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Canada's Oil and Gas Industry Soars to New Heights

Canada's Oil and Gas Industry Soars to New Heights

Canada's oil and gas industry…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Has Permian Productivity Peaked?

Oil rigs

The U.S. shale industry might have just received a huge windfall with the nine-month extension of the OPEC cuts. Shale output was already expected to come roaring back this year, but the extension of the cuts provides even more room in the market for shale drillers to step into.

The sky is the limit, it seems. However, there are growing signs that the U.S. shale industry could be reaching the end of the low-hanging fruit. Or, more specifically, drilling costs are starting to rise and the enormous leaps in production that can be obtained by simply adding more rigs also appears to be running into some trouble.

According to the EIA’s Drilling Productivity Report, productivity (as opposed to absolute production) is set to fall next month in the Permian Basin. In other words, the average rig will only be able to produce an estimated 630 barrels per day of initial production from a new well, down 10 b/d from the 640 b/d that such a rig might have produced in May. That is convoluted way of saying that the ever-increasing returns on throwing more rigs at the problem might be hitting a ceiling.

(Click to enlarge)

This is a very notable development – it is the first time that the EIA predicts falling well productivity per rig since it began tracking the data several years ago. Still, because the rig count has increased so much, there will still be more production coming out of the Permian. It’s just that as drillers gobble up all the best spots to drill, it will become more and more difficult to find easy pickings.

Moreover, simply drilling the wells is only one part of the equation. As Collin Eaton of Fuel Fix notes, companies are drilling wells at a faster pace than contractors can frac them. The shortage of completion crews means that the backlog of drilled but uncompleted wells (DUCs) has shot up over the past year, rising by more than 60 percent to 1,995 in April 2017 from a year earlier.

(Click to enlarge)

The strain on contractors means that drilling costs will also rise. Oilfield service companies bore the brunt of the market downturn over the past three years, forced to slash their rates because of the lack of work. Oil producers have consistently and repeatedly boasted about their “efficiency gains,” but much of the cost-savings came from soaking service companies. Related: The Mysterious Rosneft Deal And Its Consequences

That could be at an end. The rise in drilling activity means that oilfield service companies finally have more leverage to hike their prices. The results could be an upswing in costs for producers. Service costs could jump by 20 percent this year, according to an estimate from S&P Global Platts.

But it isn’t all rosy for service companies either. Fuel Fix notes that they have to rebuild their rig fleets after scrapping so many during the last few years. Also, finding enough people to return to work after savagely cutting payrolls will be a challenge.

Overall, however, production is still expected to increase. Generous financing from Wall Street will ensure that capital is not a limiting factor. Consequently, the shale industry will continue to shower West Texas with money, rigs and people. Oil will flow in larger volumes this year and probably next year, barring another downturn. The Permian, for instance, is still expected to add more than 70,000 bpd of additional output between May and June.

Also, OPEC’s determination to prevent another downturn in prices provides some certainty to shale drillers. OPEC is erasing some of the risk for drillers to deploy resources in the Permian. On an annual basis, the EIA estimates that U.S. oil production will average 9.3 million barrels per day (mb/d) in 2017 and a staggering 10.0 mb/d in 2018.


But if well productivity has peaked, the marginal barrel will be a bit trickier to produce next year than it was in, say, late 2016.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Phil on June 01 2017 said:
    Wells are still producing 3 x what they were in 2015. The drilling will not stop, but the completion and fracing of wells might not increase yet. the DUC's are increasing as companies are drilling not just to produce, but in order to keep their lease agreements active so when oil prices do rise higher, they will be completed and put online. Lots of prime area left to drill. Multiple companies have posted their total acreage that shows over 10k+ drilling locations still available each. Easily over 50k+ more drilling locations left and billions of barrels of oil reserves available in the wolfcamp A alone. The remaining stack has around 1/3 of what the wolfcamp hold, with areas below not as well known.

    The Permian has not peaked. Much more to come.
  • Robert on June 01 2017 said:
    Sorry Nick, but I'm going to take a big disagreement with you here on the way you use the stats. First of all, and I'd like to see more non-industry people stop using this verbage, rigs don't produce oil.......they drill wells. Reference is to the third paragraph. Rigs drill the well and then they are completed at some later date. Your article relates "new oil rates" compared to rig count, down 10 BOPD (1.6% of 640 BOPD) based on some EIA forecast of all the new wells to be completed compared to all the rigs forecast to be running, ......or something like that. The graph as presented leaves much to be desired. At the same time we have an increase in DUCs, which are wells that will come on line as they are completed.

    I suggest that comparing a forecast rig rate to a forecast new production per well while the Drilled and UnCompleted wells are stacking up is not a valid method to forecast peak production.

  • rjs on June 01 2017 said:
    i agree with what Robert said...productivity per rig is a pretty meaningless metric when you're only completing 72% of the wells your rigs are drilling..
  • Seth on June 05 2017 said:
    Considering how relentlessly the shale industry innovates, it's difficult to imagine how their is going to a "peak" in productivity.

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