Falling oil prices will have an uneven effect across US unconventional plays based on the qualities of reservoirs within any given play, Gaffney Cline & Associates (GCA) said in a recent report, noting there exists a complex relationship between the pace of shale production and falling futures prices for light, sweet crude oil.
“Oil prices in the low-to-mid $80/bbl range will allow a lot of US unconventional oil activity to continue, but a further drop could start to have a significant impact on the market and industries associated with it,” writes Bob George, GCA executive director and senior strategic advisor.
In an article that George wrote with Neil Abdalla, GCA senior geoscientist, they noted sliding oil prices have yet to reveal a direct negative effect on US unconventional oil and liquids production, which currently stands at 5 million b/d and represented 95% of US liquids growth during 2011–2013.
With more than half of the 9 million b/d of liquids produced in October coming from unconventional plays, George and Abdalla examined whether current drilling activity can likely be sustained and whether production growth can be maintained if oil prices continue to fall.
“While no one can be sure where oil prices are headed, it is crucial for any company exposed to unconventional production and economics to understand exactly what the range of outcomes of their investments could be,” George said.
Variations within plays
Shale projects are expensive to develop. Unlike most conventional oil and gas projects, unconventional formations require continuous drilling to maintain or grow production levels. GCA examined publicly available data from 3,000 wells drilled during 2011–2013 on the Eagle Ford play in South Texas.
Noting that “sweet-spot areas” are still viable at current prices,” George and Abdalla also said that “the heterogeneity of the rock means that this outcome can’t be extrapolated to the entire play.”
The Eagle Ford example also indicated that while falling oil prices can slow drilling rates, many other factors also influence an operator’s strategy regarding whether to sustain activity level, including improving drilling efficiency, they said.
Their analysis found operators working in areas of favorable geology and reservoir properties were likely to continue operations as they have been doing and remain above the economic threshold even at an oil price of $70/bbl.
However, this might not be the case for companies operating outside of these sweet spots or in basins where production performance and the net-back value of oil is much lower, they said. Those companies “are more likely to feel the pinch, leading to marginal or negative economics for wells drilled at $80/bbl oil and in some places even up to $100/bbl.”
George and Abdalla said that many small to midsized operators have shifted their assets to an essentially “pure play” unconventional focus, which requires large amounts of sustained capital expenditure to keep production output constant. “Initial production declines associated with unconventional wells typically vary from 80% to 90% in the first year,” they said.
Large variability in individual well performance means that internal rates of return can vary significantly.
“Tens of billions of dollars has been invested in unconventionals by all sectors of the oil and gas industry across the US,” Abdalla said. “This analysis on Eagle Ford activity levels and production output can be readily extrapolated to other US onshore unconventional basins.”