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Shale producers optimistic as oil production falls

Across the US' largest plays, shale output is set to fall for the sixth month in a row in September

Listening to some of the US shale industry's top executives during the second quarter results season, one might think that shale output was surging ahead as strong as ever.

Whiting Petroleum's chief executive James Volker boasted to analysts that his company had posted record output of 170,000 barrels of oil equivalent/day (boe/d) in the second quarter and planned to stay on that course. Continental Resources's president Jack Stark said his company's output was a third higher than the same time last year and 10% higher than three months ago, even though the company had slashed spending this year and pulled rigs out of the shale patch. "Bottom line, more production at a lower cost", Stark told analysts.

But these companies are the exception not the rule. Shale output across the US' largest plays is set to fall for the sixth straight month in September, according to the US Energy Information Administration's (EIA) latest shale production survey.

The Eagle Ford and Bakken shale plays, the largest producers in the US, continue to lead the decline and are now well off their peaks from earlier this year. Oil output from the Eagle Ford will fall by 56,000 b/d in September compared with August, its largest yet monthly decline, says the EIA. That will bring total production to 1.482m b/d, down nearly 15% from a peak of 1.733m b/d in March. The Bakken oilfield will see a month-on-month decline of 27,000 b/d in September, dragging production down to 1.155m b/d. That is 13% lower than the March peak.

The Permian oilfield, where shale production is still in the relatively early stages, is the only shale play that continues to see growth. Output there will rise by around 21,000 b/d in September compared with August.

Significantly, shale plays will for the first time start recording year-on-year declines in September, the first indication that US oil output is likely to tip into decline in the last few months of this year into next year. The Eagle Ford, Bakken and Niobrara shales will all be producing less in September than they were a year earlier.

Perhaps most worryingly for shale producers, the EIA figures show that the efficiency gains seen over the past year in the shale patch are starting to slow.

The efficiency gains have come from a combination of companies focusing only on their best acreage as well as continued improvements in drilling technology and methods. But there is a limit to how efficient drillers can get without major technical step changes.

Bernstein Research analyst Bob Brackett argues: "We are racing towards perfection, but the most significant [efficiency] gains are behind us," he wrote in a recent research note. "[Efficiency gains] are asymptotic not exponential. The distinction makes all the difference in the world. If correct, this world view should make exploration and production investors more cautiously optimistic - it avoids the race to the bottom."

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