US shale drillers' efficiency gains slowing down
The Energy Information Administration says US efficiency gains are slowing which could lead to a steep decline in oil output
A key aspect of the US shale oil sectors' resilience through the oil downturn has been the sharp rise in the industry's efficiency - the ability to keep production rising from fewer and fewer rigs. But many have wondered how long they'll be able to keep up the torrid rate of efficiency gains seen over the past year. New data from the Energy Information Administration (EIA) indicates that the efficiency gains are slowing markedly, at least for now, potentially pointing to a steeper than expected decline in US oil output over the coming months.
Output per rig working in the Bakken shale play will rise by just 2 barrels/day (b/d) in October, according to the EIA's monthly drilling productivity report. That comes after a period of 12 months that saw an average increase of 20 b/d/rig each month over the past year. The Eagle Ford, the US' largest shale play, saw a similar slowdown. Production/rig there is forecast to grow by just 3 b/d in October, compared to an average rise of 21 b/d/month over the past year.
A number of factors have been behind this surge in efficiency, which has helped keep US production much higher than many expected it to be a year into the oil downswing. Bakken output/rig rose a remarkable 42% from 486 b/d in October 2014 to an estimated 694 this year. It has taken just two years for that rate to double. It has been a similar story in the Eagle Ford, where output/rig has risen 40% over the past year from 566 b/d to 795 b/d.
Constant improvements in technology and drilling strategies were already driving productivity gains before the price decline and have continued through the downturn. Companies are drilling longer wells with more fracturing stages, which has dramatically increased the amount of crude coming from each well. At the same time, the industry has widely adopted 'pad drilling' - drilling multiple wells from a single pad, which has helped to cut costs. Wells are also being drilled faster than ever.
In the face of low oil prices, though, companies have focused drilling only on their most productive acreage in the sweet spots of the best shale plays, rather than more marginal wells that may have been profitable only at higher prices - 'high grading' as it is known. This process has played an outsized role in the exceptional productivity gains seen through the downturn. How big a role? In the year before the downturn, efficiency gains in the Eagle Ford averaged around 5 b/d per month, compared to 21 b/d in 2015. In the Bakken it was around 8 b/d in the year before the downturn, compared to 20 b/d
A key question for a market that has been scrutinizing US oil data for signs of a slowdown has been: how long will productivity gains continue to drive production growth? Oil bulls will welcome the expected slowdown in October, though it is too soon to know if it is just a blip or part of a trend.
The efficiency declines have fed into the EIA's production forecast, which sees the sharpest monthly declines yet from the shale patch. Combined output from the Bakken and Eagle Ford is forecast to fall by 83,000 b/d in October compared with September, to 2.6m b/d - 5% down on the previous year.