The Productivity Decline In Shale Oil Basins Is Illusory

One of the major uncertainties about next year’s oil market centers on the trend in U.S. shale oil production. Because shale drilling is highly responsive to prices and wells decline sharply, production can be added quickly but also declines rapidly if drilling is not maintained. Thus, the trajectory is harder to predict than for, say, deepwater developments that take years to bring online. As is so often the case, there seems to be a split between optimists and pessimists reflecting as much the psychology of the writer as the developments in the field.

Historically, optimists were usually company officials, often from small producers, who bragged about the quality of the reservoir they were planning to exploit. Official forecasters were, as usual, conservative and failed to understand the size of the boom until it was well underway. I confess that even though I was optimistic, predicting growth of 400-500 tb/d/yr at an OPEC seminar in 2012, that proved significantly below the growth that subsequently occurred.

The Skywalker Brigade (‘always with you it cannot be done’) has regularly trotted out arguments about sweet spots being depleted, costs unacceptably high, and the industry being deprived of capital because of gun-shy Wall Street investors. There is some validity to these arguments, but there appears to be a lot more smoke than fire.

More concerning is the recent decline in rig productivity, as measured by the Energy Information Administration and reported in its Drilling Productivity Report in production added per rig operating. The estimates for the five main oil producing shales are shown in the figure below, and the decline since late 2020 is remarkable: one-third to one-half. Combined with tight markets for production inputs, from labor to fracking sands, the implication is that maintenance of production, let alone increases, will be hard to achieve.

But the EIA’s measure of productivity is somewhat misleading, mainly because it looks at rigs operating and changes in production, and in the past couple of years, the industry has shifted its emphasis from drilling new wells (which requires rigs) to completing previously drilled wells that were not fracked, also known as DUCs, or drilled uncompleted. The figure below shows the ratio of drilled to completed wells for the three big shale basins: a number above one represents more wells drilled than completed, but if the inventory of DUCs is being run down, the number is below one.

As the figure shows, prior to the pandemic, the industry was building up an inventory of DUCs, with companies drilling up to 50% more wells than they were completing in some months. With the start of the pandemic, the industry began using up the backlog of uncompleted wells, given the shortage of crews and lower prices which made it more attractive to simply finish off already drilled wells. In recent months, the number of wells drilled has been increasing while completions have been holding steady, as the figure below shows.

Using the EIA data for changes in production and wells completed gives a different picture for industry productivity than in the earlier figure. The figure below is for the 3-month moving average of production change relative to wells completed and while the data is very noisy, it is clear that the productivity per well completed is not declining in recent months and even appears to be increasing slightly. The implication is that the apparent decline in productivity that the EIA is reporting is an artifact of their reliance on the number of rigs operating: the sharp decline in active rigs meant that productivity per rig was exaggerated, and the subsequent decline was largely a correction of this, as rigs operating and wells completed came back into balance.

This hardly settles the debate about shale production trends as there are still questions about costs, likely investment levels, the availability of Tier 1 drilling locations and so forth, to say nothing of whether the oil price will remain high enough to encourage increased investment. At this writing the price of WTI is threatening to fall below $70 a barrel. A conservative forecast would seem in order unless there is a strong price recovery (to be consistently above $80), but the most pessimistic views should be considered skeptically. Not that skepticism isn’t always warranted: As President Reagan said, trust but verify.