Peak Shale: Is the US Fracking Industry Already in Decline?

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In 2016, lower oil prices led to an overall drop in production for shale companies, whichย use horizontal drilling and fracking to extract oil and gas from shale formations such as the Marcellus and Permian. This was one of the few relatively positive financial periods for an industry plagued by high costs and low returns (although it still lost money inย 2016).

But the industry shouldn’t getย complacent, warned Robert Clarke of energy industry research and consulting group Wood Mackenzie. Cracks already are starting to emerge inย the optimistic forecasts of how much these shale formations can produce, which is a bad sign for turning around the industry’s strugglingย finances.

โ€œIt was only the best rigs, with the most experienced crews, drilling the best rock at the lowest service costs,โ€ which were doing well in 2016, said Clarke at the 2018 Energy Information Administration (EIA) annual conferenceย in June. โ€œIf you are a producer, itโ€™s very dangerous to think that that is the newย norm.โ€

But producers seemed to think it was the new normal and plowed ahead, going all in on fracking in the Permain Basin, currently seen as the best shale play in theย country.

Granted, the results have been impressive from a production standpoint. The EIA expects โ€œPermian regional production to average 3.3 million [barrels per day]ย in 2018 and 3.9 million [barrels per day] in 2019.โ€ย  Those numbers may reach 5.4 million barrels a day by 2023, according to oil industry consultantsย IHSย Markit.

While the Permian’s oil production has been prolific, it hasnโ€™t translated into profits. โ€œWhy Arenโ€™t Permian Oil Producers Profitable?โ€ย asked a headline on industry publicationย Oilprice.com this pastย May.

As DeSmog’s series on the finances of frackingย has documented, there is no doubt fracking can lead toย production of large volumesย of light oil, but it comes at the cost of approximately a quarter trillion dollars more than the industryย has made sinceย 2007.

Worldโ€™s Largest Oil Services Company CEO Offers Dire Warning forย Frackers

Asย the worldโ€™s largest oil services company,ย Schlumbergerย has an intimate knowledge of what it takes to produce oil by fracking across the many shale formations currently beingย drilled.

Its CEO, Paal Kibsgaard,ย cautioned industry analysts on a recent phone conference, soundingย quiteย like the warning from Clarke inย June.

โ€œThe well-established market consensus that the Permian can continue to provide 1.5 million barrels per day of annual production growth for the foreseeable future is starting to be called into question,โ€ Kibsgaard said, according to the Financialย Times.

Kibsgaard’s main concern touches on aย phenomenonย known as โ€œchild wells,โ€ย a situationย I reported forย DeSmog inย August.

The concept is simple. All shale formationsย are not created equal, which means toย make money, producersย need to find โ€œgood rock,โ€ or what is also known in the industry as โ€œsweetย spots.โ€

Pumpjack in West Texas at twilight
Pumpjack located south of Midland, Texas.
Credit:ย Eric Kounce,ย TexasRaiser, publicย domain

But there are limited sweet spots. And the industry isย drilling too many โ€œchild wellsโ€ in established sweet spots around โ€œparent wellsโ€ that are producing, hoping to capitalize on that โ€œgood rock.โ€ But, as I explained, the approachย isnโ€™t working, and in some cases is even costing the industry more money by damaging the existing wells in those sweetย spots.ย 

But that raises a simple question:ย If the shale industry has an abundant enoughย supply of good rock to support the rosy predictions of groups like IHS, why are companies instead drilling so many child wells around a few sweet spots instead of moving on to drill other, new sweetย spots?

Perhaps the industry doesn’t have other sweet spots to move on toย and perhapsย instead is trying to stave off looming bankruptcy from theย tremendous debt loads they areย carrying?ย 

Kibsgaard explainedย his skeptical view ofย the Permian basin’s future production, sayingย that in the Eagle Ford shale play โ€” where production is well below its peak in 2015ย โ€” โ€œup to about 70 percent of all new wells drilledโ€ are child wells. This trend indicates thatย producers thereย have run out of new โ€œgood rockโ€ and are trying to get every last bit from the known sweetย spots.

Meanwhile, in the Permian’sย Midland Wolf Camp section, child wells are already approaching 50 percent of new wells drilled, said Kibsgaard,ย and the results appear toย followย the same trajectory asย the Eagleย Ford.

โ€œWe are already starting to see a similar reduction in unit well productivity to that already seen in the Eagle Ford suggesting that the Permian growth potential could be lower than earlier expected,โ€ warnedย Kibsgaard.

This is the message from the CEO of the biggest oilfield services company to investment analysts. Will anyoneย listen?

Some Fracking CEOs Make Similarย Warnings

Schlumberger isnโ€™t in the business of drilling for oil, just supporting the companies that do. So putting forth rosy projections for the future to keep investors engaged isnโ€™t required โ€” like it may be for fracking companies deeply in debt and unable to turn a profit at current production levels. Promises of huge profits in the future are really the only likely reason for anyone to invest in frackingย companies.

But even some fracking CEOs donโ€™t believe the optimistic forecasts for the Permian. In Bethany McLeanโ€™s excellent new book Saudi America: The Truth About Fracking and How It’s Changing the World, she speaks to two of the fracking CEOs who have actually had success in the industry โ€” Bill Thomas and Markย Papa.

Bill Thomas, current CEO of EOG (formerly known as Enron Oil and Gas), one of the few fracking companies making money, tells McLean that in the Permian the โ€œreally good rockโ€ is smaller than the industry optimists are saying. This helps explain the surge in child wells where the industry is trying to over-drill what good rock thereย is.

Thomas goes on to explain to McLean: โ€œThe Permian has terrified the world oil market but there are overblown expectations of the Permian.โ€ โ€œTerrifiedโ€ because if the Permian actually manages to produce 5.7 million barrels per day,ย it would be producing a higher volume of oil than every country except the U.S., Saudia Arabia, and Russia inย 2017.

Oil traders and producers don’t like to be surprised and having a new oil supply of that magnitudeย come out of almost nowhere fits that bill.ย But as Thomas is warning, those fears may not be fullyย justified.ย 

Mark Papa is the former CEO of EOG and now runs Centennial Resource Development. Papa actually delivered his less-than-sunnyย message at the 2018 IHS Markit annual oil industry conference known as CERAweek,ย but apparently it wasnโ€™t what the audience wanted toย hear.

โ€œThere are good geological spots in shale plays and weaker geological spots, and a lot of the good geological spots have already been drilled,โ€ Papa explained during a panelย discussion.

Inย Saudi America,ย McLean reports that Papa had said that by 2020,ย even in the Permian, the best acreage will have been mostly drilled and he predictedย a sizable dropoff in production toย follow.

Time Running out for Frackers in Deepย Debt

At current oil prices, most fracking companies are losing money while trying to get every last drop out of the known sweet spots in American shale plays. Under these conditions, the industry is having a hard time accepting that what Papa, Thomas, and Kibsgaard are saying could be true. These companies can’t hope to pay back theirย massive debtsย if the best days of theย major shale plays are either in the past or rapidlyย approaching.

So, who will be right? For nearly a decade, the fracking industry has been promisingย that profits are just on the horizon, but theyย haveย not materialized โ€” not even in the ideal 2016 scenario described by Wood Mackenzieโ€™sย Clarke.

Has the industry run out of good rock? In her book, McLean quotes one industry investor, whose words should strike fear into the hearts of those invested in or holding debt for shaleย companies.

โ€œOur view is that thereโ€™s only five years of drilling inventory left in the core,โ€ one prominent investor told McLean, whose book was just published in September 2018. โ€œIf Iโ€™m OPEC, I would be laughing at shale. In five years, whoย cares?โ€

Main image:ย Wyoming’s Jonah gas field is marked by a network of well pads, roads, and pipelines.ย Credit: Bruce Gordon, EcoFlight,ย CCย BYย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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