The past few years have brought some major changes to the global oil markets. The US has taken over as the largest oil producer thanks to high prices and technologies allowing companies to exploit the resource from very tight reservoirs. The past year has brought more dramatic changes to the oil and gas industry. Oil prices have been cut in half and gas is down nearly 40% due to the glut of those commodities on the market.
Could these low prices bring the unconventional revolution to its knees? Dr. Pete Stark, Vice President of Industry Relations at IHS, certainly does not think so. “North American oil and gas companies have shown a resolve and effort possibly never seen before in the oil and gas industry,” says Pete. “Over the last decade, they have taken on the challenges of producing oil and gas from very tight reservoirs and have made great strides in leveraging technology to boost performance while driving the surge in production from tight reservoirs.
“Dealing with a 50% reduction in commodity prices is certainly a huge challenge but competition and innovation will allow the tight oil revolution to prevail,” according to Dr. Stark. “Lower oil prices may be a blessing in disguise in a longer term outlook for companies exploiting unconventional resources. Service company costs have dropped an average of 10 to 15%. The oil and gas companies are now high-grading their drilling into the known sweet spots as drilling becomes more efficient and the technology to exploit this resource continues to improve.”
Concentrating on Quality
“In the current environment, we are going to see less wells drilled,” says Pete. “But fewer wells do not necessarily mean less production. We know about 80% of the production comes from 30% of the wells. By concentrating the drilling in a reservoir’s known high quality areas, a higher percentage of the wells will be the better producers, so that overall production trends will change more slowly than drilling activity.
“Technology also is critical. Failure of a significant number of frac stages to produce in some wells is a major concern.” Pete further explains that, “Service companies are developing monitoring technology to identify and remediate segments of boreholes where initial fracs were not successful. Success could improve well performance by almost 30% and the use of ‘super fracs’ also is becoming more common. The graph shows that increasing the amount of proppant results in increased production; in the best cases doubling the proppant is nearly doubling production. The net effect is that companies are able to get more production from each well drilled and thus need to drill fewer wells to sustain their performance in the current economic environment.”
When questioned about where oil prices may go in the future and what effect that might have on the US unconventional plays, Dr. Stark was quick to point out that the US is once again a major global oil producer with global influence on oil markets. He thinks US production will flatten slowly and decline in the fourth quarter of this year. The Saudis are unlikely to slow production and with the potential nuclear deal in Iran, the oil glut could last beyond 2015, barring any “black swans” muddying the picture. “Once oil markets rebalance and prices climb again, the oil and gas companies here in the US have the operating efficiencies and infrastructure in place to readily ramp up production, keeping the shale revolution moving ahead,” he says. “Operators are prepared to produce more barrels at tomorrow’s $60 to $70 oil than they were a year ago.”
Interestingly, the ability of tight oil producers to respond fairly rapidly to changes in oil prices has positioned the US to play a role as a swing oil producer, essentially changing the way oil supply and prices can be controlled. In the past, the Saudis or the Texas Railroad Commission could control production and thus oil prices. We are now dealing with hundreds of independent producers that, through reacting to these lower oil prices by cutting costs and drilling fewer wells, will soon lower production and trigger markets to shift gears toward recovery.
“With the help of lower oil prices and a secure supply of domestic oil and gas, the US economy has remained the most competitive in the developed world,” says Pete. “This current downturn will only make us that much more competitive.”