The Shale Boom Is About To Go Bust

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By Nick Cunningham, a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics based in Pittsburgh, PA. Originally published at OilPrice

The shale industry faces an uncertain future as drillers try to outrun the treadmill of precipitous well declines.

For years, companies have deployed an array of drilling techniques to extract more oil and gas out of their wells, steadily intensifying each stage of the operation. Longer laterals, more water, more frac sand, closer spacing of wells – pushing each of these to their limits, for the most part, led to more production. Higher output allowed the industry to outpace the infamous decline rates from shale wells.

In fact, since 2012, average lateral lengths have increased 44 percent to over 7,000 feet and the volume of water used in drilling has surged more than 250 percent, according to a new report for the Post Carbon Institute. Taken together, longer laterals and more prodigious use of water and sand means that a well drilled in 2018 can reach 2.6 times as much reservoir rock as a well drilled in 2012, the report says.

That sounds impressive, but the industry may simply be frontloading production. The suite of drilling techniques “have lowered costs and allowed the resource to be extracted with fewer wells, but have not significantly increased the ultimate recoverable resource,” J. David Hughes, an earth scientist, and author of the Post Carbon report, warned. Technological improvements “don’t change the fundamental characteristics of shale production, they only speed up the boom-to-bust life cycle,” he said.

For a while, there was enough acreage to allow for a blistering growth rate, but the boom days eventually have to come to an end. There are already some signs of strain in the shale patch, where intensification of drilling techniques has begun to see diminishing returns. Putting wells too close together can lead to less reservoir pressure, reducing overall production. The industry is only now reckoning with this so-called “parent-child” well interference problem.

Also, more water and more sand and longer laterals all have their limits. Last year, major shale gas driller EQT drilled a lateral that exceeded 18,000 feet. The company boasted that it would continue to ratchet up the length to as long as 20,000 feet. But EQT quickly found out that it had problems when it exceeded 15,000 feet. “The decision to drill some of the longest horizontal wells ever in shale rocks turned into a costly misstep costing hundreds of millions of dollars,” the Wall Street Journal reported earlier this year.

Ultimately, precipitous decline rates mean that huge volumes of capital are needed just to keep output from declining. In 2018, the industry spent $70 billion on drilling 9,975 wells, according to Hughes, with $54 billion going specifically to oil. “Of the $54 billion spent on tight oil plays in 2018, 70% served to offset field declines and 30% to increase production,” Hughes wrote.

As the shale play matures, the field gets crowded, the sweet spots are all drilled, and some of these operational problems begin to mushroom. “Declining well productivity in some plays, despite application of better technology, are a prelude to what will eventually happen in all plays: production will fall as costs rise,” Hughes said. “Assuming shale production can grow forever based on ever-improving technology is a mistake—geology will ultimately dictate the costs and quantity of resources that can be recovered.”

There are already examples of this scenario unfolding. The Eagle Ford and Bakken, for instance, are both “mature plays,” Hughes argues, in which the best acreage has been picked over. Better technology and an intensification of drilling techniques have arrested decline, and even led to a renewed increase in production. But ultimate recovery won’t be any higher; drilling techniques merely allow “the play to be drained with fewer wells,” Hughes said. And in the case of the Eagle Ford, “there appears to be significant deterioration in longer-term well productivity through overcrowding of wells in sweet spots, resulting in well interference and/or drilling in more marginal areas that are outside of sweet-spots within counties.”

In other words, a more aggressive drilling approach just frontloads production, and leads to exhaustion sooner. “Technology improvements appear to have hit the law of diminishing returns in terms of increasing production—they cannot reverse the realities of over-crowded wells and geology,” Hughes said.

The story is not all that different in the Permian, save for the much higher levels of spending and drilling. Post Carbon estimates that it the Permian requires 2,121 new wells each year just to keep production flat, and in 2018 the industry drilled 4,133 wells, leading to a big jump in output. At such frenzied levels of drilling, the Permian could continue to see production growth in the years ahead, but the steady increase in water and frac sand “have reached their limits.” As a result, “declining well productivity as sweet-spots are exhausted will require higher drilling rates and expenditures in the future to maintain growth and offset field decline,” Hughes warned.

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39 comments

  1. Ignacio

    I think everybody knew that the shale boom would prove to be transient –I consider several years as transient– and it will end with holes in earth and wallets. The Bakken and Eagle Ford have become mature plays in a relatively short period and we will learn, sooner than later, how the decline of these plays unfolds. Somehow the shale business model depends on ever increasing production and production would have increased even faster if it wasn`t for resource constraints (takeaway capacity, crew availability…). According to the EIA the Permian is now filled with DUCKS, sorry, DUCs (drilled but uncompleted wells) waiting for production. Those are waiting for new pipelines and, “hopefully”, oil price increases engineered by the US by production suppression in Venezuela and Iran.

    Count me amongst those that would like oil price increases, although for different reasons.

    Reply
    1. Yves Smith Post author

      The forecasts I saw earlier were that production would peak in the early 2020s, decline gradually for the rest of the decade, and then fall off sharply.

      Reply
      1. Ignacio

        I would generally agree with that with a caveat. Given how the business model has worked so far, as described above, once peak production is achieved and there is not possibility to increase production via intensification/geographical expansion, the decline rates migth depend on the financials of oil companies, rather than geological factors. If money dries it could be more precipitous than expected. Who knows.

        Reply
  2. PlutoniumKun

    Arthur Berman has been predicting exactly this for year. They’ll spend more and more pushing production up, but eventually you get diminishing returns – the drop off in production, when it happens, will be quite dramatic as the sweet spots run dry.

    The equally big question though is the influence of oil and gas prices. A crisis in the shale fields might be precipitated not by a drop in production, but further downward pressure on prices. Or likewise, a spike in oil prices could give a boost to yet more capital investment in those fields. For now, I suspect the producers are far more worried about low prices than running out of oil/gas. A lot of them are betting on substantial rises in the future in order to make their balance sheets look better. So that’s a lot of rich people who would welcome a Middle East war.

    Reply
    1. Johny

      Art Berman began predicting that shale production would never make it off the ground, as far back as 2009. Interesting, he doesn’t use geology to make his arguments, which is unfortunate because it would lend more credibility to his case than playing at petroleum engineer.

      Reply
  3. PlutoniumKun

    Just to add – one possible catastrophic outcome for the planet of a shale bust is poorly capped wells. Properly capping a fracked well is very difficult (you need to plug each individual geological layer, its not just a matter of putting a concrete plug on the well head). If they are not properly plugged, they will leak gas for decades and its extremely difficult and expensive to properly plug. In theory of course they are supposed to be properly capped by the operators, but if they go out of business….

    So even if gas and oil fracking stopped today, they will be a major source of CO2 emissions for decades to come, one that will cost many billions to mitigate.

    Reply
    1. Roger Boyd

      Natural gas is methane, so badly capped fracked gas wells would be really bad for climate change.

      Reply
      1. rd

        States and provinces have started program to cap old O&G wells abandoned decades ago that are leaking methane. All they need to do for new fracking wells is put in tight regulations and enforce them. But that requires political will.

        Reply
      2. johnny

        Fortunately there is usually a financial incentive to not badly “cap” (whatever you think that might be, plugged? Temporarily abandoned? Poorly completed or with sloppy surface equipment?) wells.

        Reply
    2. Oh

      So even if gas and oil fracking stopped today, they will be a major source of CO2 emissions for decades to come, one that will cost many billions to mitigate.

      And methane if the gas does not contain CO2.

      Reply
      1. Svante Arrhenius

        When we’d fish, mountain bike or varmint hunt in Western PA., many decades ago (ie: ancient conventional oil & gas wells only) it was clear; not only was none of the leaking gas ever flared, but folks were tapping the rusted christmas trees. By the 80’s, as we were building the rail trails, it was far worse than our memories. Fracked ethane/ wet gas wells are off-limits, unless you have FLIR drones.

        https://m.phys.org/news/2015-05-emissions-natural-gas-wells-downwind.html
        https://m.youtube.com/watch?v=HanXGD2NJxk

        Reply
  4. skippy

    Fracking … the modern equivalent to hydrological gold mining …

    But money [tm] was made … some confuse this with value …

    Reply
    1. Svante

      Well, gold does a: not explode (oh, yes it DOES!) b: does not cause 20%-89% more global warming than CO2 (oh yes it DO!) c: “water is precious, sometimes more precious than gold?” Walter Houston, as Howard: The Treasure of the Sierra Madre, who called Bogart, “no, not ME baby!”

      Reply
  5. jackiebass

    This is old news. Drillers over estimated the production length for fracked wells to help their Ponzi Scheme. For a natural gas well the production tanks in most cases in 3 years. To keep production up more wells had to be drilled. Eventually places to drill become hard to locate.I witnessed this in northern PA. It was boom for about 5 years then came the bust. Although there is still some fracking it is only minor compared to what it was. A few made money but the cost to the environment was passed on to the taxpayers.

    Reply
  6. The Rev Kev

    There may be another factor at work here. Granted that the shale boom was always going to be a short term play, maybe the move on Venezuela is all about having oil to replace US production as it taps out – slowly at first, then all at once. Trump & Co could always buy Venezuelan oil at a market price but I think that the idea is to seize it to control more of the international oil market by being able to control international prices and you can’t do that if Venezuela is an independent country. I just wonder how much damage is going to be done in America in terms of the environment and more importantly water supplies by all the chemicals pumped into the ground. It is going to be a toxic legacy that will be there for generations to come.

    Reply
    1. PlutoniumKun

      Venezuelan oil is very important to frackers because almost all refineries in the US were built to handle the mid-density oils from Texas and Alaska. Tight oil (fracked) is super light (it can’t be fracked otherwise), and so it needs to be mixed in with heavy grade oil to make it refinable. This is where heavy Venezuelan crude and Canadian tar sand oil comes in – they are essential to create a crude that can be refined in existing plants.

      So the relationship between the US tight oil industry and Venezuela/Canada is quite complex – they all need each other to some extent otherwise they are stuck with oil that can’t be refined. This is of course one reason why Washington absolutely hates not having firm control of Venezuelan production. But its also why they can’t afford to shut it down entirely (which would happen if there was a military invasion or civil war).

      So the calculations are complex, and they are being made by idiots, so there is no telling what they are planning.

      Reply
      1. Ken

        There are several facets to this. The light oil from fracking and elsewhere is needed as a dilutent for the very heavy Venezuelan crude to enable it to be pumped on and off tank ships and through pipelines. Dilutents are also needed for the bitumen from the Alberta tar sands. The reason for the Keystone pipeline system is to pump diluted bitumen (dilbit) from Alberta to the Texas refineries is that are equipped to process this very heavy material similar to the very heavy Mexican and Venezuelan crudes. (Crude oils around the world vary greatly in composition. Refineries are equipped to process only certain types of crude.)

        The fracked oil and gas often have low market value. The gas wells may produce relatively low quantities of high value natural gas liquids. The oil often is so light that it produces low quantities of high value distillates like diesel fuel. The fracked crude may contain high amounts of impurities that make it difficult and expensive to refine.
        https://www.digitalrefining.com/article/1000979,Overcoming_the_challenges_of_tight_shale_oil_refining.html#.XNWZrqR7ncs

        The rapid decline of output of the fracked wells is not new news. Oilprice.com has a 2017 article on the same point. https://oilprice.com/Energy/Crude-Oil/Shale-Growth-Hides-Underlying-Problems.html

        Reply
        1. Olga

          Well, and then there is this:
          https://www.worldoil.com/news/2019/4/11/permians-flaring-rises-by-85-as-oil-boom-continues
          “The Permian Basin has produced so much natural gas that by the end of 2018 producers were burning off more than enough of the fuel to meet residential demand across Texas. The phenomenon has likely only intensified since then.”
          The problem seems to be a lack of pipelines to get the gas to customers.
          Not that I disagree with “the boom is over” too much, but Permian is a large area and has a way to go. But it will fizzle out in time.

          Reply
      2. rd

        Venezuela oil can be delivered directly to the Gulf Coast refineries in tankers that require no permitting or construction. Canadian oil requires pipelines (e.g. Keystone XL) which are held up in permitting. So it is ironic that the Keystone pipeline permitting quagmire is likely to be a proximate cause for the Trump administration dabbling in Venezuela as many Gulf Coast refineries are geared for Alberta/Venezuela oil.

        Reply
  7. RWood

    Using data from field experiments and computer modeling of ground faults, researchers have discovered that the practice of subsurface fluid injection used in ‘fracking’ and wastewater disposal for oil and gas exploration could cause significant, rapidly spreading earthquake activity beyond the fluid diffusion zone. The results account for the observation that the frequency of man-made earthquakes in some regions of the country surpass natural earthquake hotspots.

    According to the U.S. Geological Survey, the largest earthquake induced by fluid injection and documented in the scientific literature was a magnitude 5.8 earthquake in September 2016 in central Oklahoma. Four other earthquakes greater than 5.0 have occurred in Oklahoma as a result of fluid injection, and earthquakes of magnitude between 4.5 and 5.0 have been induced by fluid injection in Arkansas, Colorado, Kansas and Texas.

    Fracking: Earthquakes are triggered well beyond fluid injection zones
    https://www.sciencedaily.com/releases/2019/05/190502143353.htm

    Reply
  8. QuarterBack

    I seriously doubt that the shale boom was ever about being profitable. I have long held that the shale industry has been artificially elevated as a hedge against risks induced by the long term Middle East geopolitical and military strategy. It was always expected to loose money and have negative secondary effects, but it had been decided to be necessary. Shale has survived because of a gentleman’s agreement by the power players to cover the costs of the shale strategy; that along with investment media hype and stealthy subsidies to try to induce outside suckers to reduce some of the burden of those behind the hedge.

    Reply
    1. rd

      The shale industry was largely small to mid-sized firms that figured out the technology to go into low-priced leases because the oil was inaccessible. Junk bonds have fueled their growth and operations. As long as they get the cash flow from wells to pay their junk bond interest payment, it can keep going. Once they can’t, expect a Wile E. Coyote splat in the junk bonds market and the fracking oil patch. The majors have moved in so they might be a bit of a flywheel for the system, but ultimately if prices are too low to support drilling, then the majors will pull the plug as fracking is not a long-term investment play over multiple price cycles in the same way an offshore oil field is. Instead, it can be turned on and off at will with new drilling always required to sustain production, so you just stop drilling when prices are too low.

      Reply
  9. Amfortas the hippie

    a couple of on the ground, as it were, observations:
    i live in frac sand country(“Brady Brown”). there was a crisis of late to my north, as 2 of the 3 sand plants in and around Voca and Brady Texas suddenly closed(after a few years of financial shenanigans/scandal, and them being sold to multnational outfits, etc). West Texas found a way to use the more local, white sand for their purposes, and stopped buying the Brady Brown.
    Immediate local Depression, folks moving if they could sell their houses(for sale signs there are routinely a decade old), local pols/big wigs freaking out.
    one of them just reopened…and all of a sudden, there’s gobs of sand trucks heading South(Eagle Ford). first time in prolly 8 years.

    Both of my brothers in law work in the patch in the Permian…roughnecking.
    when i probe them for anecdotes…being careful not to ask leading questions…they expect more or less permanent employment. one, against my advice(which he asked for), just bought a house in Sanderson…which has no reason for being save oil.
    My cousin, in East Texas, just hired on with a pipeline company…headed to either the Permian or the Bakken(he’s waiting to find out).
    so there’s a spurt of renewed activity in South Texas, and the expectation(both in the workforce, and in the boardroom) that West Texas(and Dakota) will continue for some time.

    and…i just remembered my last trip through Pasadena, Texas…a year ago…
    the great big refinery on 225(I think it’s Exxon) was putting in a gigantic separater(or whatever you call those things)…easily as tall as the smaller skyscrapers in downtown houston(maybe 20+ stories)…using 2 of the biggest, tallest cranes i’ve ever seen or heard of.
    Dad says it’s for heavy, sour crude(a la Venezuela and Iran). so there’s at least year old expectations there, as well…ie: exxon thinks it’s gonna need much more refining capacity for that oil.
    it can’t last forever, of course.

    Reply
    1. Harrold

      Midland & Odessa are definitely planning on the continuation of oil production and are forecasting no busts.

      This hurts my head to understand as there are still people alive there who have been thru multiple booms and busts over the past 70 years.

      Reply
      1. Harry

        I would imagine its for the same reason there is no global warming or climate change in Florida. Its bad for business. Those guys know the truth. But theres no advantage in talking about it.

        Reply
    2. Synapsid

      Amfortas,

      I don’t know about that particular cracker but Exxon is building up refining capability for the light tight oil and condensate coming out of the Permian. That work is in the Houston area.

      The idea may be Why ship it out when we can make money out of the products? I dunno.

      Reply
  10. Svante

    In summary: If you’re leaving an exceedingly expensive, but eminently walkable major city, with acceptable (off peak) mass tramsit, prodigeous gas/coal/nuclear/hydroelectric sources immediately available… to move to a “normal” southern Appalachian city? Don’t neglect to research PV, geothermal, “passive” convection, and plug-in hybrid or EV transportation options? When we were awaiting news from LA/MS friends in 2005, I’d been wondering about what my actually retiring atop the Marcellus would be like. We’d all figured Katrina’s tour of Mars, Ursa, Mensa, Bullwinkle & Ram Powell platforms would (given Halliburton ruling the country) touch off a slick water fracking pyramid scheme that would have the Acela megalopolis simply killing us for our fracked gas, as they’d simply stolen our coal, gas, oil and nuclear energy? Silly, substance abusing, deplorables!

    Reply
  11. Obdurate Eye

    I’m surprised no one has mentioned in passing Chevron’s walk-away from the Anadarko deal. CVX knows exactly what Anadarko’s actual and potential wells are worth to them under a variety of pricing scenarios. They’d rather pocket the $1bn break-up fee than overpay for a bunch of marginal wells. Good pricing/ROI discipline = not succumbing to deal-fever: A tip of the chapeau to them.

    Reply
  12. Obdurate Eye

    I’m surprised no one has mentioned in passing Chevron’s walk-away from the Anadarko deal. CVX knows exactly what Anadarko’s actual and potential wells are worth to them under a variety of pricing scenarios. They’d rather pocket the $1bn break-up fee than overpay for a bunch of marginal wells. Good pricing/ROI discipline = not succumbing to deal-fever: A tip of the chapeau to them.

    Reply
  13. RBHoughton

    The evidence for production-suppression is opposition to the new Russia to Germany pipeline and US sanctions on Iran and Venezuela. Poland is America’s stalking horse in Europe but is not getting much support from its neighbors.

    Its my suspicion that vast sums of speculative money have gone into fracking in USA and UK because there was nothing better to do with the great increase in the money supply. That seems to be what’s keeping the industry afloat for the time being.

    Plutonium Kun’s advice about plugging wells points to the frightful environmental effects that are coming to those countries that have allowed fracking. It will be the people that suffer.

    Reply
    1. Ptb

      It was the fruits of Bush admin energy policy. Doubt it was primarily geopolitical, more like tail wagging the dog. Though the distinction is increasingly blurry now.

      Every presidency seems to have a couple of these programs. Mixed range of soundness as policy…

      Market innovation (Enron), corn ethanol, developing H2 fuel cells (with the H2 coming from natgas at the time), subsidies (and loan guarantees!) for electric cars, even bigger ones for luxury electric cars, natgas import facilities, natgas export facilities, favor pipe to Canada and block the rail, favor rail to Canada and block the pipe, govt indemnifying the nuke industry from lawsuit damages arising from accidents, allowing utilities to “bail in” customers in case of losses from nuke projects, exempting any and all fracking waste products from clean water regs, actually subsidizing solar and wind, actually retiring coal, also actually sanctioning or invading no less than big 5 oil producing countries…
      Whew! Policy!

      Reply
  14. Bob Bancroft

    Destroying limited fresh water is insane. This is a perfect example of the horrible consequences of capitalism. Profit corrupts the political system as the state merges to serve the oligarchs.

    Reply
  15. EnergynEntropy

    There is no any real oil in shale oil and tar sand, at all.

    There is no any real excess energy in any nuclear and fusion power plants. And, there is no any real excess energy in solar, wind and hydro.

    All of these are a mere sub-product of the almighty conventional, finite, gold-grade, once-only fossil fuels.

    “No energy store holds energy enough to extract and collect an amount of energy equal to the total energy it stores” (The Fifth Law)

    https://the-fifth-law.com

    Reply

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