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Category: Business, Economics and Finance / Economic Trends / Company News / Oil and Gas

Is the slide in US shale oil and gas production about to bottom?

Friday, 26 Aug 2016 13:59:32 | Stephen Letts

The US Energy Information Agency says the industry may have troughed. (Kate Hill: ABC South East)

The tight oil and shale gas industry in the US has been suffering, its sudden capitulation in part fuelled by its success and rapid growth.

While the rig count tumbles and bankruptcies mount, research from the US Energy Information Agency indicates that the industry may now have troughed and production will again start growing again.

Around 2010, US shale oil and gas production was turned from a marginal outlier to a mainstream energy supplier by a combination of rising oil prices and technological improvements in hydraulic fracturing - or fracking - that saw drill costs fall between 25 and 30 per cent in the past three years alone.

That success prompted a none-too-subtle response from the giant producers in the Gulf States - particularly the Saudis - to pump the nascent sector out business.

The flood of oil has created a massive glut, crushing prices in both the oil and gas markets, making the economics of the higher-cost US industry marginal at best.

US rig count follows oil price down

The oil and gas rig count tumbled along with the industry's creditworthiness with more than 80 US oilfield service suppliers being declared bankrupt since the start of 2015.

Late in 2014 there were around 1,600 oil and almost 400 gas rigs plying their trade above the shale beds dotted throughout the US. By May this year the combined total was 404.

Firmer prices recently have seen the rig count on the rise again with another 100 back in action, although still down around 400 from the same time last year, according to industry analysts Baker Hughes.

Rig count vs oil price Photo: US Rotary rig count

US still likely to become net energy exporter in next decade

While the sector is badly beaten-up, the US ambition of becoming self-sufficient in energy has not been diminished.

By the end of 2015, shale oil extraction accounted for 52 per cent of US oil production and the fracking revolution is expected to transform the US into a net energy exporter sometime in the next decade.

Fracking remains a controversial technique, where a mixture of high-pressure water, chemicals and sand is blasted into deep beds of rock or coal, fracturing the formation and releasing trapped - or tight - oil and gas.

Its critics point to groundwater pollution, geological damage and the destruction of farmland as some of fracking's adverse side-effects.

The EIA - the independent statistical wing of US energy policy - believes fracking may be about to get a second wind, once again driven by technological change and higher prices.

An EIA research paper has found that shale oil production is likely to decline through to the end of 2017, a peak to trough fall of 14 per cent from 4.9 million barrels in 2015 to 4.2 million barrels, as low global prices continue drive drilling rigs out of action.

The EIA forecasts that 2017 may well see production declines in tight oil bottoming out.

"The use of more efficient hydraulic fracturing techniques and the application of multi-well pad drilling, as well as changes in well completion designs, will allow producers to recover greater volumes from a single well," the EIA report said.

The modelling for increased production from the so-called "tight formations" in the shale beds is also predicated on an increase in oil prices, with the reference case being a projected $US136 a barrel in 2040, a bit more than double the current benchmark price.

By 2020 shale oil production is expected to be back at around 5 million barrels a day, growing towards 7 million barrels a day over the next two decades.

Tight oil graph Photo: US tight oil production

One field alone, the Bakken - which spans 37,000 square miles in North Dakota and Montana and has a recoverable resource of 23 billion barrels of tight oil - is forecast to reach 2.3 million barrels per day by 2040, almost a third of the projected US total tight oil production.

Shale gas production unlikely to slow

The EIA model plots a different course for shale gas, which currently accounts for roughly half the natural gas production in the US.

"Unlike production from tight oil, which declines in the near term before increasing later in the forecast period, natural gas production from shale gas plays is expected to increase through 2040," the EIA found.

The EIA also ran a series of different price outcomes through to 2040, setting the global benchmark Brent crude oil spot price at an average $US73 per barrel in the low oil price case, $US136 per barrel in the reference case, and $US230 per barrel in the high oil price case.

"In the high oil price case, drilling activities increase tight oil production through 2026, after which it begins to decline," the EIA said.

"The opposite is true in the low oil price case, where tight oil production declines slightly before increasing after 2026."

The expected improvements in fracking technology are expected to deliver another 50 per cent step-up in production from just the base price effect. Production of shale gas increases in both the high and low oil price cases.

While low prices and little technological development leaves gas production flat-lining, in the bull case of high prices and increased drilling efficiency, production could treble by 2040 according to the EIA forecast.

The EIA modelling does not take into account potential significant technological breakthroughs in renewable energy - such as utility scale storage - or a tougher regulatory environment for carbon emissions.

EIA 5 cases Photo: Tight oil and shale gas production in five cases

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