U.S. Shale Oil Will Inevitably Decline - It's Already Starting

Nick Cunningham gets it right again.  Happy to see this as the lead story right now about Oil and Gas.  I've commented about this repeatedly in the past, and the decline rates of U.S. Shale Oil are getting to the point of being unable to be ignored.

U.S. Shale’s Glory Days Are Numbered

There are some early signs that the U.S. shale industry is starting to show its age, with depletion rates on the rise.

A study from Wood Mackenzie found that some wells in the Permian Wolfcamp were suffering from decline rates at or above 15 percent after five years, much higher than the 5 to 10 percent originally anticipated. “If you were expecting a well to hit the normal 6 or 8 percent after five years, and you start seeing a 12 percent decline, this becomes more of a reserves issue than an economics issue,” said R.T. Dukes, a director at industry consultant Wood Mackenzie Ltd., according to Bloomberg. As a result, “you have to grow activity year over year, or it gets harder and harder to offset declines.”

Moreover, shale wells fizzle out much faster than major offshore oil fields, which is significant because the boom in shale drilling over the past few years means that there is more depletion in absolute terms than ever before. A slowdown in drilling will mean that depletion starts to become a serious problem.

... Put another way, depletion will become “a greater theme” in the future, so companies that are sitting on assets that deplete quickly will fall out of favor. Those that can stave off declines will fare much better.

The investment bank still expects U.S. shale to add around 1 million barrels per day each year through 2021 at least. But with early signs of strain, limits on productivity and steeper decline rates, it is clear that the industry’s glory days are numbered.

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The old Red Queen Effect 

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Did I miss the bit about many of the fracking companies soon having to make debt repayments they can't afford? Or is everyone just expecting the USA government to bail them out with subsidised loans, that will never be fully paid back.

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Nick's writing is usually quite good - not this time. Unless objective was to show depth of misunderstanding of the industry by likes of Wood Mac & Goldman. 15% pa decline (after ~85% decline in first three years) - gimme a break... If ROI isn't positive by then - it never will. They just don't get it, applying conventional mindset to a very different game.

Art Berman called shale industry "a retirement party" - you know days are numbered...

Wells can be produced profitably, just now with almost $100K/acre and blind "statistical" approach. In other words - a lot of companies will loose a lot of money.

 

 

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