US shale’s resilience touted despite output decline: Fuel for Thought

Last week’s announcement by US company Apache of a major find in West Texas’ Permian Basin seemed to vindicate the optimism about shale heard the previous week at a conference in Norway.

Scott Douglas Sheffield, chief executive of shale driller Pioneer Natural Resources, played the role of spoiler-in-chief at the ONS conference, harrying big oil with some uncomfortable assertions.

The bad news, for those in the industry who missed out on shale and expected it to fade with low prices, is that the Permian should be able to increase its output from 2 million b/d to 5 million b/d in the next 10 years, assuming prices reach $56/b in 2025, Sheffield said.

Pioneer itself is growing its output by 27-30% annually. “It’s in that [price] strip that I see the Permian adding 300,000 b/d per year in US supply,” he said.

Emphasizing his contrarian stance, he said he doubted some of the higher forecasts of long-term oil demand growth due to global warming, alternative energy and electric vehicles, while boasting of the company’s use of wind power in its own operations and the solar panels on his home.

In Sheffield’s view, the dip in US production has been misconstrued, with some underestimating the Permian as output falters in the Eagle Ford and the Bakken.

What some have failed to appreciate is that rig reductions in the Permian have happened partly because of reduced drilling at conventional, non-shale sites, rather than in shale, he said. The Spraberry-Wolfcamp shale, where Pioneer operates, remains resilient and Pioneer’s own breakeven price is below $25/b. Prices paid for shale acreage have been rising, in some cases, to levels higher than in 2013-2014, he said.

“In the Permian we still have about 600,000 b/d of conventional production that’s declining—it’s arresting the growth. [However] there’s one field in the Midland basin, six fields in the Delaware basin that make up most of the growth in production. The Permian is still growing,” he said.

Majors needed to meet demand growth

But while the world’s oil majors were largely caught off guard by shale and have been struggling to maintain a foothold in many parts of the world, Shell chief executive Ben van Beurden insisted on their relevance, reiterating the International Energy Agency’s central scenario for a 25% increase in energy demand by 2035 and predictions of oil demand growth of 1-1.5 million b/d for the next five years.

That, together with decline from existing fields of 5%/year, means the notion of stranded assets, by which oil and gas become redundant, is a “red herring,” he said.

The industry is now filling the gap between demand growth and natural decline “quite comfortably, with all the investment decisions that we took four-five years ago. [But] that time will dry up,” Van Beurden said. “We will see the tightness come back into the market. I’m more worried about supply shrinkage.”

If Shell is sticking with its big-project mentality, and worries some investors with its high debt levels, one man hedging his bets is ConocoPhillips chief executive Ryan Lance.

His company has made the leap into US shale, while maintaining a core of conventional operations. Of its 1.5 million boe/d of production, ConocoPhillips says one third is from unusually low-decline fields such as Norway’s Ekofisk, while it has increased its US production by 80% since 2008.

ConocoPhillips’ approach resembles that of Apache, which thinks its new Delaware Basin play could hold more than 3 billion barrels of oil and 75 Tcf of gas.

With no refining segment to worry about (Conoco hived off its downstream in 2012), both companies have a foot in shale and another a world away in the North Sea.

“We can see short-term swings between over- and under-supply: if $80-90/b comes, we’d better be prepared for $30-40 on the back end of it,” Lance said.

While the US shale industry will take time to recover, not least having lain off 200,000 workers, “we’ll see gaps between supply and demand and if so, more US shale is going to be called on to meet that growing demand,” he said.

Lance acknowledged concerns about energy demand, but said that was an argument in favor of shale and its flexibility.

“When we think about going forward in a more volatile world with cyclic prices and shorter cycles between peaks and troughs you start to ask yourself what wins in that...environment. What we’ve convinced ourselves wins is a large stable base of production which provides the cash flow to fund dividends and stabilize your production, and then a lot of low cost investments in the portfolio that have a range of cycle times.”