The shale revolution is transitioning into a manufacturing stage where production can be turned on and off based on minor price fluctuations.
6/1 – Donald Luskin and Michael Warren at Wall Street Journal – The Shale Boom Shifts Into High Gear / Oil production is becoming a modern manufacturing process, with frackers using the ‘just-in-time’ approach
Think of it as Moore’s Law applied to oil production.
Combine two factors, increased efficiencies and rapid depletion.
Ten thousand wells in Bakken and I don’t know how many thousands of wells in Marcellus, Eagle Ford, and Permian have given hundreds of companies vast experience at efficiently guiding a well bit through a 100 foot thick layer of shale for 10,000 horizontal feet.
The authors’ description:
The ability to keep the drill bit in the middle of the formation has required improved 3-D seismic research and ever-increasing advances in telemetry and remote guidance, to locate and drain a productive area. It’s like learning to pilot a drone flying two miles underground, and through rock. It was difficult and expensive at first. Now it is known art.
It is still amazing to me: keeping a drill bit centered in a thin layer of drifting rock when the bit is 10,000 feet down and 10,000 feet out. Doing so is now second nature for a lot of drillers.
That skill combined with pressure of dropping crude prices is creating efficiency gains on the cost side and productivity gains on the output side.
Combined effect of those pressures mean that a lot of producers have better margins at $65 a barrel now that at $95 a few years ago, according to the authors.
Rapid depletion as a feature
Now consider what has been the downside of shale oil: the rapid depletion rate. Rough picture is that around half of a well’s production will be drawn out in the first year and another 20% or 25% in year two. That means somewhere in the rough neighborhood of 75% of production will be in the first two years with the remainder spread over the next two decades.
That actually is a favorable feature – you get most of your money back in two years. That is a super-fast recovery of investment. Ultimate profitability isn’t dependent on prices 10 and 20 years from now.
Look at the authors’ concise contrast with traditional drilling:
Capacity across a diversified portfolio of wells can be turned on when future prices justify it, and off when they don’t. That turns upside-down the traditional model of oil megaprojects that require billions in upfront capital, years of lead time, and always-on production irrespective of price.
Shale oil drillers are hyper nimble compared to traditional oil.
The authors suggest we are now at the point drillers can drill when the expected market conditions in the next 24 months justify doing so. And make a sweet profit.
Amazing change of view this creates is that oil production can now be on-and-off. Today’s prices, today’s demand, expected prices for the next two years, and expected demand for the next two years can increase or decrease production with a few months lead time.
Check out the full article. It is superb.
Peak Oil is still dead
Oh, and this is yet one more round of proof of the foolishness of “peak oil.” Don’t bet against human ingenuity.
The authors’ comment:
Now Hubbert’s Curve has been trumped by Moore’s Law.