Syed Rashid Husain

 The writer is Vice President of Al-Khobar-based Al-Azzaz Est., eminent journalist and energy analyst. He writes a popular weekly column   ‘Energy Outlook’ for Saudi Gazette and also contributes to Pakistan’s Dawn and the BBC.

OPEC Producers : In The Game For A Long Haul

by shariff mohammed | Feb 06, 2018
OPEC Producers Are In The Game For A Long Haul

An interesting new study – with long-term possible consequences - is making rounds!
For the last few years, oil pundits have been banking on the premise that the shale revolution is here to stay and that the U.S. is the new energy superpower. 

Now, all that is under review, if a recent MIT study is to be believed!
Ever since the onset of the shale revolution, many believed that the evolving drilling technology has been primarily responsible for shale growth and the consequent U.S. domestic output gains. Projections of the U.S. Energy Information Agency (EIA) were also based on this very premise.

The MIT study questions this very premise. It points to a major flaw in the EIA forecasting technique. It is emphasizing; it is not correct to surmise that better technology has been behind all the recent output gains in the U.S. domestic production and that the domestic U.S. output would continue to rise in the foreseeable future.
The paper instead argued that U.S. domestic output increments have been largely due to low energy prices, compelling drillers to focus on sweet spots where oil and gas were easiest to extract. Things would get progressively worse each year after that, as wells in various sweet spots get exhausted and technology fails to close the gap, the paper underlined.

Increasing productivity of each new well matters because it’s the only way to boost output. Typically, production drops precipitously soon after a well is tapped. A recent EIA report also points out that about half of U.S. oil output came from wells, two or fewer years old.

“The EIA is assuming that productivity of individual wells will continue to rise as a result of improvements in technology,” Bloomberg quoted Justin B. Montgomery, one of the authors of the study, as saying. “This compounds year after year, like interest, so the further out in the future the wells are drilled, the more that they are being overestimated.”

So even though output in the Bakken more than tripled from 2012 to mid-2015 on a per-well basis, yet the real reason behind the growth, as per the paper, is that shale companies abandoned iffier fields to drill in the best acreage following the slump in energy prices.
“There certainly could be some validity to getting a rosier forecast because right now, the industry is working sweet spots,” admits Dave Yoxtheimer, a hydrogeologist at Penn State University’s Marcellus Center for Outreach and Research. “When that’s all played out, they’re going to have to go to the tier-two acreage, which isn’t going to be as productive.”

Even now, some signs of a slowdown cannot be missed out. Gas output in the Marcellus basin has fallen 10 percent on a per-rig basis since reaching a high in September 2016. In the Permian, per-rig oil production has decreased almost 20 percent over a similar span.  Extrapolating from field studies conducted in North Dakota’s Bakken shale deposit, Montgomery and co-author Francis O’Sullivan pointed out that due to the above reason, the total U.S. oil and natural-gas production from new wells could undershoot the EIA estimate by more than 10 percent in 2020. “The same forecasting methods are used in other plays in the U.S., and the same dynamics are likely to be present (there too),” Montgomery added. EIA is aware of the report. Margaret Coleman, the EIA’s leader of oil, gas and biofuels exploration and production analysis, said in an email to Bloomberg that “the study raises valid points” and the administration is looking at ways to give its estimates a tighter focus.

She added that many shale fields lack the detailed well data that aided the MIT study, which means EIA forecasters have to use known geologic information and assumptions about prices and technology to come up with estimates. EIA apparently didn’t had access to the tools available to the MIT researchers.

Veteran oilman Harold Hamm, the chairman of Continental Resources Inc., has also been long arguing that the U.S. government was way too optimistic. The EIA projection is "just flat wrong,” failing to take into account a new discipline among U.S. drillers, Hamm said in an interview on Bloomberg TV last September.

A new perspective is being added to the global energy equation and it is interesting - for OPEC producers – for more than one reason. They are in the game – for a long haul – it now seems. Happy New Year!

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