS, to name just a few.

The amount of natural gas and NGLs coming from these unconventional operations will continue to rock the world.

Original Post 

The big question I had regarding this article: what was its point? Why did the Financial Times publish it? Why did the Financial Times publish it at this time? A lot of terms were thrown around without definitions; the best example: "efficiency". What jumped out at me was the writer's apparent misunderstanding that in the big scheme of things, the US shale revolution is NOT about horizontal drilling. It's about hydraulic fracturing. Wow, I could go on and on.

See also this post on the resurgence of the Haynesville. 

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The Article

Disclaimer: in a long note written by someone with an inappropriate exuberance for the Bakken, factual and typographical errors are bound to occur. The point of my comments is to provide a general gist of my worldview of the Bakken. And I'm sure I'm wrong in many cases, and see things from a different angle.

The Brits apparently don't understand the US shale revolution. A reader sent me this article -- absolutely fascinating -- and so incredibly off base I just had to blog about it. The link: https://www.ft.com/content/e17930dc-b288-11e7-a398-73d59db9e399.

It's behind a paywall. If the link is blocked, google -- ft in charts has us shale peaked.

Note: there is so much to write here, it's impossible to capture everything. I may stop here, or I may add more. But for those who understand the US shale revolution, this is nothing new. For newbies? Well, what can I say? One wonders if the Saudi's planted this story in yet another attempt to kill the US shale revolution. 

Really: what was the point of the article? The headline asks whether the US shale revolution has peaked. That may be the main theme, but a secondary theme is to suggest that if the US shale revolution has peaked, it is because "technology and efficiencies" have peaked.

The article lost relevancy for me as soon as I noted that not once did the article mention:

• the price of WTI
• the fact that Saudi Arabia was unable to crush the US shale operators
• the fact that OPEC will have to extend production cuts if they hope to quash the current crude oil glut

The article alludes to those issues but does not address them directly. The article seems to focus on US shale technology. It begins:

In the outlook for crude prices, a crucial factor is how far US shale oil production can grow. 

The shale revolution has transformed global oil markets over the past decade, reversing the long decline in US output, challenging Opec’s influence, and helping to trigger the plunge in prices that began in 2014. It has meant windfalls for oil consumers, and some painful adjustments for producers. The leap forward that made shale oil commercially viable for the first time was a revolution in productivity. 

EOG Resources and other pioneering companies worked out how to get oil to flow from wells at much higher rates than in the past, thanks to the application of improved techniques for horizontal drilling and hydraulic fracturing, and those productivity gains continued after the first breakthroughs. Exploration and production companies have been able to drill wells faster, and squeeze more oil out of them by targeting the right rocks more precisely and fracturing them more effectively. The outlook for the industry depends on how far those gains can be sustained and extended. 

Disclaimer: I am inappropriately exuberant about the Bakken.

So, let's begin to look at the various points.

1.  The article starts with two plays: the Bakken and the Eagle Ford. The entire article pretty much only focuses on the Bakken, Eagle Ford, and the Permian. The SCOOP/STACK was not mentioned. Nor the Niobrara (a graph did include the "DJ"). Nor several other US plays (see sidebar at the right).

2. Immediately, the writer begins with "rig count."

A rush to drill in shale formations such as the Eagle Ford in Texas and the Bakken in North Dakota was followed by a flood of production, which mostly held up even after most rigs stopped running in 2014-16. 

As we mentioned many, many times, the "rig count" in the Bakken is irrelevant. I can't talk to the other shale plays and I cannot talk to the oil sector in general, but with regard to the Bakken, tracking the number of rigs has now become irrelevant when looking at past production, current production, and future production. At one time more than 210 rigs in North Dakota did not produced a million bopd; now less than 60 rigs in North Dakota are producing over one million bopd and that's with almost 2400 wells shut-in or not completed.

3. The writer than gets into productivity:

Over the past year, however, the productivity gains seemed to have slowed considerably, suggesting that the revolutionary era for progress in shale is over. In the Eagle Ford shale, productivity — as measured by production from new wells per active rig — has been falling.

But the writer does admit:

Those productivity data from the Energy Information Administration are an imperfect measure, however. For a start, they do not take into account the extent to which companies are drilling wells and then deliberately not bringing them into production as they wait for higher prices. (These are known as DUCs, or Drilled but UnCompleted wells.) So what can we say about the true picture of productivity in shale? 

We'll skip to that later, but this is where the writer failed to mention that during the boom, the price of WTI peaked around $130; WTI dropped to $26 at its low and has since clawed its way back to $52 (barely). Talking about productivity without talking about the price of oil seems to make no sense to me. As far as I can tell, the writer never addressed the issue of price in this article. 

4. At this point, the writer completely misunderstands the shale revolution:

Another factor is the shift from vertical to horizontal wells. A well running horizontally through a layer of oil-bearing rock is typically much more productive than a vertical one that just punches through a section of that layer. Seven years ago, the numbers of wells drilling horizontal and vertical wells in the US were about equal, but since then the vertical rig has just about disappeared. Some, at least, of the reported rise in rig productivity since 2011 was simply a result of that shift to horizontal rigs, which has now largely run its course.

Really? This is what the revolution is all about: horizontal drilling. Horizontal drilling onshore replacing vertical drilling onshore was a no-brainer. The amazing thing is that the shale revolution has resulted in deferring off-shore drilling or, in some cases, abandoning off-shore drilling altogether.

5. And then this:

One of the other big changes in recent years has been in hydraulic fracturing: pumping water, sand and chemicals into the well at high pressure to crack it, allowing the oil and gas to flow out.

This statement alone suggests the writer could be a nominee for the Geico Rock Award.

Helloooo! This is what the US shale revolution was all about. I thought that was a given, but apparently the writer thought it was mostly about the switch from vertical drilling to horizontal drilling. No, the Bakken revolution was due to horizontal drilling plus fracking. The sum of the parts was greater than just simple addition of horizontal drilling plus fracking. The US shale revolution required both: horizontal drilling and fracking.

6.  Then this:

Companies have been using “bigger” fracks, with higher volumes of sand, and the result has often been higher production. But there is some evidence that that process may also be hitting its limits. A good way to assess underlying productivity is to look at production per well, adjusted for the total depth and length of that well. 

Well, duh. "Bigger fracks has often resulted in higher production." What can I say? Well, I might add that the number of stages must also be taken into account. And knowing where to place those stages (think microseismic arrays) might be something to consider. There's a lot more to fracking than sand and water. If that's all it took OXY would still be drilling in North Dakota.

7.  Continuing the fracking theme:

Kayrros, a Paris-based energy research firm, has done that exercise for the Permian Basin of west Texas, the hottest area for investment in the US oil industry recently. 

Its conclusion is that productivity adjusted for well length 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. 

See graph below.

Again, note: the research firm and/or the writer lumps all operators together into one "sector." In fact, the Bakken has shown increased productivity, and if one breaks the data out further (the Permian has many sub-plays) and by operator, the story would be much clearer. 

Again, price was not mentioned. Choking back wells when prices of oil are low was not mentioned. The example used was the Permian. I can't talk to the Permian but in the Bakken, the number of wells producing 30,000 bbls in the first full month of production after fracking is surging, and the length of the wells has not increased, and for the most part, I am not seeing a huge increase in the amount of sand being used to frack in the Bakken.

This is the graph to which the writer speaks when it is mentioned that improvements in production techniques in the Permian are lagging / losing.

Well, if that's the case, then did improvements in production occur in the Bakken to explain the jump in production/rig in the Bakken? I don't think so. Explanations are elsewhere but I don't want to mention what I think is going on for a number of reasons. 

8. Then the writer moves to the time it takes to drill a well in the various shale plays:

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. 

The writer is being a bit disingenuous here: confusing efficiency of rigs vs time to drill a well. Operators do not include the time it takes to move a rig when they report the number of days it took to drill the well. Combining pad drilling and time to drill a well in the same paragraph as "recorded efficiency" is a bit disingenuous. Pad drilling does not account for "efficiency" in terms of individual wells. In the aggregate pad drilling is incredibly important but pad drilling has nothing to do with production (unless the writer wants to talk about the "halo" effect, which obviously is well beyond the information in this article). 

We're down to 15 days to drill and complete a well in the Bakken. At the beginning of the boom, it was taking as long as 65 days. Of course, the pace of decline is going to slow down; and, believe it or not, at some point, drilling times will fail to stop declining. Is the writer arguing that the Bakken is failing because operators can't drill and complete a well in less than 24 hours?

The shale plays are all identified and can bring wells on line in less than two weeks.

How long does it take to bring a new nuclear plant on-line? Ten years?

How long does it take to bring a new off-shore well on-line? Five years?

It is now estimated that from the time an operator submits a request for a permit for a new well in the Bakken, oil can be flowing into the national pipeline grid within 60 days. From spud to oil in the pipeline in the Bakken: in less than 30 days.

9. Finally, the writer says that "the US exploration and production sector has been a great place to burn cash." The writer lumps/bundles 48 US E&P companies into a single data point. It would be interesting to see a similar graphic for the amount of CAPEX three or four of the major oil companies put into off-shore exploration (not production - just exploration) in any given year.

If one wants to talk about burning cash, one could start with the failed nuclear plant in South Carolina ($12 billion) -- consumers are paying for that plant that will produce no electricity. Or one could talk about the amount of cash invested in Tesla (about $10 billion, so far, I believe) with little to show for that investment. And then, of course, we could talk about the Kemper coal plant in Mississippi that has now cost $7.3 billion and is still not finished. 

Much more could be discussed. The reader who sent me this link suggests the writer did not know much about the US shale revolution or that this was a planted story.