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Shale’s Shortcomings

In a recent article in “Oil Voice”, Nick Cunningham questions how much efficiency has really been realized in shale operations, and the implications for future production. The author notes that the highly touted efficiency gains by shale operators are the result of three major strategies:  improving technology (longer lateral legs on horizontal wells and using more sand in frac jobs), focusing on sweet spots (also known as ‘retreat to the core’) and demanding lower prices (from drilling contractors and service companies).  Cunningham then proceeds to question the effectiveness of each of these approaches.

The article quotes research that found focusing on the sweet spots in a formation has accounted for about 35% of the recent cost reductions in shale production, and strong-arming contractors another 40%. Sustainable operating efficiencies and learning curve advances total about another 26% of savings.  In other words, about three-fourths of cost reductions are from practices that will not improve overall oil recovery from a play.

Cunningham further contends that technology improvements are a “mirage” when it comes to enhancing ultimate recovery of reserves. Longer laterals can improve output from an individual well for an individual company, but do not necessarily mean that recovery from the entire basin is improved in the long run.  Longer laterals and higher well recoveries means that fewer wells can be drilled in the future without interference.

The author points out that concentrating on sweet spots also can accelerate production, but merely means that we are burning through finite reserves at a higher rate. Remaining reserves will be more expensive to produce and require higher prices to do so.

As prices recover, and demand increases, drilling contractors and service companies will be able to demand higher prices, making some of today’s cost reductions illusive.

For all these reasons Cunningham thinks that prognosticators such as the Energy Information Administration (EIA) are deluded in thinking that shale production in the U. S. will continue to grow for decades. He takes issue with the agency’s prediction that shale output could increase from its current level of about 8.6 million barrels of oil per day to 11.3 in 2040.

The author then cites examples from several major shale plays pointing out that to achieve the levels of output predicted by the EIA would be at best, unlikely. North Dakota’s Bakken shale would have to double production to more than 2 million bopd, which he considers impossible.  This would require doubling the number of wells completed per year to about 4,000.  Further, in core areas of the play, there are already troubling signs of well interference.  He goes on to say that similar problems can be expected in Colorado’s Niobrara and the Permian Basin of West Texas and Southeast New Mexico.

Cunningham concludes that shale production cannot continue to increase for the next 25 years, and Donald Trump’s assumption that we can drill our way to energy independence is ill-founded. However, I think that the author is overlooking several points.  Accelerating production and moving value forward is nothing new.  In fact, it the underlying basis for present value analysis which is used by most operators in evaluating prospects.  Further, the industry has always exploited cheap, easy to find reserves first, leaving the more difficult and expensive for later.

In relative terms, the low hanging fruit was harvested decades ago. As supplies deplete and prices rise, more difficult projects will be undertaken.  Finally, shale oil production growth will not depend solely on the Bakken, Permian, the Eagle Ford in South Texas, etc.  The recent surge in activity in Oklahoma’s SCOOP and STACK plays are good examples, and we don’t even know what future explorers will find.  No one can accurately predict the future, but I suspect that the saying “Shortage never won a race with technology” will prove true, yet again.

To read the article in its entirety, please go to https://www.oilvoice.com/Opinion/669/Not-So-Prolific-US-Shale-Faces-A-Reality-Check .