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US Shale Resilience: Oil Industry Experts Say Shale Will Rise Again

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Oil Industry Experts Say Shale Will Rise Again

 

 

(Bloomberg) -- The American shale industry shocked the world with its rebound after the 2014-2016 bust, setting records for output that pushed the U.S. to the top spot among oil-producing countries. A handful of experts is saying that will happen again.

The comeback trail would be steep and long. The spread of coronavirus is crushing demand while Saudi Arabia and Russia are creating a glut. Everybody agrees U.S. production will take a bigger hit than last time, when it dipped before soaring. As many as 70% of the 6,000 shale drillers may go bankrupt, and one-third of shale-patch workers are expected to lose their jobs. Wall Street, which financed the last boom, has cut off the cash spigot.

Oil rigs stand in the Permian Basin area of Odessa, Texas, U.S., on Saturday, Jan. 19, 2019. In the Permian, America's busiest oil patch, a producer needs to blast as much as 60,000 barrels of water into a well every day, along with sand and chemicals, to complete the fracking that cracks open the tight, oil-bearing rock about a mile underground.

But some experts are saying the future, however far off, will be better. They’re looking past the dire forecasts and vertical chart lines and cautioning against despair. They’re echoing a widespread view that’s mostly unspoken during the market meltdown: Yes, America can shock the world again. The boom-and-bust cycle will shift, and shale is in a position, with its infrastructure, its ability to ramp-up quickly and its plentiful reserves, to rise from the ashes stronger than ever.

When the dust settles in the Permian Basin and other American shale fields, the survivors will be leaner and more tech savvy, according to Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd. That means lower production costs and a greater ability to respond to the next price rebound with the last thing Moscow and Riyadh want -- another boom.

“Companies go bankrupt, but rocks don’t go bankrupt,” Yergin said in an interview. “When this all shakes out, there will be other people to develop shale.”

Noah Barrett also believes the growth engine of U.S. crude production will be humbled, but won’t flicker out. That’s because shale has extensive infrastructure that isn’t going anywhere.

“The resource is still there, the pipeline capacity, the processing capacity,” said Barrett, a Denver-based energy analyst at Janus Henderson Investors. “Those are still there.”

Even if predictions are correct, that overall American oil output will slide to 8 million or 9 million barrels a day, down about one-third from the current 13 million, the U.S. would still count among the world’s very top producers, Barrett said.

Bloomberg Intelligence is forecasting a more-modest production falloff of about 1.5 million barrels a day.

The weakest companies “will go into stronger hands,” said Vincent G. Piazza, BI’s senior oil analyst. “The industry is going to be in a lot better shape than in 2014-2016. The balance sheet is in a lot better shape. I wouldn’t underestimate the ability of this industry to re-create itself.”

Fereidun Fesharaki is a shale believer, too. The chairman of global energy consultant FGE said he also expects the price squeeze to force explorers to become more efficient and cost-competitive.

Still, any rays of optimism must penetrate a very dense, dark cloud. In the market cataclysm that’s still unfolding, crude and fuel prices around the world have sunk to levels not seen in nearly two decades.

As if by evil magic, the Covid-19 outbreak has chased tens of millions of people from streets, stores, factories and travel hubs, suddenly degrading demand for gasoline, jet fuel and diesel across the world’s largest economies.

Veteran crude analyst Roger Diwan expects global consumption to plunge by more than 14 million barrels a day -- the biggest demand shock since the birth of the oil age. The pipeline that hauls 60% of the East Coast’s gasoline supply from the Gulf Coast is cutting capacity by one-fifth. In Chicago, wholesale gasoline tumbled to 15 cents a gallon, the lowest since at least 1992.

The virus-driven calamity has been compounded by the disintegration earlier this month of the Russia-Saudi cooperation pact that capped global crude supplies. Because of the rapidly expanding worldwide glut of crude, a barrel of oil in some parts of Texas recently fetched about $16. In Canada, oil traded for less than $10.

The price plunge instantly made thousands of prospective shale sites money-losing propositions. Companies have been in such a hurry to cut losses that some have paid early-termination penalties on rigs and other gear to halt work before contracts are up.

Slashing Spending

Even Chevron Corp. is retrenching. The California giant, widely recognized as holding some of the richest acreage in the Permian, said Tuesday it was slashing spending by $4 billion and halting share buybacks to conserve cash.

In the final three months of 2019, nine explorers and six service companies filed for bankruptcy, according to Haynes and Boone LLC. That represented $13.5 billion in debt. This year’s churn is just getting started. Mizuho Securities analyst Paul Sankey expects as many as 70% of the 6,000 or so shale drillers to go bankrupt before the cycle turns.

But private-equity firms that swooped in to buy ailing explorers and tempting assets during the last bust won’t be able to unfurl a safety net this time. The buy-and-flip model that underpinned their foray into shale has disappeared, forcing those firms to become oilfield operators, which in turn means tapping their own credit facilities, said Ian Rainbolt, vice president of finance at Warwick Energy Group, the biggest owner of non-operated U.S. shale assets.

Only about one-third of the Permian and other U.S. fields count as sweet spots that can harvest oil profitably at $30 a barrel, he said. West Texas Intermediate traded at $21.42 on Friday.

“Private equity’s going to be out of the game,” Rainbolt said. “It’s a very, very tough fund-raising market.”

In the meantime, service providers -- the hired hands of the oil industry who do everything from stack steel pipes to frack wells -- will experience extreme pressure, along with the explorers who are demanding price cuts, said Stacey Morris, director of research at Alerian, an indexing and research company. Pipeline owners are somewhat insulated because oil and natural gas still need to be shipped to refiners and export terminals, she said.

Shale Threshold

“The market is going to be out of balance for quite some time,” Morris said.

Yergin, the confidante of oil ministers and chief executives, sees the threshold for reinvigorating shale between $50 and $60 a barrel. U.S. crude was trading above the $50 level as recently as Feb. 26.

“At $50, we’ll start to see a recovery and a step up in investment, so long as people feel safe about the price floor beneath them,” he said.

It’s funny that Yergin should put it that way. A big part of shale’s resilience lies in its unique geology. Unlike the so-called conventional fields in Saudi Arabia and Russia, North American shale is rock so dense that it doesn’t degrade or collapse on itself if oil production is interrupted. In other parts of the world, disrupting output can do irreversible damage.

That’s why the bulk of Chevron’s $4 billion spending cut will take place in the Permian, CEO Mike Wirth said Tuesday. It’s a rare field where production can be turned off almost instantly without adverse long-term impacts.

With shale, “the assets don’t go away because you haven’t destroyed the field,” said Ken Medlock, senior director of Rice University’s Center for Energy Studies. “We’ll see a thinning of the herd but the assets will still be there.”

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Oil Industry Experts Say Shale Will Rise Again

What happened to it, that it needs to rise, is it in trouble now?

Nothing like some Humble Pie to perhaps make this sector see sense, but even as its future lies in the hands of foreign players the arrogance prevails.

FACT- If the USA do not make fair market share cuts, the next meeting will be over quicker than the last one, two months has proved who blinked first and it was not Russia or KSA- Shales future lies in Americans hands correct, but those hands need to shake on a deal that was unthinkable to most two months ago.

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53 minutes ago, BenFranklin'sSpectacles said:

OPEC nations fall into chaos, and perhaps even actively stoking conflict

No secondary- and tertiaty-order consequences there?

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(edited)

https://www.newsweek.com/trumps-oil-diplomacy-probably-doomed-so-brace-10-barrel-opinion-1496178

Dont know if Newsweek is Liberal dont really care, Im looking at lots of pieces on this an all are pointing to the slant that Putin will favour with the Kingdom. Too many side deals for anyone to be sure.

Current state of play leverage is not the order of the day in anyway for this sector and concessions will be required from all parties, no-one is going to walk away from this with a beautiful deal........

Edited by James Regan
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(edited)

1 hour ago, BenFranklin'sSpectacles said:

Just spitballing:

Suppose there's no deal and prices stay low.  Shale production dips temporarily, but stabilizes the second oil prices rise, a la 2014-2016.  Shale workers suffer, the US loses its net exporter status, and OPEC retains some market share.  Most OPEC nations can't balance their budgets at these low prices, so allowing the market to run its course merely delays their inevitable decline while introducing price instability.  Overall, not a great result for the US. 

Suppose there's a deal and prices increase a bit.  Those prices still won't be high enough to stimulate much shale drilling.  The net benefit to shale workers would be negligible, the US would still likely lose its net exporter status, and US consumers would lose the benefit of ultra-low prices.  OPEC still experiences that long-term instability.  It doesn't seem like there's much in this for the US. 

Suppose there's no deal, but the US government decides to protect its market share.  This could be accomplished through a cocktail of tariffs, sanctions, waived regulations, fast-tracked project approvals, reduced royalties, low interest rates, letting OPEC nations fall into chaos, and perhaps even actively stoking conflict.  Prices would rise little more than if the US struck a deal with OPEC, except this time the US gains market share, protects shale workers, remains a net exporter, etc.  There's a lot for the US to like about this scenario. 

All of that said, does the US really need to strike a deal?  It seems to me that we hold all the cards.  Why not lend shale oil some support while letting OPEC producers fight among themselves?  It would be easy to keep the industry afloat until the dust settles. 

On that note, there's a ready-made conflict brewing in the Middle East: Iran keeps chucking missiles at US bases.  Meanwhile, the US appears to be withdrawing troops to Western Iraq.  From this location, it's more difficult for Iran to target US troops - but those troops remain perfectly capable of unleashing chaos.  I also noticed that Trump has ordered the military to prepare a plan for striking Iranian-backed terrorist groups.  What happens to Iraqi oil production if conflict erupts on its soil?  What happens to Saudi production if there are more attacks on its infrastructure?  Bad things, I imagine.  And we're one incident away from that happening. 

Now, if I were the intelligence agencies, generals, and elites planning such disruption, I'd want to do it with a minimum of damage to my own economies.  The problem in the past was that any disruption to Middle Eastern supplies would cause skyrocketing oil prices, upsetting The Voters.  Today, that seems not to be the case.  We have plenty of new production queued up, inventories are rapidly reaching their upper limits, there's a domestic industry to protect, citizens are distracted by a pandemic, and oil traders have been conditioned out of their old panicky habits by the Saudi infrastructure attack.  If there were a time to initiate Middle Eastern chaos, the next 2-3 months would be it. 

Maybe I'm missing something, but I don't see how the US walks away from this empty handed. 

Ben Very nicely written and a good take away - I think the deal should be a fair deal - History has shown us its never the case, perhaps this time as we are all having a reality attack history may prove us wrong, I hope so for everyone.

Edited by James Regan
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31 minutes ago, U_P said:

No secondary- and tertiaty-order consequences there?

As he said he was spitballing and putting it all on the table, that part jumped out to me also but I kept reading, I don't think he was wishing this at all. - No-one needs to walk away empty handed and Tit for Tat has only gotten us this far. Moral codes are hard to break but there does come to a point where rational thinking is required and any thoughts of domination should be focussed in other areas, with positive motives.

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2 hours ago, U_P said:

No secondary- and tertiaty-order consequences there?

Maybe.  My first guess is that those secondary and tertiary-order consequences would be mostly positive for the US.  The Middle East has been a PITA for 1400 years.  The fewer resources they command, the better off the rest of us tend to be. 

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2 hours ago, James Regan said:

As he said he was spitballing and putting it all on the table, that part jumped out to me also but I kept reading, I don't think he was wishing this at all.

I'm not wishing evil on the Middle East - but if they were on fire and I had water, I'd probably drink it. 

2 hours ago, James Regan said:

No-one needs to walk away empty handed and Tit for Tat has only gotten us this far. Moral codes are hard to break but there does come to a point where rational thinking is required and any thoughts of domination should be focused in other areas, with positive motives.

You make a good point here, but moral codes have practical consequences.  If we underestimate the depths to which our opponents will sink, we may not survive those consequences.  I.e. our "moral code" must allow us to adjust our behavior according to who we're fighting. 

I learned something interesting in war: the laws of war are mostly self-enforced courtesies.  We don't do certain things because we don't want to live in the world those actions produce.  E.g. you usually don't have to tell soldiers not to torture and kill prisoners because they'd prefer to be afforded the same courtesy.  A good way to model this is the repeated prisoner's dilemma: the prisoners will interact with each other many times, giving each the opportunity to learn from and respond to the other's behavior.  This changes the optimal strategy. 

What is the optimal strategy?  As it turns out, there's such a thing as a "dominant" strategy: a strategy that is optimal regardless of how your opponent plays.  It also turns out that tit-for-tat is a dominant strategy - which is interesting given the negative connotations associated with it.  This disagreement between fact and connotation deserves further thought. 

What, exactly, is tit-for-tat?  The connotation is that when our opponent harms us, we harm them.  The resulting mental image is two opponents constantly fighting when they could be cooperating.  This image is incorrect.  Tit-for-tat means we mirror our opponents behavior, good or bad.  When they harm us, we harm them back - but when they do good to us, we do good as well.  Tit-for-tat is always optimal, or dominant, because it protects us from bad actors while providing everyone an incentive to cooperate.  I.e. tit-for-tat works regardless of who we're dealing with.  If your opponent has half a brain, they'll figure out what you're doing and behave themselves. 

Why, then, has tit-for-tat caused so much trouble with the Middle East?  They don't cooperate.  To put the Middle East into perspective, I'll offer you the last piece of advice we were given before entering Iraq:

"If you find yourself in a situation where you'll be captured, fight to the death or save the last bullet for yourself - because they're just gonna cut your head off." 

I'm all for cooperation, but the current Middle Eastern culture doesn't give us much to work with.  They've been causing trouble for centuries, there's no reasonable expectation of them changing, and the world has learned to deal with them accordingly.  It is what it is. 

Rather than criticizing US behavior in the Middle East, I think people should consider what would happen if the US were less forceful.  History suggests a gentler approach would end poorly.  Thus, I'd argue that tit-for-tat is the worst strategy in the Middle East - except all the others that have been tried.  I.e. until the Middle East changes, the current violent mess is as good as the region will get. 

That brings us to wishing harm to others.  When you deal with a culture that is persistently belligerent, exports extremism, constantly causes violence, and generally creates a world we don't want to live in, it must be contained.  If that requires force, then it requires force.  If that culture poses a sufficient threat, then its opponents are morally justified in eradicating it entirely.  E.g. the world had no qualms about laying waste to Nazi Germany.  The question is not whether there are moral justifications for eradicating a culture, but whether a particular culture requires such action. 

Now we can answer the original questions:
1) Do I wish harm on the Middle East?  No.  I don't care about the Middle East enough for that. 
2) Would I use force to strip them of resources, thereby containing their violent ideology and protecting the innocent?  Yes.  I think they're a danger to others, and until their culture changes, they shouldn't be trusted with wealth or power. 

In other words, I try not to be vindictive - but I am ruthlessly practical. 

"There are some people who think you have to hate them in order to shoot them. I don’t think you do."
"
There are some assholes in the world that just need to be shot."
--- General James Mattis, USMC

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“Suppose there's no deal and prices stay low.  Shale production dips temporarily, but stabilizes the second oil prices rise, a la 2014-2016.”

So let’s see....most of the rigs in shale country will shortly be stacked if the present scenario continues. Same with the frack spreads. The experienced people who know how to run this stuff are gone.

Then you have those nasty decline curves on any wells you open up. You can’t drill any new wells to take advantage of the initial production rates to maintain any production plateau - as you don’t have any people to crew the mothballed rigs and frack spreads!

So tell me again how the shale boys will bounce back from a ‘temporary’ dip in production, raise production and then stabilize that production? 

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(edited)

11 hours ago, James Regan said:

As he said he was spitballing and putting it all on the table, that part jumped out to me also but I kept reading, I don't think he was wishing this at all. - No-one needs to walk away empty handed and Tit for Tat has only gotten us this far. Moral

I guess I assumed that we would try to not to go down the same road of death and destruction, but its very much on the table. The point as often the case becomes driven by personal experiences and this cannot be argued against and the point should be excepted as its a strong view, and right or wrong becomes a wasted argument, "beauty is in the eye of the beholder etc"..

9 hours ago, BenFranklin'sSpectacles said:

Maybe.  My first guess is that those secondary and tertiary-order consequences would be mostly positive for the US.  The Middle East has been a PITA for 1400 years.  The fewer resources they command, the better off the rest of us tend to be. 

In the same vein the United Kingdom had been plundering the world for said resources and many many others, it did make us a Great Britain but didn't really do us well in the end, theres a good lesson there.

On the flip side the USA is 1000+ years younger and has surpassed all others in foreign meddling and military operations especially for the thirst of oil. Why spend Trillions fighting over sand for a resource that is in abundance at home? Spend those funds on technology to extract said resource, would save a lot of time and lives.

Time for  reset something isn't working in this formulae , when said resources don't require to be fought over as they are in said countries frontiers, surely a share deal is better than an oil war which once again will turn into warfare for real (Would have used the word Conventional but thats off the table also), ie large exploding devices propagating more death and destruction  a la "Tit for Tat' and the cycle continues...

Edited by James Regan

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Look at the article following this. Apparently we are now testing tigers for the virus!😂

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1 hour ago, James Regan said:

The point as often the case becomes driven by personal experiences and this cannot be argued against and the point should be excepted as its a strong view, and right or wrong becomes a wasted argument, "beauty is in the eye of the beholder etc"..

Perhaps.  I would argue that there are sufficiently objective metrics for what constitutes "good" or "bad" behavior.  E.g. most of us agree that the murder of journalists and oppression of women is bad.  For the relativists out there, I would argue there are behaviors I would sooner oppose violently than live with.  That's just my personal preference.

 

1 hour ago, James Regan said:

In the same vein the United Kingdom had been plundering the world for said resources and many many others, it did make us a Great Britain but didn't really do us well in the end, theres a good lesson there.

The difference is that the countries Britain "plundered" tended to end up wealthier, healthier, and more technologically advanced than Britain found them.  At least, that was the case when natives embraced what Britain had to offer.  Those who suffered tended to do so because of their own failures - not Britain's.  Unfortunately, historians have decided to ignore these details in favor of an anti-Western view. 

 

1 hour ago, James Regan said:

Why spend Trillions fighting over sand for a resource that is in abundance at home? Spend those funds on technology to extract said resource, would save a lot of time and lives.

Agreed.  It's now cheaper to either produce domestically or wean ourselves off the stuff.  We should do so. 

 

1 hour ago, James Regan said:

Time for  reset something isn't working in this formulae , when said resources don't require to be fought over as they are in said countries frontiers, surely a share deal is better than an oil war which once again will turn into warfare for real (Would have used the word Conventional but thats off the table also), ie large exploding devices propagating more death and destruction  a la "Tit for Tat' and the cycle continues...

Tit-for-tat allows a third option: walking away.  My argument is not that the US should try to dominate the Middle East, but that we should exclude them from Western markets until they learn to behave.  I think the sanctions on Iran are a great example of this.  Rather than starting a hot war, we simply cut them off.  The financial pain they're suffering is sufficient retaliation.

It would be nice to apply the same approach to other OPEC producers, but does a legal mechanism exist to do so?  How many sanctions can the US impose before our allies rebel?  Will wealthy people with financial interests attempt to torpedo non-violent approaches?  If the non-violent route can't get the job done, the only option may be to sow some chaos.  That's less than ideal, but ultimately better than dependence on undependable countries. 

I agree with you in principle that non-violent, mutually-beneficial relationships are preferred; the question is whether that can be done in the Middle East.  A cursory look at 1400 years of Middle Eastern history leaves me in doubt. 

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(edited)

Okay, murdering journalists (assuming you could even find a ‘real’ one) is bad. Tar and feathering the so-called journalists who do nothing but play spin doctor or spout biased mantra without simply reporting the news to the people and letting them make up their own minds - not so bad.

Edited by Douglas Buckland
Ghh
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9 hours ago, Douglas Buckland said:

“Suppose there's no deal and prices stay low.  Shale production dips temporarily, but stabilizes the second oil prices rise, a la 2014-2016.”

So let’s see....most of the rigs in shale country will shortly be stacked if the present scenario continues. Same with the frack spreads. The experienced people who know how to run this stuff are gone.

Then you have those nasty decline curves on any wells you open up. You can’t drill any new wells to take advantage of the initial production rates to maintain any production plateau - as you don’t have any people to crew the mothballed rigs and frack spreads!

So tell me again how the shale boys will bounce back from a ‘temporary’ dip in production, raise production and then stabilize that production? 

I think it depends on how they are flowing the wells now.  I have noticed that the new wells are being tested at high IP levels but then after that they choke them back and produce them at significantly lower levels.  For example, a first month well that has a 1400 bbl/day IP for oil will be allowed to produce 25kbbl the first month but there after it produces 15k consistently for the next 5 months.  They are flattening the curve if you will by pushing the production out on a longer time scale.  As long as they can extract the same amount of oil per well, it's fine and a better way to manage the production.

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But if you need money, can you afford to choke back production?

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2 hours ago, wrs said:

I think it depends on how they are flowing the wells now.  I have noticed that the new wells are being tested at high IP levels but then after that they choke them back and produce them at significantly lower levels.  For example, a first month well that has a 1400 bbl/day IP for oil will be allowed to produce 25kbbl the first month but there after it produces 15k consistently for the next 5 months.  They are flattening the curve if you will by pushing the production out on a longer time scale.  As long as they can extract the same amount of oil per well, it's fine and a better way to manage the production.

I knew wells could be shut off, but I didn't know they could be throttled.  I read somewhere that shale wells use natural pressure to lift the oil and, therefore, do not require pumps.  Is that true?  If so, is that why it's possible to throttle them?  Or is throttling achieved by simply installing a smaller, cheaper pump? 

 

1 hour ago, Douglas Buckland said:

But if you need money, can you afford to choke back production?

Would investors allow deferred payment?  Given a choice between liquidating the assets for pennies on the dollar today and payment in full when the crisis is over, would they not take payment in full when the crisis is over?  Interest rates are low these days, so the delay might cost them less than bankruptcies. 

 

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1 hour ago, BenFranklin'sSpectacles said:

knew wells could be shut off, but I didn't know they could be throttled.  I read somewhere that shale wells use natural pressure to lift the oil and, therefore, do not require pumps.  Is that true?  If so, is that why it's possible to throttle them?  Or is throttling achieved by simply installing a smaller, cheaper pump? 

Normally in the conventional side any well is often choked to preserve the life time of the well, ie like running your Mustang you thrash it it will fail quicker. The lifting of oil comes in many forms, by Injecting water, gas, natural reservoir pressure (normally choked) and electric pumps. Pump life/failure is the main reason for working over an electric pump lift well, ie recover down hole pump and tubing and change out, add new cable etc.

There are a lot smarter guys than me on this whom I sure would love to embellish.

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2 hours ago, BenFranklin'sSpectacles said:

I knew wells could be shut off, but I didn't know they could be throttled.  I read somewhere that shale wells use natural pressure to lift the oil and, therefore, do not require pumps.  Is that true?  If so, is that why it's possible to throttle them?  Or is throttling achieved by simply installing a smaller, cheaper pump? 

Yes, they use formation pressure and sometimes gas-lift which reinjects gas from the well back into the well bore.  The effect is to reduce the weight of the column and thus allow the fluids to come to the top more easily.  In any case, there are no pumps on shale wells, they are too deep for that technology to work.  The throttling comes from limiting the choke which is a valve that the flow passes through at the wellhead before it enters the separators.  So as the valve is closed more, less product comes out.  The flow may need some adjustment after the choke is restricted, I am not sure what that entails but I don't think it's a lot of effort.  

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3 hours ago, Douglas Buckland said:

But if you need money, can you afford to choke back production?

Well if you are spending more to get it out than it gets you in revenue, then you are not going to pay down debt or bills, you are simply throwing good money after bad.

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(edited)

TVD is 9000 to 11000 and MVD is around 14000-15000 for a 4-5k lateral.  MVD is the sum of the horizontal and vertical bores.

Edited by wrs
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2 hours ago, wrs said:

TVD is 9000 to 11000 and MVD is around 14000-15000 for a 4-5k lateral.  MVD is the sum of the horizontal and vertical bores.

Thanks I just learnt something Ive never heard it called  MVD before we always referred to it as TD Total Depth. What does the V stand for in MVD is in not the same as your TVD? Mind you I have been away from a drill floor for a while it may be a Shale Term.

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18 minutes ago, James Regan said:

Thanks I just learnt something Ive never heard it called  MVD before we always referred to it as TD Total Depth. What does the V stand for in MVD is in not the same as your TVD? Mind you I have been away from a drill floor for a while it may be a Shale Term.

There is no such thing as MVD. Its TD, TVD and/or TMD. In a horizontal well from the KB (kelly bushing) to the lateral toe, in feet, is TMD, total measured depth.

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