U.S. Shale Oil Output Will Be Less Resilient Than Gas: Kemp

 

The failure of gas production to respond to lower prices and a falling rig count has left many analysts wondering if it heralds the same problem in the oil market - worsening oversupply.

 

The number of rigs drilling for oil has plunged almost two-thirds over the last 12 months, but crude production is unchanged since October 2014 and down by less than 5 percent compared with its peak in April.

 

Like shale gas producers, shale oil drillers have managed to raise output while cutting costs by concentrating on the best-known and most productive formations and areas.

 

They have also standardized and accelerated the drilling process, drilled longer horizontal wells with more fracking stages, and employed more horsepower to fracture larger areas underground from the same hole.

 

But closer examination reveals important differences between the two markets that suggest oil output will be less resilient than gas to lower prices.

 

 

 

Marcellus Exceptionalism
The United States produced 2.5 trillion cubic feet of gas in August, up 7 percent compared with the same month in 2014, according to the U.S. Energy Information Administration.

 

Production continued to increase even though spot prices were down by almost 30 percent and the number of rigs drilling specifically for gas fell by nearly 38 percent over the previous 12 months.

 

Output has become progressively disconnected from prices and the rig count since the eruption of the financial crisis and onset of the economic downturn in 2008 and 2009.

 

The number of rigs drilling for gas has dropped by more than 85 percent, from more than 1500 in October 2008 to less than 200 in October 2015, according to oilfield services company Baker Hughes.

 

But over almost the same period gas output has grown by 766 billion cubic feet per month, or nearly 45 percent, according to the EIA.

 

The disconnect has piled pressure onto natural gas prices as the market struggles to absorb the enormous flood of extra molecules.

 

Continued production growth, coupled with a mild summer and a slow start to the winter heating season in 2015, has pushed the amount of gas in storage to a record level.

 

Front-month gas futures briefly slipped below $2 per million British thermal units last month for the first time since April 2012, and before that since January 2002.

 

Continued increases in gas production have been entirely attributable to output from the stacked Marcellus and Utica shale formations in the northeastern section of the Appalachian Basin.

 

Three states overlying the northeastern section of the basin - Pennsylvania, Ohio and West Virginia - have seen their combined output rise 11-fold since the start of 2010 to more than 600 billion cubic feet per month.

 

Production from the rest of the United States has generally been flat over the last five years, with a total rise of just 7 percent.

 

As a result, tri-state production has risen from less than 3 percent of the national total at the start of 2010 to more than 24 percent.

 

 

 

No Shale Oil Analog
The superb production characteristics of the Marcellus and Utica shales have transformed the gas industry and eclipsed earlier shale plays such as Barnett and Haynesville.

 

But the Marcellus/Utica play is exceptional and it is not obvious that there are any similar oil-rich shales which could keep oil production growing despite the sharp drop in prices.

 

Possible shale oil candidates would be the Bakken play in North Dakota, the Permian and Eagle Ford plays in Texas, and the Niobrara in Colorado and Wyoming.

 

Producers in all four regions have cut drilling and completion costs, increased efficiency, and boosted output per well since the middle of 2014.

 

Even so, production has been slowly dropping in Eagle Ford since March, Niobrara since April and Bakken since May, according to the EIA.

 

The only region to defy the slump in prices has been the Permian Basin, where output has continued to rise and is forecast to hit 2 million barrels per day this month.

 

Permian production has grown by 250,000 barrels per day, more than 15 percent, over the last 12 months, according to estimates contained in the latest edition of the EIA's "Drilling Productivity Report".

 

Pioneer Resources, one of the most aggressive shale drillers during the slump, has called the Permian "the only place to grow oil long-term" and said it might quit Eagle Ford within the next five years to concentrate on Permian wells.

 

Like the Marcellus in western Pennsylvania, the Permian Basin is a very old producing area, with vast resources that can be accessed more effectively thanks to fracking.

 

The Permian has witnessed a sharp drop in the number of active rigs, but slightly smaller proportionately than in the Bakken or Eagle Ford plays.

 

But output increases have slowed markedly and at the moment it seems unlikely it will match the exceptional performance of the Marcellus.

 

Unlike natural gas production, oil output has already slowed and turned down in response to the halving of prices since mid-2014, and will continue to fall as long as prices remain below about $60 per barrel.