WSJ: Shale performance not meetng forecasts

The Wall Street Journal via Morningstar has another of their ongoing takedown articles on shale oil. The newspaper has been writing about disappointing shale production for sometime. Admittedly, however, shale production keeps on increasing each year. So the question is: is the WSJ wrong and production will keep increasing or will their analysis eventually be proven correct?

In February 2015, Whiting told investors that it expected the wells it drilled that year in North Dakota to produce 700,000 barrels of oil and gas apiece over their lifetimes. In 2018, Rystad estimated those wells were on track to produce only about 590,000 barrels. Rystad has since revised that forecast to about 540,000 barrels, or roughly 23% less oil and gas than Whiting projected.

. . . In October 2016, Encana Corp. estimated that its wells in the Eagle Ford shale of South Texas ultimately would produce about 580,000 barrels of oil and gas each. Rystad's initial estimate showed Encana's Eagle Ford wells from that year on track to generate less than 360,000 barrels. Rystad's forecast has since dropped to about 345,000 barrels of oil and gas, roughly 41% less than Encana told investors.



. . . Were it not for new wells that began producing in 2019, output in the Permian Basin of Texas and New Mexico would have declined by about 40% this year, according to energy analytics firm IHS Markit.

I have to admit the article is somewhat disappointing. In early 2019, the Wall Street Journal via Oil and Gas 360 wrote that production was coming in 10% lower than forecasts for 29 major shale producers. This current article doesn't expand on this, but instead just focuses on two shale producers. It would have been nice if the Wall Street Journal had reported about the 29 major shale producers and if production was coming in lower by more than the estimated 10% earlier in 2019.

What is interesting is that if new wells were no longer put into production for 2019 that oil output would have declined by 40%.

There are other issues with shale oil. Not only is production coming in lower than expected, but shale producers are seeing a higher gas to oil mix. Bloomberg via MSN writes:

America’s top shale field is becoming increasingly gassy as drilling slows down, undercutting profits for explorers at a time when investors are demanding better returns.

. .  . Producers in the Permian are already flaring record levels of natural gas. The Texas Railroad Commission, which oversees the oil and gas industry in the state, has granted nearly 6,000 permits allowing explorers to flare or vent natural gas this year. That’s more than 40 times as many permits granted at the start of the supply boom a decade ago. While flaring gets rid of the methane, it still releases carbon dioxide and other particulates into the air.

I know that Texas is a conservative state, but at what point in time do they say that there is simply too much flaring. When they do, that will likely result in a cap (perhaps temporary) on oil production. That being in addition to the fact that shale producers have been over-promising.

It is always interesting to look at some EIA data on oil: drilled but uncompleted (DUC) wells keep on falling. In January 2019, DUC wells hit a high of 8,798. In November, the number had declined to 7,574. And it is also interesting to see rig counts from Baker Hughes: they hit a high of 885 in late December 2018. As of the last December 2019 report from Baker Hughes, the count was down to 677. There was an interesting 18 rig count spike during one week in December so that is something to keep an eye on -- are oil rig counts going to stop falling or maybe even increase?

It really does appear that US oil production increases are driven by a drawdown in DUC.

One thing that is in the back of my mind is how many of the DUC wells might never start producing oil or gas? I found this S&P Global article from September 2019 that had this quote:

In March, analysts with Raymond James & Associates claimed EIA was overestimating the number of DUCs in the seven biggest US unconventional plays. EIA was including thousands of wells which were drilled years ago, but are unlikely to ever be completed in their estimates, Raymond James analysts said. EIA's DUCs estimate may be overstated by as much as 2,000 wells, or about 30%, they said.

Based on this, it might be more accurate to say that DUC wells are really at around 5,574 versus 7,574. I don't have the DUC count up through December. That will have to wait a month, but let's say a revised drop in DUC is from 6798 to 5,574. That is close to an 18% drop in less than a year's time. I suspect that if rig counts stay in the 670 range, that the drawdown of DUC wells will have to increase dramatically to keep US oil production growing.