The pressure on shale drillers to throttle back on their aggressive drilling continues to crop up in new places, and there are growing signs that the Permian is slowing down.
Shale companies spent just $5 billion on land deals in West Texas in the last six months, a fraction of the $35 billion spent in the prior nine-month period, according to the Houston Chronicle, citing Wood Mackenzie data.
It’s the latest piece of evidence to suggest that “Permania” might be easing. The hottest shale basin on the planet has suffered from rising costs as too many companies pour money into West Texas. The crowded field has pushed up the price of land, labor, oilfield services, rigs and more. That has led to a rude awakening for a lot of shale drillers. "It's just taken the edge off the Permian," said Greig Aitken, head of upstream oil and gas mergers and acquisitions at Wood Mackenzie, according to the Houston Chronicle.
Many signs suggest that the falling costs of production have stopped falling. In fact, production costs are on the rise again, for a few reasons. First, the low hanging fruit of cost cutting has ended—there’s no fat left to cut and deeper reductions would mean cutting into bone. Second, as mentioned before, there is cost inflation in a lot of areas, including labor, fracking crews and acreage. Related: Iran, Iraq, And Turkey Unite To Block Kurdish Oil Exports
But arguably the most troubling development for shale drillers would be if the production figures from the oil well disappoint—and there are pieces of evidence that indicate there is cause for concern.
Over the summer, Pioneer Natural Resources reported a much higher than expected gas-to-oil ratio (GOR), raising alarm bells for investors worried about Permian production problems. The anxiety was compounded by the fact that many consider Pioneer one of the stronger shale drillers in the Permian. The company also revealed that it drilled some “train wreck” wells, although it reassured investors that it had solved the problem.
But as The Wall Street Journal notes, the “solution” added an additional $400,000 to each well. In other words, costs are adding up in many places, which will ultimately push up the breakeven price for shale drilling. Meanwhile, other E&Ps have had to lower their production guidance because of the backlog for oilfield services, which are delaying operations.
There’s a growing consensus that the pace of shale drilling needs to slow down, or else E&Ps will destroy value. “All these factors are pointing to slower, more methodical development,” said David Pursell, managing director at Tudor Pickering Holt, according to the WSJ. “That needs to happen.”
A shift toward more “methodical” development would likely mean that U.S. shale undershoots growth forecasts. While the EIA expects U.S. oil production to top 10 million barrels per day, the more prudent approach advocated by more and more shale investors would likely mean output remains flat for years to come, never topping 10 mb/d, according to BTU Analytics.
“There are no new shale plays that have come forward,” Mark Papa, CEO of Centennial Resource Development Inc., told the WSJ. “Their ability to spew forth infinite streams of oil is really just a myth.”
The EIA estimates that shale production is still on the rise, but further gains will be much harder to obtain. The rig count is still slowly ticking up, but the large weekly increases in rigs appears to be over. Because there is a lag between movements in the rig count and subsequent shifts in oil production, the recent slowdown in the rig count raises the possibility of oil output plateauing later this year.
Related: The Trillion Dollar Market That Stopped Chasing Profits
Moreover, with several years of data on the books, it appears that while breakeven prices vary from company to company, the industry in the aggregate appears to start and stop at around $50 per barrel. With WTI struggling to hold gains above that threshold, there’s little room to run for shale companies. The explosive growth in the shale patch will need much higher oil prices if it is to continue.
The recognition that the Permian bonanza might be overdone could mark the dawn of a new era in which shale companies feel compelled to take a more cautious approach and live within their means.
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Some activist investors are seeking dramatic changes to executive compensation as a way of incentivizing profits rather than simply higher levels of drilling. Pioneer Natural Resources’ CEO Tim Dove recently told an industry conference in Oklahoma City that he was feeling the heat from a “thundering herd” of investors, pressing him to focus on shareholder returns.
By Nick Cunningham of Oilprice.com
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The ingenuity of these Americans is raising funds is amazing.
There is no doubt that shale oil and gas exist and are massive but at what price are they profitable with all these overpriced lands and negative cash-flow.
This is a classical definition of Ponzi scheme. This is a pyramid scheme. A house build on sand would surely collapse.
Even from the day I was born from my mother's womb I understand the basic law of Economic 101: demand an supply. I cried only when I need food and I stopped eating as soon as I am full.
OPEC and US shale producer essentially destroyed the oil and gas industry in the past 2 to 3 years by producing and supplying hydrocarbon that the market does not need while claiming they want market share that does not exist.
Many family have been destroyed, marriage broken and many committed suicides because of lost income through massive lay-offs. Most of these could have been prevented but human selfish interests have no bound.The damage to the industry and people will take decade to repair if at all it could be.
It looks like the loss of pressure in the play and drilling wells too close together is really damaging legacy production. The threadmill to try to battle declines is turning out of be a tougher thing to overcome than anyone thought. Need to add insane amounts of production in the Permian now just to stay flat.
The funniest part is that Permian shale production is still only ~1.3M/day. People seem to be fooled thinking it's higher not knowing that the Permian is still half conventional production (that isn't growing much anymore). It's humorous that people think that 1.3M that took years to get to will just double no problem when, even now seeing with the crazy amount of drilling, producers can barely cancel out declines.
Also, while gas is more ubiquitous than oil, we have developed a new important gas play even much later into the gas revolution (the Utica). One should always watch out for analogies between the two.
Papa was right about natgas crashing, but he dismissed the chance of oil price crashing. Those who wondered if the same thing could happen to oil from shale as had from gas were correct. "Hundred dollars" here to stay for oil is long, long ago in the rear view mirror.
Pioneer is running into what many start up E&P companies find out quickly if they do or don't have a good acreage position...at some point you have to drill the wells that will give a company a good ROR rather than simply grow production/cash flow. Cash Flow is pertinent when a company is trying to grow but when companies continue to drill marginal or uneconomic wells (which may not be determined for 6-18 months after first production of each well) the economics eventually catches up to you.
Shale plays are attractive to investors for the very reason of quick cash flow. Generally speaking you don't drill a dry hole and 99% of the time a company will have cash flow after drilling and completing a well. Unlike the days of conventional exploration, a company would drill 5 wells and maybe have one economic well that they would invest completion dollars to turn to production to grow cash flow. However, they invested in four other wells with no cash flow. The investment community does not like those odds and elected to spend the money on drilling and completing every well expecting some cash flow in hope the technical team they invested with knows were to drill the best wells. Shale plays have simply redefined exploration with a larger investment and a longer wait to see if a company can gain a positive ROR and multiple on the investment.
Without an increase in commodity prices, we have hit the waning point of some investors who are ready to cash out or demanding positive returns and rightfully so.
Nick Cunningham previously noted that the combined EIA estimate for the legacy monthly volumetric rate of decline in existing tight/shale production was about 0.35 million bpd per day per month from July, 2017 to August, 2017, i.e., the gross rate of decline in existing production, absent new wells.
The estimated gross legacy volumetric decline increased from 0.26 million bpd in January, 2017 to 0.35 million bpd in August, 2017 (month over month in both cases), which I assume primarily reflected the increase in US Crude + Condensate (C+C) production (the higher the production the higher the volumetric decline, especially from these tight/shale plays).
The legacy decline estimates are from the EIA Drilling Productivity Report (DPR). The estimates, and how to use them, is a controversial topic. Some argue that you can't sum the monthly decline estimates, because of the hyperbolic nature of the decline curves, but on the other hand, new (high decline rate) wells are always being added.
In any case, US C+C production averaged 8.9 million bpd in 2016. The last monthly report (for July) put production at 9.4 million bpd, and the average year to date through July at 9.2 million bpd.
So, let's assume an average production rate of 9.4 million bpd for 2017 (versus 8.9 in 2016).
Production in 2017 would be the sum of:
X (Production from 2016 & Earlier Wells) + Y (Production from wells put on line in 2017) = Assumed average of 9.4 million bpd, which would be a total annual volume of 3.4 Gb.
The problem is trying to come up with the X & Y numbers.
We can say that the average month over month estimated decline in existing production in 2017 is probably going to be in excess of 0.3 million bpd per month, but this is different from the annual average decline in pre-2017 production.
David Hughes has studied tight/shale plays extensively, and he estimates that we need about 2.2 million bpd of new average annual production, every year, just to offset declines from existing wells. Based on this estimate, US operators would need to add an annual average of 2.7 million bpd, to offset a decline of 2.2 million bpd and to show a 0.5 million bpd net increase.
The data would look like this for 2017 average production:
2016 & Earlier Wells: 6.7 million bpd average rate
2017 Wells: 2.7 million bpd average rate
Total for 2017: 9.4 million bpd
Note that this implies an estimated simple percentage decline of about 25%/year in existing (pre-2017) production, average annual. I noticed that this is quite close to the Citi Research estimate for the gross legacy rate of decline in US gas production, 24%/year.
Based on these estimates, US operators need to put on line the productive equivalent of Mexico's 2016 C+C production + the productive equivalent of Canada's 2016 dry gas production, every year, just to maintain current production.
Gotta have more copy for the advertisement revenue to keep flowing and the rubes to keep reading.
What if crude production cash flow is, in fact, getting continually tougher?
Confounding the picture is experienced, knowledgeable companies like Chevron placing a strong bet in the Permian. I ask, is it the "pull" of the Permian, or the "push" of yet riskier plays like deep-water and hostile countries that make playing the odds in the Permian RELATIVELY more attractive? In this light, playing in the Permian looks to be forced-choice.
While our administration is chasing coal and assumes the worth of forever burning oil, I suggest that we transition away from combustion forms of energy just as fast as we reasonably can.
It's not that burning fossil fuel has been a bad thing. It's just that times are changing, Our great burning looks different.