Shale Oil: Lower Production Around the Corner?

Both the Wall Street Journal and Reuters recently published articles predicting that shale production growth is reaching a peak.

From the Wall Street Journal:

Unlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner than anticipated.

Some interesting data points from the article include:

1. In 2018, the year end at a production level of 12 million barrels per day. So far, 2019 is averaging 12.2 million barrels per day. Admittedly, there's a problem with this. The article also mentions that 2018 had an average of 11 million barrels a day. So 2018 production increased dramatically throughout the year as the average was 11 million barrels a day while the year end number came in at 12 million. What I wish is that they'd mention what current production is at, which is probably slightly higher than 12.2 million barrels per day.



2. Rystad Energy believes that production will peak at 14.5 million barrels a day in around 2030. Since that is 10 years away, they're saying that US oil production will only incrementally increase by very small amounts each year from this point onwards. If we straight line this out, we're talking annual growth of only a little over 200 thousand per year. Oil demand is also estimated to peak in the 2030s. So the question might be: can this slow growth in shale oil keep up with growing demand. CNBC has this forecast from the IEA: 2019 demand growth will be 1.1 mb/d and 2020 will come in at 1.3 mb/d. This seems to imply that shale production growth won't be able to keep up with demand growth unless Rystad's forecast includes a big ramp up in 2019 and 2020 and then even less than a 200 thousand growth rate beyond 2020.

3. There are discussions around the fact that longer oil wells are being drilled. At the end of the article, the WSJ mentions EOG Resources. Here's some data points: 2016 wells produced 38 barrels of oil per horizontal feet or 194,000 barrels per well; 2017 wells are at 30 barrels for around 198,000. These are production rates after 2 years of operation. That indicates that wells have gone from just over 5,100 feet per well (194,000/38) to 6,600 feet per well (198,000/30). It would be interesting to see if it is really cost effective to drill a well an additional 1,500 feet and only get an additional 4,000 barrels of oil (assuming this is per year).

Reuters has this to say:

Experience suggests changes in oil prices filter through to drilling with an average delay of around 4 months and to output with a total lag of around 12 months. Production in July, therefore, reflected the relatively high prices that prevailed before oil prices started to slump in October 2018.

. . . Lower prices and drilling activity should start to filter through into even slower growth in Lower 48 output towards the end of the year and into 2020. 

Here's some data points that I like to track:

1. Baker Hughes has oil rigs at the end of 2018 at 885. The rig count as of the end of September was 713.

2. The EIA (Energy Information Administration) has DUC (drilled uncompleted wells) declining from 8,798 in January 2019 to 7,950 for August 2019.

It really looks like oil production is coming in slightly higher than 2018 due to the reduction in DUC wells.