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Geology over technology: Bernstein warns of limits to shale production bonanza

Manyof America's oil and gas producers are expecting greater production returnsfrom longer lateral lengths when they drill in unconventional plays. They couldbe in for a rude awakening, however, as returns from the Barnett Shale indicatethat longer laterals have not translated into greater production totals.

Anew report from Bernstein Research said there is "no evidence of improveddecline" in the Barnett Shale when longer lateral lengths are used. Thefirm indicated that lateral lengths have increased since 2003 from 2,000 feetto as much as 5,000 feet in the third quarter of 2015. The average peak ratedeclined, however, from 450 boe/d in early 2003 to less than 350 boe/d in thefirst quarter of 2016.

"Increasinglateral length hurts all horizontal well performance as frictional lossesincrease and in the Barnett, optimal well length was determined by balancingreduction of fixed costs with reduced incremental production," Bernsteinsaid. "Even correcting for lateral length, Barnett wells got worse withtime. The E&P narrative is that a revolution in technology of improvedcompletions (more sand, water, clusters, geo-steering, landing, etc.) ispushing down the cost curve. Yet we fail to see it in the most complete datarecord we have."

Unconventionaldrillers still are optimistic about the results they anticipate, though. Duringa recent speech at a Deloitte conference in Houston, CEOScott Sheffield said his company expected to benefit from the surge inunconventional production in the Permian Basin.

"Forthe last 70 years, we've been going after this dirty sandstone that used toprovide wells producing 100 barrels per day," he said. "Now, we'regoing after the source rock, and we're getting wells that are producing 2,000barrels per day."

Sheffieldwent on to say that he believes production in the Permian, which is currentlyaround 2 million barrels per day, could increase to as much as 5 MMbbl/d by2025. One of the reasons for that expectation was the belief that technologicalimprovements, including the use of longer laterals in horizontal drilling,would lead to improved production totals.

Bernsteincontended, however, that "operators couldn't overcome geology," andthe same rules that have applied to drilling historically still apply tounconventional producers: there are only so many high quality locations with alimited amount of oil and gas.

"Webelieve that the Barnett shale offers compelling evidence that technologyimprovements ultimately cannot overcome geology," the firm said. "Webelieve the implication is that shale is a scarcer resource than generallyconsidered and thus are more constructive longer-term as the world must seek amore marginal barrel to match future demand growth. That is bullish forlonger-term oil price."

As aresult of its findings, Bernstein said it would recommend investors buy intocompanies with "the best access to the largest and best qualityresources." Among that group, the firm said, are Pioneer, , and