My opinion entitled “US tight oil production and the future oil price” published on 12 January 2015 (http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid = 2015011223027) addressed the drilling for and production of shale or tight oil in the US Lower 48 states. Since the opinion was published the number of active, onshore, oil-directed, drilling rigs in the US Lower 48 States has fallen from 1,421 to 631, a much larger drop than what was anticipated. However, in spite of 790 oil rigs having disappeared, production of shale or tight oil appears resilient. This begs two questions: How could oil production be kept up under such circumstances? And how reliable are the published tight oil production figures? Tight oil producers have been working on enhanced drilling efficiencies (pad drilling, “down-spacing”, reduced drilling time per well etc.) and enhanced recovery technologies over a period of time. Estimated Ultimate Recovery (EUR) per tight oil well has typically increased between 25 percent and 45 percent when compared to pre-2012 wells with standard completions, the so-called “legacy” wells. Production costs have also fallen by as much as 30 percent as oil producers are putting pressure on suppliers and equipment manufacturers. Since January the cost of a typical lateral well in a sweet spot of the Bakken field area in North Dakota has decreased from some $9m to $7.7m, while EUR per well has increased. One must not forget that E&P companies operating onshore in the US are usually required as per their lease agreements to drill a certain number of wells per month or year to retain their hydrocarbon E&P lease. In the first 4 months of 2015, with West Texas Intermediary (WTI) prices fluctuating between $45 and $55 per bbl, many of these oil producers elected to drill and not complete a growing number of wells. In such way they complied with the provisions of their lease agreements, but also saved precious funds given that completion cost onshore in the US is some 60% of total well capital expenditure. As of February 2015 more than 4,700 onshore US wells — 80 percent of which being oil wells — were drilled, but not completed. At the end of April, when the WTI price started rising towards $60 per bbl, a number of Texas oil field operators were again mobilizing completion crews, as demonstrated in the figure (Graph). Texas is the home of the large tight oil producing areas Eagle Ford and Permian. In spite of this development, in early June there were still more than 3,800 wells, drilled, but not completed. At the current WTI price levels tight oil production could be sustained simply by going back to these uncompleted wells. In fact, with no more new wells drilled, in order for US oil production to stabilize at the current level, it would suffice to complete some 500 tight oil wells each month to the end of 2015. If WTI price rises above $65 per bbl, most E&P companies operating in the Bakken, Eagle Ford and West Texas Permian tight oil basins will return to full drilling, hydraulic fracturing and completion activity. At the current price level of around $60 per bbl we also see increased hedging of future production for the balance of 2015 and the calendar year 2016. Up until recently most companies had only hedged some 10 percent of their production for the remainder of 2015. This number is now increasing to some 50 percent, a situation which likely will help sustain US oil production in 2016. One should not overlook the re-hydraulic fracturing activities of an increasing number of E&P companies. Hydraulic fracturing of legacy wells drilled in 2012 and earlier was frequently performed on a “hit or miss” basis. As tight oil well analysis improved, it became evident that in many cases re-fracturing of a legacy well nearing the end of its producing life could increase hydrocarbon recovery by between 60 and 80 percent of the previous EUR. Currently, the typical cost for this process is between $1.5 and $2m per lateral well and the large service companies have started offering re-fracturing on a “no cure, no fee” basis. Hence, E&P companies should have nothing to lose by applying this procedure. Indeed, taking as an example sweat spots in the Bakken field area where a drilled, hydraulic fractured and completed for production well currently costs around $7.7m, a refracking of a legacy well could prove a very cost-effective investment. Over the last year the US shale or tight oil production has been the world's marginal oil supply and lots of attention is therefore given to published production data for this class of hydrocarbons. But how reliable is the tight oil production data available today? Statistics for oil production in the US are currently collected on a state and not federal basis. With the exception of North Dakota which produces reliable drilling and production data with a 2 month-time lag, many other states produce such data only annually, and correct information may take up to 2 years to become available, even to the US Department of Energy (DoE). As a result, all oil production data currently published by DoE's Energy Information Administration (EIA), as well as Texas Railroad Commission, are estimates, in fact derived with misleading input such as the number of wells drilled, a data group which I discussed in previous paragraphs. Some 13,000 oil and gas well operators are currently active in the United States. A lot of these smaller operators have the tendency to resist “form-filling” as a time-consuming, highly bureaucratic exercise, which they cannot afford. EIA is currently implementing a new system modelled on the EIA-914 form process used already for shale gas, which they hope will provide them with 85% coverage of the larger oil well operators. It will however take time for this system to be applied and properly work. One should also not forget that modern shale oil and gas E&P activities are fairly recent developments, representing an industry going through rapid improvements and change. This is a process clearly accelerated by the low oil price environment, where operators are forced to improve procedures, cut costs and, generally, become more efficient. It is observed that large conventional oil producers and interties that, generally speaking, can influence the international oil market and, therefore, oil pricing, have built large and sophisticated models to predict, not only US, but North American, tight oil production. However, given all aforementioned concerns regarding the reliability of oil production data, modelling of tight oil production will remain at best a haphazard activity, at least until the new EIA process-derived data become available to the industry. Reportedly, Saudi Minister of Petroleum and Mineral Resources Ali Al Naimi stated in St Petersburg on June 18, 2015, that Saudi Arabia will be increasing oil production to capacity over the summer. Although such an action of Saudi Arabia — producing at capacity in an era of soft, and potentially falling prices when the country recently also has started up two large new refineries — makes good economic sense, it also begs the question whether this also is a way to stop the price of WTI rising above $60 per bbl and even approach $65 per bbl. The latter price level is likely to accelerate US oil production growth. Only time will tell if the oil price rally is sustainable. We certainly live in an interesting time. — The writer is the senior partner of Morten Frisch Consulting, UK. He can be contacted at: [email protected] Website: www.mfcgas.com
