US Tight Oil: Remaining Competitive?

Since the oil price collapse, upstream development spending has been cut worldwide at surprising rates. How is that changing the world of drilling unconventional plays in the US?
This article appeared in Vol. 14, No. 4 - 2017


In this latest installment in our regular series - 'Q&A' - Thomas Smith talks to Robert Clarke, a Lower 48 Research Director with Wood Mackenzie, who works closely with E&Ps, investors and service companies in the North Texas market.

The US Lower 48 capital expenditure cuts have been massive, so where is the bulk of the investment for the Lower 48 going now? 

It’s certainly earmarked for the Permian, and in that area it’s mostly within the Wolfcamp zone. We estimate almost a third of all drilling and completion capital spent in 2017 will be put to work in the Midland and Delaware Basins. In oil terms, this is 50% of the total capital invested in onshore US oil assets. This year, Delaware investment will surpass Midland investment, and we forecast the relationship to stay that way over the next decade. 

What has changed in Woodmac’s tight oil production forecasts the past six months? 

I don’t think we’re alone in the fact that we have had to continually raise our Permian supply outlook. Concerns around adding rigs and personnel turned out to be largely overdone. Permian rig count increased by almost 90 units in just the first six months of 2017. It turns out that many rig providers ‘gold plated’ their equipment during the downturn to give themselves the best opportunity to win back work during the rebound. The rigs have shown up – to say the least – and they’ve brought their A-game. 

What about cost inflation for 2017; how are operators handling any increases? 

Cost inflation is real, but producers and service companies have found smart ways to work together in a balanced fashion. Many new contracts have rates that are scaled to WTI prices. Spot market rates for tangible goods like proppant are rising, but to combat that, producers have really optimized their logistics and supply chain management. 

Robert Clarke started out as a field geologist for a private engineering and consulting firm in Houston, Texas, before joining Wood Mackenzie. His specializations include geologic play description, decline curve analysis, production forecasting, analog play modeling and economic benchmarking. New and emerging technologies have not only made tight oil production possible, but a major player for the industry. After the initial price collapse and consolidation period, tight oil companies have started growing again. How is this possible with the current low oil prices? 

This is a complex issue and one that has – to be honest – baffled many investors. To answer it succinctly though, producers aggressively attacked both main areas that really impact US onshore economics: costs and productivity. Wells are drilled faster and cheaper. All non-essential material and time has been removed. Regarding productivity, completions are more effective and producers drilled their top prospects. “Better frac, best rock” is a simple way to say this.

What variables and data points are Woodmac analysts currently paying the most attention to and why? 

Wells are clearly more productive today, but understanding the rate at which they’ve improved is important. What will cause productivity to rise even more, or conversely fall, as the best zip codes become fully developed? This obviously impacts future economics, Permian supply, and ultimately WTI prices. We’re also looking at new project variables like the performance of child wells versus their parents, as well as the impact of frac hits for closely-spaced completions. Initially, frac hits appeared to be more of an issue for older, mature, conventional producers. We’re now seeing infill well frac hits communicating with shale wells that were drilled just a few years ago. 

What will the near future hold for US tight oil? Still competitive in five years? Ten years? 

Definitely competitive in the near term; it gets complicated down the road though. Onshore costs are rising, while deepwater costs are falling. Some of the characteristics that made the Permian unique won’t exist going forward. Today it’s seeing a different scale of activity from a different set of companies. The collective set of Permian operators has done a fantastic job getting the play to where it is today, but they can’t rest on their laurels. The best companies aren’t, and they’ll be the ultimate winners.


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