How Is U.S. Shale Oil Production Performing So Well?
MENTONE, TX - FEBRUARY 05: The Patterson 298 natural gas fueled drilling rig drills on land in the ... [+] Permian Basin that is owned by Apache Corporation (Photo by Spencer Platt/Getty Images) Getty Images  Production of oil and gas from shale has been a modern marvel, and one that has repeatedly confounded prognosticators. From the beginning of the use of hydraulic fracturing, some in the industry touted the great potential of shale, but others, typically outside analysts, argued that, for example, shale oil could not be produced because the molecules were larger than methane molecules, that the Bakken was a unique basin whose success could not be duplicated elsewhere, that the Marcellus would never be a serious producer, and that high decline rates would severely limit the amounts produced. Instead, shale oil and gas have been spectacularly successful, only dropping (in aggregate) when prices declined sharplyalthough some pessimists interpreted the declines as permanent. Last year, during the pandemic, shale oil production dropped by about 2.5 mb/d in short order, but much of this was due to wells being shut-in when prices collapsed to $16 in April of 2020, while producers waited for a price recovery. Since then, about 1 mb/d has returned to production, but supply remains well below pre-pandemic levels. (Figure below)  Shale oil production (b/d) The author from EIA data. What is perhaps most surprising is that oil drilling dropped by 75% last spring, and even now has only partly recovered (Figure below) without resulting in a drop in production. As many have noted, shale wells tend to decline far faster than conventional wells, often 70% in the first year of production. Which means that a large portion of drilling is devoted to offsetting declining production before any increase can occur. In the case of the Permian, in 2019 approximately 80% of gross added capacity was devoted to offsetting the decline in existing production. (Using the EIAs Drilling Productivity Report legacy production data.) Oil-directed drilling rigs active by basin. The author from Baker Hughes data. And yet, as the first figure showed, production has not been declining but has been stable after the initial drop, except for the February freeze. Given the enormous drop in drilling and high decline rates, this would seem counterintuitive. But it turns out that waterfowl is the answer, specifically DUCs or Drilled UnCompleted wells. It has long been noted that the Permian basin especially has a large number of wells that were drilled but not fracked (uncompleted), creating a reservoir of cheaper capacity additions available to the industry. Since the cost of fracking a well is about half the total cost of drilling and fracking, for a cash-strapped industry, this was the low-hanging fruit. The figure below shows how this has played out over the last year, with the number of wells drilled down sharply, still about half of pre-pandemic levels despite the recent recovery. But the number of wells being completed or fracked is only down about 25%. This explains how production declines of 80% can be offset well enough for production to be stable even with depressed drilling. Wells drilled and completed in the Permian The author from EIA data. All of which suggests that, with higher oil prices now prevailing, there is a significant possibility that shale drilling and production will resume its growth. The figure below shows the EIAs projections of lower-48 onshore production, dominated by shale oil, as it has evolved over the past year and the mild optimism embodiedgrowth of 1 mb/d from now until the end of 2022. Combined with shut-in capacity in OPEC+ producers, this seems easily capable of balancing the market and keeping a lid on prices. How Saudi Arabia in particular will react to a resumption of shale oil production growth will determine prices over the next year.