Shale Series Part 2 - Constraints: water and money

Recently, the Wall Street Journal discussed the fact that shale forecasts are over-stated by 10%.

What are some other interesting facts about the future of shale?

OilPrice.com has an interesting article up on constraints. Water constraints to be specific:

Water already accounts for about 15 percent of the cost of a shale well, according to analysts at Morgan Stanley. “In the Permian, total spending on water is expected to double over the next 5 years, to $22B, with E&Ps on avg using 50 barrels (bbls) of water for each lateral foot completed,” the investment bank wrote in a new report . . . Last year, Wood Mackenzie said that the rising cost of water disposal alone would increase the breakeven price in the Permian by between $3 and $6 per barrel, potentially shaving off future Permian oil production by around 400,000 bpd by 2025.

That's an interesting constraint that to some degree shale producers can't control. For example, oil pipelines are an issue, but that can be resolved by just building out pipelines. One really can't control the rain. Should there be a significant drought that hits the shale region, it could cause problems for shale production.

Another constraint out there is capital. Continental Resources chief executive Harold Hamm argued that US shale growth could come in at 50% less than the growth at the start of the year due to difficulty in raising capital:



The deceleration would be driven by the discipline onshore producers demonstrated last year to keep their spending within cash flows and refrain from taking on more debt. That is in part bowing to investor pressure to reduce costs and improve returns, Hamm said in an interview at the Argus Americas Crude Summit in Houston, Texas.

Regarding capital: The Wall Street Journal stated that $112 billion more cash has been spent than has been gotten via operations so there's a big deficit out there.

Regarding shale growth: Energy Information Administration (EIA) mentioned that US shale was estimated to hit close to 8 mb/d in December 2018 and was at 6.3 mb/d in Dec 2017. A 50% decrease in the growth would indicate we'd end up at around 8.9 mb/d in Dec 2019 (assuming his 50% decrease carries throughout the year).

It should be noted that Hamm also believes that US production could be higher by 50% in a decade. So using the Dec 2018 estimate of 8 mb/d, Hamm believes that by 2028, US shale will be around 12 mb/d.  

Of interesting note, the IEA (via Oilprice.com) recently said US shale would need to hit 15 mb/d by 2025 to prevent an oil supply crunch if investments in conventional oil don't pick up soon. (I'm not linking directly to the IEA report as I found some of the wording confusing and OilPrice.Com seems to better explain what IEA is reporting.) So under Hamm's forecast, we could still potentially run into an oil crisis if conventional oil investments don't pick up. It should also be noted that IEA believes that US shale production will top out at 9.2 mb/d (just slightly higher than the 8.9 mb/d target that I'm coming up with based on Hamm's assumption for the start of 2019) versus the 12 mb/d by Hamm. That's some wide forecast differences.