Shale Oil: Budget Cuts and Reasons for Slowing Growth

The Wall Street Journal recently looked into the increase in bankruptcies amount shale producers. Reuters recently looked at what shale producers are doing to try and avoid bankruptcy:

Investment bank Cowen & Co . . . expects total spending this year to fall 11% over last year, based on proposed budgets.

The slowdown in drilling is spurring cost-cutting in oilfield services, including staff cuts and restructurings at top firms Schlumberger and Halliburton Co. Schlumberger plans a writedown yet to be determined this quarter, noting its results in North America have been “under significant pressure,” CEO Olivier Le Peuch said on Wednesday.

In Texas, the center of shale oil production, energy employment dipped 1.8 percent in the first six months of 2019, according to the Dallas Fed. New drilling permits in the state fell 21% in July compared with the same month last year, according to state data.



The article mentions how in Q2'19 the top 29 publicly-traded producers generated $26 million in free cash flow. A year earlier (unsure if this is 2018 or just Q2'18) these producers had generated a negative $2.4 billion. So it would seem that these cost cutting efforts are helping cash flow. Of course, free cash flow doesn't necessarily cover the interest expenses that resulted from all the debt build-up from prior years. Taking that into account, $26 million in free cash flow isn't enough to stop bankruptcies.

Rigzone wonders if shale production growth is slowing.

U.S. shale oil output growth is slowing and nowhere is this more evident than in the Permian Basin, where growth will be under 1 percent in August according to the Energy Information Administration (EIA).

They list a number of reasons for this:

1. New wells aren't producing as much as the older wells did. This is driven by the fact that the best locations have already been drilled and that well are being drilled too closely together.

2. Pipeline capacity, which should be resolved by July 2020 when more capacity comes online.

3. And then there is Trump's embargo on Venezuelan oil: The absence of heavy Venezuelan oil, due to the embargo on imports, has made blending the lighter oil from the Permian basin more difficult at home and has constrained export opportunities, since there are only a few condensate splitters or simple refineries able to handle Permian light crude in Europe.

Summary

To me, this has a mixed message for future shale growth in the U.S.

There are growing financial constraints: Reuters mentions that in order to respond to concerned investors, spending for shale producers is down.

There are capacity constraints: Rigzone is saying that there are also pipeline capacity issues that are slowing shale growth.

There are geology constraints: the prime locations have already been drilled.

There are Venezuela issues: President Trump's embargo as well as the fact that Venezuela's oil industry is in a long-term production decline.

Some of these might be temporary. As bankruptcies increase, oil majors will be buying up these producers. Pipeline problems will disappear in 2020. On the other hand, we have newer wells producing less oil than the older wells did. And even if the embargo on Venezuela oil ends, it isn't like their production is going to zoom back to prior levels immediately. There is a lot of investment in fixing decaying infrastructure that needs to occur.

It'll be interesting over the next couple years to see what direction shale production takes. The key here might just come down to geology.