The global shale oil and gas industry is still in its infancy (in the learning curve) but the United States industry is far ahead and has shown inspiring results as their shale/tight oil production increased from1.24 million barrels daily (MMBD) in 2007 to 4.68 MMBD in 2014 – which represents approximately a 3-3/4 fold increase[3]. This increase in oil production was supported by sustained higher oil prices of over $100/BBL that provided a breathing space to the industry, allowing it to develop and master innovative technology (horizontal drilling, hydraulic fracturing, multi fracturing, less use of water etc) and was well supported by favorable policies of various States. The sustained higher oil prices encouraged a shale gas boom in the US that also produces substantial condensate. Even in the regime of very low Henry Hub (HH) prices, we saw tremendous growth in US gas production – resulting in reduced gas imports from Canada. The combined effect of both these and other factors allowed the US to reduce its net oil import dependency from 60% in 2005 to below 27% in 2014, despite the growth in domestic oil demand that was hovering around 18 MMBD recently (Figure-1).
Figure-1:
US net oil import dependency. Source - EIA
The
question is how will the collapsing oil prices from over $95/BBL during the
period of March 2011-October 2014, to below $45/BBL that now hovers around mid
fifties affect the US tight oil industry? Do we expect a continued boom in the
US tight oil production or is a burst immanent? One possible outcome is that
lower oil prices result in cutting back
drilling activities that in turn would reduce US tight oil production with some
lags. The reason being that tight oil/gas is expensive to develop/produce and
the production decline rate is significantly higher than the conventional oil.
Therefore, in order to sustain the level of production more wells need to be
drilled and fractured. However, thus far, this has not been the case in the
face of plunging oil prices, US tight oil production is still increasing, even
after a number of months of sustained lower oil prices and decline of the drilling rig count. This paper reviews and explores each of the seven tight oil
plays – Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica
(see Map-1)[4].
It looks at how the production from these prospects will help the country in
reducing oil import dependency and why tight oil production is insensitive to
oil prices and rig count. The analysis is both qualitative and quantitative
using econometric modeling.
Map-1 US Shale/Tight resources in
various regions. Source: EIA web-site
Figure-2[5]
illustrates the US total tight oil profile. The burgeoning oil prices during
2007/2008 set the momentum of US tight oil boom. The higher oil price
expectations allowed breathing space to the oil and gas industry in
exploitation of unconventional resources that are more abundant than
conventional. During the early period, generally daily productivity per well
was quite low and hence so was the production level. But drilling of thousands
of wells allowed a deeper understanding of the geological prospects and
technology in carrying out hydraulic fracturing more efficiently – improving
productivity per well. As a result of higher oil prices, horizontal drilling
and hydraulic fracturing, tight oil production increased from 1.24 MMBD in 2007
to over 4.68 MMBD at the end of 2014. Visual inspection of these trends
demonstrates that there is a positive correlation between the number of rig
count and oil prices with some lags. However, both oil production and daily
production per rig seems to be insensitive to both oil prices and rig count. The aggregating of data for the seven different prospects
could be providing a biased assessment, therefore it is imperative to analyze
the individual prospects to determine whether the similarities and divergences
exist across the prospects. And if so
why.
Figure-2 (a): Total Rig & Price Relationship
Figure-2 (b): Total US Tight Oil Profile
United States Tight Oil Behavior
Figures-3 to 9
illustrate the relationship of oil prices, rig count, production and
productivity per well (daily barrel production per rig) for each of the seven
plays. Visual inspection of these trends generally demonstrates that all the
seven prospects - Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian
and Utica show similarities (Figure-3-9
(a)). Generally, all seven prospects demonstrate a positive correlation between
oil prices and rig count, though magnitude and number of lags differs from
prospect to prospect. This could be due to different cost structures that vary
between prospects, to differences in geological conditions, the extent of
difficulty, extent of available infrastructure, proximity to market, etc. For example, some wells or plays are significantly
deeper than others thus more costly to drill and complete. In addition, the
period of contracts with service companies also vary, therefore the response to
increase/decrease in rig counts to increase/decrease in oil prices differ.
Another
interesting feature of these trends is highlighted in Figures-3-9 (b). With the
exception of Haynesville to some extent, oil production and productivity per
rig did not respond to either oil prices, or the number of rig count. In fact,
collapsing oil prices did not deter aggressive upward movement in oil
production even after several months had elapsed. The question is what causes
this to happen? Is it that the break-even prices have substantially declined or
can we expect a burst soon, or something else?
One explanation
is certainly related to the industry learning curve. That is drilling and
hydraulic fracturing of
thousands of wells allowed them to better understand the geology, optimum
number of fractured spaces required to maximize production, less use of water
for hydraulic fracturing which may have helped them to cut costs. Yet another
explanation could be related to the difference between drilling strategies for
unconventional and conventional resources. The strategy of unconventional resources
is driven by economics (profitability of individual wells) rather than
maximizing the overall resources recovery. Therefore the biggest challenge in
the case of unconventional resources is not to find the productive zones, but
rather to find zones that are most conductive to effective stimulation. As a
result of this strategy, they often select the potential fracture treatment
parameters that produce profitable wells, but leave behind considerable
hydrocarbon resources.
Therefore, when
oil prices tumbled production and
productivity per rig kept increasing, this may have been due to revisiting
these reserves that were not fractured earlier during the regime of higher oil
prices. Revisiting and fracking of these
reserves previously left behind probably helped the industry to continue
to increase production as this does not require additional drilling of wells.
Thus production continues to move upwards, despite a decline in rig count and
oil prices. The question is how long this phenomenon will last. This is
difficult to predict in the absence of historical data, however some of these
unusual trends will become visible during the next few months if oil prices
remain around $50/BBL. If oil production increase continues even after several
months have passed then this could be due to the combination of revisiting
untapped reservoirs to frack and declining break-even costs to below $50/BBL
for some prospects. If this is the case it would be alarming for OPEC, who are
trying to increase/maintain their market share and are therefore refusing to
cut oil production. Should Iranian
sanctions be lifted and if the US Congress waives export restrictions, it will
be a dilemma for OPEC members how to compromise between market share and
balance their ever rising budgetary requirements.
Figure-3
(a): Bakken – Rig & Price Relationship
Figure-3
(b): Bakken Tight Oil Profile
Figure-4 (a): Eagle Ford – Rig & Price
Relationship
Figure-4
(b): Eagle Ford Tight Oil Profile
Figure-5
(a) Haynesville – Rig & Price Relationship
Figure-7
(a): Niobrara - Rig & Price Relationship
Figure-8 (b): Permian Tight Oil Profile
Figure-9 (a): Utica – Rig & Price Relationship
Visual inspection reveals that there is a positive correlation between rig count and oil prices, but there seems to be no correlation between oil production, rig count and oil prices. Table-1 depicts the estimated results for each of the seven plays. In each of the prospects, rig count is run against oil prices and monthly oil production also tested against oil prices using monthly data for the period January 2007 to February 2015. Analysis of the graphs has established there is lag structure present. We have used polynomial distributed lag models with varying weights and lag structure. The best estimated results are reported here.
Figure-5
(b) Haynesville Tight Oil Profile
Figure-6
(a): Marcellus – Rig & Price Relationship
Figure-6
(b): Marcellus Tight Oil Profile
Figure-7
(b): Niobrara Tight Oil Profile
Figure-8
(a): Permian – Rig & Price Relationship
Figure-8 (b): Permian Tight Oil Profile
Figure-9 (a): Utica – Rig & Price Relationship
Figure-9 (b):
Utica Tight Oil Profile
Visual inspection reveals that there is a positive correlation between rig count and oil prices, but there seems to be no correlation between oil production, rig count and oil prices. Table-1 depicts the estimated results for each of the seven plays. In each of the prospects, rig count is run against oil prices and monthly oil production also tested against oil prices using monthly data for the period January 2007 to February 2015. Analysis of the graphs has established there is lag structure present. We have used polynomial distributed lag models with varying weights and lag structure. The best estimated results are reported here.
As was expected the rig count did
not increase/decrease in response to increase/decrease in oil prices
instantaneously, rather it took a number of months before the full impact of
one percent increase/decrease in oil price affected the rig count. Generally the
data shows that the response during the first two periods was either statistically
insignificant or marginal; however, it strengthened with time and full impact
was witnessed after a lag of four periods. The short-term elasticity is
generally insignificant while the full strength was established in the long-run
when one percent increase/decrease in oil prices lead to increase/decrease in
rig count between 0.2% for Haynesville and 0.57% for Permian. More than 99% of
the variation in rig count is explained by oil prices. When monthly oil
production is run against rig count and oil prices in all the cases models were
suffering from an autocorrelation problem and the given explanatory variables
were also statistically insignificant.
Table-1:
Estimated Results US Tight Oil Plays
Bakken
|
Eagle
Ford
|
Haynesville
|
Marcellus
|
Niobrara
|
Permian
|
Utica
|
|
Constant
|
3.47
(4.6)*
|
4.75
(1.5)^
|
-0.15
(-0.01)
|
3.57
(6.7)*
|
2.40
(4.45)*
|
3.93
(1.91)^
|
1.98
(0.96)
|
P0
|
-0.08
(-1.38)
|
0.01
(0.10)
|
-0.03
((-0.89)
|
0.01
(0.53)
|
-0.01
(-0.27)
|
0.02
(0.6)
|
-0.13
(-0.58)
|
P1
|
0.03
(0.97)
|
0.1
(1.64)^
|
0.06
(1.74)^
|
0.04
(1.22)
|
0.03
(0.69)
|
0.07
(1.93)^
|
0.38
(1.55)^
|
P2
|
0.15
(4.1)*
|
0.27
(2.23)**
|
0.19
(2.51)**
|
0.08
(3.15)*
|
0.13
(3.77)*
|
0.17
(5.59)*
|
-
|
P3
|
0.28
(4.1)*
|
-
|
-
|
0.12
(1.98)^
|
0.28
(3.51)*
|
0.30
(4.47)*
|
-
|
P
∑ Pi
|
0.38
(3.0)*
|
0.38
(2.91)*
|
0.2
(1.74)^
|
0.26
(3.15)*
|
0.43
(3.77)*
|
0.57
(5.59)*
|
0.24
(1.30)
|
AR(1)
|
0.97
(56)*
|
0.99
(67.7)
|
0.99
(83.2)
|
0.97
(61.4)*
|
0.94
(31.8)*
|
0.99
(51.8)*
|
0.98
(39.9)*
|
MA(1)
|
0.51
(5.5)*
|
0.26
(2.52)
|
0.44
(4.5)*
|
-
|
0.26
(2.55)**
|
0.43
(4.42)*
|
0.95
(39.9)*
|
Adj.R2
|
0.99
|
0.99
|
0.99
|
0.99
|
0.96
|
0.99
|
0.95
|
DW
|
1.92
|
1.96
|
1.75
|
1.96
|
1.93
|
1.86
|
2.21
|
Conclusions
What we have
learned from history is that our oil and gas industry is quite dynamic and
adjusts quickly in challenging situations which is supported by innovative
technology. In any given situation oil production and more particularly tight
oil production should be responsive to changes in oil prices and rig count.
However, the contrary seems to be the case, despite decreasing rig count and
oil prices, US tight production kept rising in almost all seven plays. Normally
a lag of few months occurs before a response
to changes in oil prices can be observed, however, generally tight oil
production aggressively moves upward. This may be due to a number of factors –
decrease in break-even cost and revisiting and fracturing leftover reserves
from the period of higher oil prices. The US tight oil industry would be
clearly a winner if they sustain their
current level of production with oil price of mid-fifties during the rest of
the year. So far it appears that US tight oil industry successfully weathers
this episode of lower oil prices. Having said that the next few months will be
critical to determine whether the US tight oil industry continues to boom or
will burst in response to lower oil prices.
[1]
Dr. Ghouri is Oil & Gas advisor with expertise in global / regional, macroeconomic analysis and market assessments. Expertise in long-term forecasting for crude oil and LNG prices in various markets. Have been extensive writing the possible implications of US shale oil and shale gas on global oil and LNG industry. I have developed Oil & Gas industry models/analyses in support of industry leaders, investment bankers and politicians. My publications (80+) have appeared in international industry journals and presented papers at several international-energy conferences (WPC, WEC, ECSSR, GasArabia, SPE, IPTC, IEA/OPEC, ICEED, IEF, MEPGC). I have taught courses on “Global Energy Economics & Petroleum Project Evaluation”, “Petroleum Economics” worldwide.
[2] Dr. Ansari is a general dentist in private practice in Qatar, with an original background of statistics and economics
Dr. Ghouri is Oil & Gas advisor with expertise in global / regional, macroeconomic analysis and market assessments. Expertise in long-term forecasting for crude oil and LNG prices in various markets. Have been extensive writing the possible implications of US shale oil and shale gas on global oil and LNG industry. I have developed Oil & Gas industry models/analyses in support of industry leaders, investment bankers and politicians. My publications (80+) have appeared in international industry journals and presented papers at several international-energy conferences (WPC, WEC, ECSSR, GasArabia, SPE, IPTC, IEA/OPEC, ICEED, IEF, MEPGC). I have taught courses on “Global Energy Economics & Petroleum Project Evaluation”, “Petroleum Economics” worldwide.
[2] Dr. Ansari is a general dentist in private practice in Qatar, with an original background of statistics and economics
[4] While shale resources and production are found in many U.S. regions, this paper is focusing on the seven most prolific areas, which are located in the Lower 48 states. These seven regions accounted for 95% of domestic oil production growth and all domestic natural gas production growth during 2011-13.
[5] Source for Figures 2 to 9 – Energy Information Administration (EIA) web-site data base.
