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Friday, October 27, 2017

Is U.S. Shale Heading for Higher Heights or a Crash? Depends on Who You Ask

Much like the predictions from analysts about oil prices, the predictions for whether good times or difficult times are coming for U.S. shale drillers are all over the map.  Here is a sampling of the recent articles discussing various predictions about shale.

From Platts:
US shale oil production is unlikely to peak before the middle of next decade, but current fracking techniques may be risking the prospect of faster decline rates from tight oil than many are forecasting, a top oil industry event was told this week. 
As the US shale industry continues to chase lower breakevens and boost productivity in the wake of the 2014 price downturn, shale players have turned to pumping much larger volumes of sand and water into horizontal wells. 
In addition to "bigger fracks", drillers have also increased the density of their fracking stages in a bid to boost the volumes of tight oil drained from each well. 
Although the techniques have raised initial flows rates by up to 30% in some wells, the intensive fracking is depleting the source rocks faster risking a sharp rise in future decline rates, according to Bernand Duroc-Danner, the former CEO of Weatherford International.
But then there's this, from MarketWatch:
A sharp rebound in U.S. shale-oil production is showing no signs of tapering off —and that looks likely keep a lid on oil prices in coming years, even as OPEC and its allies continue to cut production. 
That’s the view of several industry experts, gathered for the Oil & Money conference in London this week. It was a recurring theme throughout the sessions, as oil experts and industry players across the board forecast yet more rises in production to come. 
”U.S. shale is in a turnaround, and I think that you have a second peak coming,” said David Knapp, chief energy economist at Energy Intelligence. 
“It won’t be quite as high [as the first one]. But you’ll have a local peak for Eagle Ford, and I think the Permian has a decade or more left before we are really draining it,” he said.
But wait, here is this from The Fuse:
Cracks in U.S. shale emerged earlier this year, with evidence pointing to a slowdown in the three-year efficiency campaign that began when prices collapsed in 2014. Cost cutting and new drilling techniques have helped U.S. E&Ps dramatically lower their breakeven prices, but headwinds for the industry are gaining in strength. A rebound in costs—for equipment, fracking services, rig rates, labor, etc.—started to undercut the progress achieved by the industry over the past year. U.S. oil production, however, continued to grow anyway. 
More signs of trouble have continued to crop up. Rig productivity is falling, shale companies are no longer making headway on drilling times, and cash flow continues to disappoint investors, who are demanding change and questioning the bullish growth forecasts for U.S. shale. 
Rising Costs 
U.S. shale ramped back up after the OPEC deal was announced about a year ago, when WTI returned to above $50 per barrel for a period of time. With many shale drillers having successfully lowered their breakeven prices, analysts assumed that the rebound in production would be swift and overwhelming. The rig count soared and U.S. oil production has climbed by about 1 million barrels per day (mbd), from 8.55 mbd in September 2016 to roughly 9.5 mbd a year later. An uptick in drilling costs was a consequence of a tighter market for rigs, capital and labor, but analysts believed this development would not derail the rosy projections for the shale industry. The EIA still expects the U.S. to average 9.9 mbd in 2018.
But WKSU says a shale "re-boom" is coming:
Now, Hecht says the adjusting he did to keep the business going is about to pay off. Advanced bookings are coming in from drillers again and he believes that’s a sign energy companies are gearing up for a new run at the Utica Shale.

Andrew Thomas, executive-in-residence of Cleveland State University’s Maxine Goodman Levin College of Urban Affairs, agrees. The university just finished a study of Ohio‘s shale play and he says it has unique economic factors to carry it forward. 
For one, Ohio is not what's called an extractive economy. 
“We are not like Oklahoma where we make our living off oil and gas upstream business. The Ohio economy uses oil and gas, especially natural gas. So, the fact that we have these depressed prices is spurring a lot of that economic activity in Ohio.”
From CNBC, though, comes this more gloomy assessment from one OPEC producer (although it's not gloomy for him):
Saudi Aramco's Amin Nasser, CEO of the world's largest oil company, says he does not spend much time worrying about booming production from U.S. shale fields. 
One reason, says Nasser, is that shale drillers will eventually deplete the low-cost, high-quality "sweet spots" they've focused on throughout much of the three-year oil price downturn. American energy companies have driven down the cost of producing a barrel of crude, staved off bankruptcy and prevented output declines by tapping their best oil fields first. 
"The concentration that we are seeing today is on the sweet spot of shale, and this will not last forever," Nasser said in an exclusive interview on CNBC's "Squawk Box."

"You can concentrate for some time on the sweet spots and produce more oil. But ultimately you need to venture downward, and that's where you have less quality and you require more cost to produce these barrels," Nasser said Sunday from the command center at Saudi Aramco headquarters in Dhahran.
All of this can't help but make me think of this classic rant from former NFL coach Jim Mora.

 

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