Shale’s Efficiency Boost Is Not Guarantee of Strong Future Growth | OilPrice.com

HSBC’s recent forecast suggests U.S. shale oil production will keep rising for another four years before peaking, but the real story is more complex. Wood Mackenzie highlights a new era of efficiency gains in shale, yet these advancements come with significant costs that could hinder future growth. Despite last year’s impressive 1 million barrels per day increase, driven by unexpected efficiency improvements, the sustainability of such gains is far from guaranteed.

Shale Shocked

Last year, the U.S. shale industry surprised pretty much everyone, possibly even some within its circles, by boosting production more than forecasters expected amid a consistent decline in rig numbers.

One of the reasons for this growth was the price of oil, which was still comfortably high in the early months of 2023. The other big reason was a new urge among drillers to make their drilling more efficient however they could.

The Wood Mac report, authored by the research director for the Lower 48, Maria Peacock, notes that the new efficiency gains would not have been possible just a few years ago because shale drilling operations were scattered over larger areas. Now, they have become more clustered, opening up opportunities for improvements such as downtime reduction.

Indeed, downtime reduction is, according to Peacock, a major feature of the new efficiency era in U.S. shale. “While tech improvements have been transformative, the greatest advances have come from eliminating downtime,” she wrote.

Fracking, meanwhile, has become faster and cheaper, laterals have become longer, and richer companies have started fracking several wells simultaneously. All this has helped with the production boost-and with declining well productivity.

Related: Supply Concerns and Demand Optimism Are Boosting Oil Prices

Well productivity in the Permian, as Reuters reported back in April, citing Enverus data, has shed 15% since 2020. This was not exactly an unexpected development, given the nature of shale oil reservoirs and the nature of fracking. In fact, the faster well depletion in shale as compared with conventional oil wells has often been cited by contrarian analysts as the reason for their bullish outlook on oil prices. And yet, U.S. output has just continued rising.

SimulFrac

This seems to have created the perception that U.S. crude oil output will continue to rise at the same pace for all eternity, regardless of international prices, because of the constant drive to boost efficiencies and reduce costs. However, the efficiency boosts have come with a price, and that price is higher production costs on top of the decline in well productivity. In fact, the higher costs have come in part because of that decline in well productivity.

Those longer laterals, for instance, were a response to declining productivity. They worked to reverse it, but this made well drilling costlier. The so-called simulfrac, which involves drilling a swarm of wells and then fracking them simultaneously to improve recovery rates, costs a lot more upfront than drilling and fracking individual wells.

What all this suggests is that, like in the energy transition, there is always a trade-off. It also suggests it is wiser to acknowledge this trade-off-better efficiencies and higher output at higher costs-rather than pretending it does not exist and cherry-picking only the positives.

However, it is because of these trade-offs that efficiency fans in the Permian and the rest of the shale patch are likely to remain guarded with production growth. Granted, 2023 saw them add more barrels than anyone expected, but this does not guarantee a repeat of the situation this year-especially with prices lower than they were in 2023. And especially after the wave of mergers and acquisitions that has not ebbed yet.

Merger Mania

Shale players closed deals worth some $200 billion in the past 12 months, and they’re not finished yet. The first quarter of the year saw record M&A activity in the oil patch, with deals worth $50 billion. Then, in the second quarter, Conoco inked a deal to buy Marathon Oil for $22.5 billion, signaling that the momentum was still strong in dealmaking.

This momentum is making shale oil a less crowded place. The less crowded an industry, the fewer people will be making decisions that affect its direction. In other words, the production growth rate in the shale patch is now in the hands of fewer executives than just a few years ago.

This is yet another natural process-consolidation as a means of growth-in an environment where untapped and unleased acreage has pretty much run out after years of explosive growth. But this natural process, just like well productivity changes and efficiency gains, makes future growth rates in shale oil production uncertain rather than guaranteed, as some analysts like to present them.

If recent shale history has taught us anything, it is to never make assumptions. Just because efficiency gains boosted production in 2023, it does not mean the boost will be repeated this year. And just because these efficiency gains have made drilling more expensive, it doesn’t mean drillers won’t find a way to cut costs again. Ultimately, while 2023’s efficiency-driven production boost was impressive, the true test for the shale industry will be maintaining growth amid rising costs and evolving market dynamics.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com: