It’s easy to catch the pessimism swirling around in the media. The phrase “resilient production” has become as common as dirt. The consensus view is that shale producers have become so efficient at extracting oil and natural gas that we need only a few rigs to keep production up, and that no end is in sight to the low price misery. But as is often the case, that sort of thinking is a result of complacency, lazy analysis, and group-think.
Take natural gas as an example. The US currently produces about 80 billion cubic feet per day (bcf/d). Shale gas is estimated at about half of US production, or 40 bcf/d (and probably more now as that statistic is a few years old). There are currently 90 rigs looking for gas in the US, which is the lowest since I have no idea when, but Baker Hughes’ rig count shows it being the lowest number by far since at least 1987. In 2013 and 2014, there were an average of over 350 rigs drilling for gas, most of which were chasing highly prolific shale gas plays. During this period, US natural gas production rose by 4.5 bcf/d per year.
However, contributing to this glut was the large amount of solution gas coming from oil wells being drilled. For example the Bakken oil formation in North Dakota alone added 0.6 bcf/d, and in 2014 added another 0.8 bcf/d. And that was from a single oil-dominant formation; many US shale oil fields produced significant additional solution gas. The same held true for natural gas liquids; liquids-rich shale gas production took off because producers could, a few years ago, make good money selling the liquids even if the gas was dumped as a waste product. So natural gas production increases also include gas as a byproduct, which means that pure shale gas production didn’t really add much more than offsetting natural declines.
While that’s an ugly barrage of statistics, it’s useful to look at those numbers to see if there is any reason to believe 90 gas rigs can maintain production, particularly with few oil rigs adding new solution gas.
The answer is: highly unlikely. Oil companies can’t make money drilling for oil or liquids, so that source of gas growth has been cut off. It is true that natural gas production has remained high, however that can be largely attributed to the completion of wells that had been previously drilled. This phenomenon massively distorts production statistics, because what is reported is drilling rig activity and production. Even if only one rig was in operation all year, a significant amount of production would be brought on stream by completing this inventory. Energy-illiterate news publications would completely miss the point, marvelling at the unbelievable productivity gains that must be occurring from that single rig.
At some point though, the various factors will catch up. The uncompleted inventory is being drawn down, solution gas production is dwindling along with oil well drilling, and so few rigs are drilling for gas that we don’t even hear about flaming faucets anymore. It is true that well productivity has increased due to much longer laterals and more frack stages, however this is a very short term solution that maximizes initial production at the expense of long term recoveries. At some point in the near future, natural gas production could very well fall off a cliff.
And maybe we won’t even know that it happened until it’s truly upon us. Most current production data is not actual data at all; it’s built on sophisticated models that estimate new production based on a number of factors that rely in large part on historical consistency. Rapid, large changes sometimes surprise the models, so the news could happen quickly.
There is also an embedded expectation that the shale resource is so great and so immediately accessible that any uptick in prices will lead to a new drilling frenzy. Higher prices will definitely lead to more drilling, but there is no certainty that a flood of gas will quickly materialize. It took vast amounts of capital, and extensive drilling of sweet spots, to get production up that quickly. We will soon see how big those sweet spots truly are.
One caveat hangs over the whole debate though, and that is what global natural decline rates really are. It is easy to clearly see declines on individual wells or projects, but this is masked by the variability in maintenance capital budgets, by new pipeline takeaway capacity that previously constrained some areas like the Marcellus, and by new projects coming on stream that were started years ago. Given how cash flows have dried up, how banks have stopped being banks, and how hard it is to raise equity, there are plenty of indicators that increasing production significantly will not be easy. We will find out soon enough.
Read more insightful analysis from Terry Etam here