Prospects for US shale productivity gains
US Shale performance has been disappointing this year. Most international organisations have been revising down their 2020 US shale production forecasts. The downgrade reflects lower oil prices, lower rig counts, capital constraints, pipeline bottlenecks and a negative trend in well-productivity. After all, 2019 has been a punishing environment for any company to lower its production guidance, raise its capex or report an operational mishap.
One of the major factors behind the revision in forecasts has been a decline in well productivity. Many commentators have been eager to call a ‘peak’ in Permian productivity, or suggest that the basin is running out of resources. The reasons for this pessimism lie within the data: Based on reported numbers from the EIA, the implied 30-day production rate from new wells in the Permian basin has now fallen 20 percent year-on-year (YoY) to 610 b/d. With an average 30-day IP-rate of 610 b/d and despite the fact that the Permian completed a vast 485 wells per month over the first half of 2019, the month-on-month growth has been slowing down markedly as compared to last year.
This recent performance has caused fears over the future of the US shale industry. Some worry that the best resources have now been produced and productivity has peaked. However, we find these conclusions are premature, as they are based on backward-looking, volatile data. By contrast, to provide forward-looking indicators, we have assessed the industry’s innovation across a longitudinal sample of 350 technical papers from summer-2019. Our methodology is very different from listening to the commentary on earnings calls, which tends to be backwards looking, very high-level, and shies away from technological innovations that are on the cusp of commercialisation. We believe the trends in US shale are still constructive. The quantity, quality, basin-focus, technical-focus and methodologies of these papers all imply continued productivity gains, not problems. The most exciting innovation areas are in enhanced oil recovery, digital instrumentation, machine learning, advanced modelling and overcoming parent-child issues. Therefore it is premature to discount the shale industry yet.