Industry Trend Analysis - More Drilling Needed To Drive Shale Growth - DEC 2017

BMI View: Deepening decline rates will offset production growth across the shale patch. In the absence of both stronger price gains and widespread technological deployment, the current pace of development will moderate growth over 2018.

The production recovery in the shale patch is facing significant headwinds. After returning to y-o-y growth in Q217, crude production from unconventional deposits has grown by over 300,000b/d, reaching an estimated 5.58mn b/d in September. This has been largely achieved by employing advanced completion techniques at new wells, which involves increasing the density of frac stages while pumping larger volumes of proppant and water per stage. This boosted initial production (IP) rates, generating upside across the shale patch.

However, we caution that while enhanced recovery techniques have increased initial flows by upwards of 30% within some wells, drilling activity must accelerate in order to offset decline and add to production. Given our outlook for a more tempered oil price increase next year, there is risk that further cost inflation could temper development outside of core acreage within a shale play.

Diverging Trends
Production and Decline Rates In Select Shale Plays, 000b/d

We previously highlighted the ways in which shale producers can offset the effects of rising service costs ( see ' How Shale Is Coping With Cost Inflation ' , August 3). These include more efficient drilling techniques, more effective completions and improved logistics to and from a drilling site. With these methods now employed throughout the sector to varying degrees, we caution that upside to cost efficiency is reaching a limit.

This is illustrated by the fall in rig productivity exhibited across nearly all of the major crude producing plays, despite an increase in the rig count y-o-y. The Bakken was the only region to experience an increase in productivity due to a slower y-o-y increase in active rigs relative to the other plays. With output having risen over the past several months, a lower rig count makes each unit appear more efficient.

Rig Productivity Is Tappering Off
Crude Production per Rig, b/d
Source: EIA

Well breakeven costs vary widely, both across and within each of the major oil-producing plays. For example, the average full-cycle breakeven of a well in the Permian can cost anywhere from USD45/bbl to over USD80/bbl, depending on its location. Given our forecast for WTI to average USD54/bbl in 2018, this implies that development beyond the five core counties with the lowest breakeven costs - Howard, Martin, Midland, Loving and Reeves - will be limited.

With respect to high grading, or the practice of focusing investment into the most profitable acreage, this is exhaustible, given issues around well spacing and interference. We therefore believe a higher oil price will be necessary to expand development zones that can generate enough production to offset decline rates and generate stronger growth. This is unlikely to happen before 2019, given our current price forecast ( see ' Brent: Shifting From Bear To Bull ' , October 5).

The deployment of more advanced technologies poses upside risk to our outlook. Further progress in the drilling and completion space could increase ultimate recovery rates per well, reducing the need to expand beyond core acreage. However, we caution that any such plan will likely take an extended period of time to be realised, given the challenges associated with testing, assessing and implementing new equipment on a large-scale.

This informs our more modest growth outlook with respect to shale production. We forecast annual average shale growth of 220,000b/d for 2018, which is significantly below consensus. Upside will be driven by the Permian play, where vertically-stacked acreage continues to attract the bulk of upstream investment.