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Permalink Reply by Skip Peel - Mineral Consultant on January 8, 2015 at 4:49

Oil production will be falling by end of 2015

reuters.com Wed, Jan 7 2015  By John Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Jan 7 (Reuters) - Unless prices recover, U.S. oil production will start falling before the end of 2015 as new drilling is insufficient to replace declining output from wells completed in 2013 and 2014.

Future production depends on the rate of decline from existing wells (known as the decline curve) and the average age of old oil wells as well as the number of new ones drilled and their productivity.

Decline curves for typical shale wells in the Bakken, the Permian Basin and the Eagle Ford are all widely available on the internet, as are basic data on the number of wells in each play and their approximate age.

In the short term, U.S. oil production is set to continue rising because there is still a backlog of wells waiting for fracturing crews and completion after the record drilling during the first ten months of 2014.

In North Dakota, for example, there were around 650 wells waiting on completion services at the end of October 2014 because drillers had outpaced completion crews, according to the state's Department of Mineral Resources.

As these wells are completed, there will be a significant increase in reported output because newly completed wells yield extremely high rates of production in the first few days and months after starting to flow.

But as the backlog is cleared, production will plateau and then start to fall, as new drilling and completions fails to keep up with the declining output from older wells.

RECENTLY DRILLED WELLS

Daily production from a typical Bakken well falls by around 65 percent by the end of the first year, then another 35 percent by the end of the second, 15 percent by the end of the third, and around 10 percent per year thereafter, according to state regulators (link.reuters.com/kup73w).

There are currently around 8,600 wells producing from the Bakken shale, of which more than 2,000 were drilled and completed in 2014, with another 1700 dating from 2013 and 1700 dating from 2012.

Almost a quarter of Bakken wells are under a year old and their output is set to decline by as much as two-thirds in the year ahead.

In total, more than half the wells in the Bakken are less than three years old, and these rapidly declining wells account for the vast majority of oil output (link.reuters.com/nup73w).

To replace the declining production from this large inventory of recent wells, companies would need to drill more than 2,000 new wells in 2015.

But drilling rates have already started to fall sharply and the number of new wells will fall far short of the replacement rate unless oil prices improve.

The number of rigs active in the state has fallen to just 169, down from 191 in October, according to the Department of Mineral Resources.

Further declines in drilling are virtually certain in the months ahead as rig crews come to the end of their existing contracts.

CASH CONSERVATION

Sweet crude from the Bakken fetched less than $32 per barrel on Jan 6, and sour crudes were worth less than $23, according to posted prices from Plains Marketing.

At these price levels, there are no parts of the Bakken, whether in the core areas of the play or on the periphery, where drilling new wells makes financial sense.

Most of the small and medium-sized independent oil producing firms which dominate shale plays rely on borrowing to fund new wells and already carry a high debt burden.

The imperative in the current environment will be to conserve as much cash as possible by limiting the cost of new drilling and abandoning plans to drill wells which are not profitable (which is most of them at current prices).

The same pattern is repeated with only minor differences in the Permian Basin and Eagle Ford in Texas, the two other major shale plays.

In both, there are large stocks of relatively young and rapidly declining oil wells drilled in 2013 and 2014. Meanwhile rigs are being idled as small debt-laden exploration and production companies try to conserve cash.

Across the United States, oil production has surged by more than 3 million barrels per day in the last four years and by more than 2 million in the last two years alone.

But almost all of that production increase has come from recently fractured shale wells which are now declining rapidly and must be replaced to sustain let alone grow output.

However, drilling rates are plummeting. The industry has idled almost 130 oil-directed rigs (8 percent of the total) since Oct 10, according to oilfield services company Baker Hughes.

Oil-directed rigs are being idled at the fastest rate since the financial crisis in 2009 and before than 1991 and 1988, and hundreds more will be taken out of service in the next few months.

The net result is that production will be declining month on month by the end of the year, though in the next few months it might continue increasing.

PRODUCTIVITY AND COSTS

Some analysts have questioned whether U.S. oil output will indeed fall, arguing improvements in drilling and well productivity will offset the smaller number of rigs operating and wells drilled.

That seems implausible. Given the large stock of comparatively new wells, rapid decline rates, and sharp drop in rigs operating, a truly enormous improvement in productivity would be needed to keep production flat let alone on a rising trend.

Costs will come down as the price of everything from rig hire to fracking sand and contractor rates are renegotiated. But it would need an epic reduction in costs to make shale oil profitable at less than $45 per barrel in Texas and Oklahoma and $35 per barrel in North Dakota.

Analysts with an optimistic view about production (and a bearish view on prices) can point to two important examples where output was flat or continued to increase despite steep price falls.

In 2009, oil output in North Dakota and the United States flattened though it did not fall much in response to plummeting prices amid the financial crisis and recession and a slowdown in new drilling.

And U.S. natural gas production has continued to rise each year since 2008 despite the depressed level of gas prices and the number of gas-directed rigs falling by more than three-quarters.

Neither of these cases should provide much comfort, however. In 2009, the inventory of recently drilled shale wells was small, less than a thousand, accounting for just a fraction of national oil output, and prices rebounded very quickly.

U.S. gas production has been sustained despite low prices and a fall in the number of gas-directed rigs because of the huge increase in associated gas output from oil wells.

U.S. gas production been sustained by the oil boom. Shale oil producers have no such support. On balance, it is more likely than not that U.S. oil output will be declining by the end of the year unless prices rise from current levels. (Editing by William Hardy)

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Permalink Reply by Skip Peel - Mineral Consultant on January 8, 2015 at 6:41

Sound familiar?

ROGERSVILLE SHALE COULD BE EASTERN KY.'S FIRST MAJOR PLAY, OBSERVERS SAY

wfpl.org  By Erica Peterson   January 6, 2015

Excerpt.

Speculation has begun in Eastern Kentucky about a potentially large reserve of oil and natural gas trapped about two miles underground. If the Rogersville Shale is proven productive, it would be the region’s first major oil and gas play. This has excited the industry, but some residents are worried about the toll large-scale oil and gas production would take on human health and the environment.

The Rogersville Shale is a Cambrian-age formation that lies under much of Eastern Kentucky and extends into West Virginia. Two test wells have already been drilled: one in Lawrence County, and another in Putnam County, West Virginia. But Dave Harris of the Kentucky Geological Survey said because the operators have drilled the wells under a special provision called a ‘stratographic test permit,’ the results are confidential.

“It is a potentially productive formation, we just don’t know how much oil and gas,” he said. “No results have been announced, we don’t have any flow rates or production data yet to indicate exactly how prolific this formation might be.”

Link to full article:    http://wfpl.org/fracking-coming-cumberlands/

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Permalink Reply by Hopeful About Natural Gas on January 8, 2015 at 9:17

Sounds very familiar - more O&G. Iin the long run too much O&G has been found around the world that fracking can extract to be ignored. There are problems (earthquakes? methane leaks? pollution?) I'd like to see the industry do a better job of being on the leading edge of responding to these rather than let fear mongers scare the public.

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Permalink Reply by Skip Peel - Mineral Consultant on January 8, 2015 at 10:30

Hang, the earthquakes are minor and limited to certain areas...and it is not fracking related.  In fact the bulk of the produced water (and it ain't much relative to the total produced from conventional reservoirs) associated with horizontal wells is frac flow back.  Unconventional reservoirs don't have much water in them compared to conventional reservoirs.  For example, the stripper wells in Caddo Pine Island Field produce hundreds of barrels of salt water for every one barrel of oil....and that's a good well.  The bulk of historic CV wells (vertical completions) produce lots of water.  That's why there was about a thousand disposal wells in NW LA before the first horizontal well was ever drilled.  In short, it's minor, it's isolated and it's related to injection wells and not fracking. 

Now the industry has a lot of shortcomings but we hardly ever discuss them specifically.  Methane leaks are indeed one and should be addressed but it's not on the top of the list.  Abandoned wells, many of which are "orphaned" (the operating company has gone out of business) are a looming problem hundreds of times more potentially polluting and in a much more serious manner than the total volume of methane leaking from wells and associated infrastructure.

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