WSJ: Shale estimates overly aggressive

The Wall Street Journal recently had an article that looked into projections by fracking companies between 2014 - 2017. Via Rystad Energy AS, WSJ came to the conclusion that actual oil and gas production would come in 10% lower than estimated. This excluded oil majors such as Exxon Mobil. Some of the interesting points from the article are:

1. The Journal’s findings suggest current production levels may be hard to sustain without greater spending because operators will have to drill more wells to meet growth targets. Yet shale drillers, most of whom have yet to consistently make money, are under pressure to cut spending in the face of a 40% crude-oil price decline since October.

2. Schlumberger Ltd. , the oil-field-services giant, reported in a research paper that secondary shale wells completed near older, initial wells in West Texas have been as much as 30% less productive than the initial ones.

3. One reason thousands of early shale wells aren’t meeting expectations is that many companies extrapolated how much they would produce from small clusters of prolific initial wells, according to reserves specialists. Some also excluded their worst-performing wells from the calculations, which is akin to eliminating strikeouts when projecting a baseball player’s batting average.



The article mentions that initial projections were given to hedge funds. It also mentions that since 2008, an index of oil and gas companies has fallen 43% while the S&P 500 has more than doubled. Based on data from this article, at what point do hedge funds start to sue for being provided bad data?

To meet projections provided to hedge funds, oil and gas companies will need to drill even more oil than anticipated, because there are additional costs that will have to be incurred. The problem, as stated in point 3, is that projections were made on the best wells. Point 2 states that drilling secondary wells are 30% less productive than the initial ones. I think those two together indicates that more than anticipated wells need to be drilled to hit targets, which also means greater costs. And then the more oil you produce, the more likely you flood the market and negatively impact prices, making it even harder to meet projections.

The article states that the US currently produces 11.5 million barrels a day. One big question is can the US continue to produce at these levels considering that current expectations are not being met and that future oil well expectations might need to be lowered (point 2)? To me, the shale industry hasn't made much money. In fact, the article states that $112 billion more cash has been spent than has been gotten via operations. I would almost believe that investors should be telling US oil producers to stop producing oil up to the point that oil prices start dropping. Instead, they should start following oil prices up. It seems like the US is trying to produce as much oil as possible. Maybe instead, they should have more self-control and maybe stay steady at 11.5 million barrels a day. Eventually, oil prices will rise and they can start producing a profit.