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I'd love to see an unbiased analysis of the long-term economics of an individual shale well. There's some data that indicates volumes drop off pretty dramatica

I'd love to see an unbiased analysis of the long-term economics of an individual shale well. There's some data that indicates volumes drop off pretty dramatically over time at the individual well level. If this is true, then it requires perpetual investment of new capital in new wells just to maintain constant production volumes. The public data isn't great because old wells are mixed in with new wells and so it's hard to see how production changes with the age of the well. Here's an example from Bakken https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats... You can see that in 2016 the total number of producing wells didn't change much, which probably means new wells weren't being drilled, so the data is mostly from older wells. Daily production per well drops quickly from month to month. Then in 2017 and 2018 the growth rate in total wells more than doubles, and the production per well also increases, probably because new wells produce much more than existing wells. If this is true, then it looks like the shale boom is sustained by heavy investment of fresh capital. When interest rates rise or credit dries up, the shale boom could quickly turn to bust.

ec109685 8y ago
It would be good to overlay that with the price of oil. That is clearly a driving factor in how much they can pump out of the wells and whether they’ll drill new ones.
mirimir 8y ago
TFA claims that: > The once-powerful partnership between fracking companies and Wall Street is fraying as the industry struggles to attract investors after nearly a decade of losing money. Is that inaccurate? I'm guessing that fracking was profitable until oil prices crashed. So is the financial debate about if, when and how much oil prices will increase?
- panarky 8y ago
  Oil prices aren't particularly low by historical standards. https://imgur.com/a/twnV7GZ https://imgur.com/a/twnV7GZ So I'd guess that the "decade of losing money" is due to poor economics of individual wells, where production dramatically falls over time. That requires more and more capital for new wells just to maintain constant volumes. If you only look at aggregates it can appear there's a boom, when in reality it's a bit of a shell game that only works as long as you're constantly drilling new wells.
  - mirimir 8y ago
    > Oil prices aren't particularly low by historical standards. True. But I think that fracking only became financially viable (or at least, plausibly so) when oil prices were at historic highs. Similarly for tar sands. But there have also been subsidies, to help ensure adequate domestic production. For the oil and natural gas industries overall. And this will be the go-to technology as traditional oil and gas reserves dwindle. At least for petrochemicals.
    - xref 8y ago
      Shale became economically viable due to fracking, whereas previously shale had to be steam heated to release the oil which is extremely energy intensive and thus expensive, which is why Shell tried it in the 70s but abandoned the tech.
    - hermitdev 8y ago
      Fracking is a more expensive means of extraction than traditional drilling. IIRC, the oil is also of lower quality. I dont recall the precise price, but fracking is only profitable if crude is over ~$80/barrel.
      - CuriouslyC 8y ago
        The number for at least one major petrochemical company is closer to $30/barrel
  - Nasrudith 8y ago
    Really it is a matter of diminishing returns of cheaper oil - the easier wells and methods of extraction get depleted and while it is possible to reduce the extraction costs through technological advancement it is very unlikely it will ever reach historic lows. Just like how surface deposits of copper and bronze and especially native ore were quickly depleted in areas with long term civilizations.
cascom 8y ago
Couple of points: - yes decline curves are fairly steep, requiring constant investment to maintain production (often referred to as the drilling wedge) see pg.20-21 [1] - However, almost all of a new well's cost is the drilling and completion costs on the front end vs the lease operating expense to produce oil/gas once the well is online -IRRs are pretty high on individual wells (see. pg. 15 [2]) - since decline curves are so steep the pricing environment when the well comes online is tremendously important to well economics [1] https://d1io3yog0oux5.cloudfront.net/_be06fc1138095794ea39e91c0db9899c/anteroresources/db/641/5541/pdf/Credit_Suisse_Conference_Presentation_February_2019+vF5.pdf https://d1io3yog0oux5.cloudfront.net/_be06fc1138095794ea39e9... [2]http://investors.eogresources.com/Cache/1500112768.PDF?O=PDF&T=&Y=&D=&FID=1500112768&iid=4075407 http://investors.eogresources.com/Cache/1500112768.PDF?O=PDF...
D_Alex 8y ago
I would love to show you an unbiased analysis of long-term economics of individual shale wells, I have a few. But, confidentiality. I can say that: First of all the picture is quite complex, and of course not all wells are the same. Second - talking "in general" - the break-even oil price for shale oil wells has declined quite dramatically, from around $80-100 in 2014 to $40-50 today, with current wells costing less and producing more than wells of 4 years ago. However, third: The improved economics are not primarily a result of technological advances. Rather, the lower well cost is largely due to lower rig rates and cheaper and more efficient labour. The lower rig rates are not sustainable in the long term, they are low only because it is better to have the rig working and earning at least a little money (not enough to justify buying a new one in the future) than rusting away in a yard. Labour productivity gain is partly explained by the fact that the only the most experienced and efficient crews are now working, and higher well productivity is partly due to only drilling the very best prospects. The quality of crews and prospects is a barrier to raising production further. In summary, I believe the shale boom is an economic oddity. Whether it continues for any length of time depends on the oil prices. At the current prices, it is not sustainable. Corollary: If the oil price is effectively set by the true cost of shale oil, we should expect that the price of oil will rise to $80-100/bbl in the medium term.
- ianai 8y ago
  How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I’m trying to figure out whether the current situation is likely to grow prices relatively linearly or more suddenly - if technological improvements aren’t possible.
  - D_Alex 8y ago
    >How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I don't think the ageing workforce is a huge problem, if that is what you are asking. The labour pool can smoothly absorb new entrants to replace the retirees. The problem is that if a rapid expansion of workforce is needed - eg in response to increased demand for rigs if oil prices jump into the $80-100/bbl range - the quality of the labour pool will suffer, the productivity will decline and costs will increase. Are the prices likely to grow suddenly? In some scenarios (eg effective OPEC action, ME conflicts) - certainly. More interesting is what ought to happen in a "business as usual" scenarios. I see it as a race between the decline in production from major "conventional" fields, the growth in energy demand esp from India, China and the "little tigers", and the transition to renewable energy and the "electric economy". My pick is that the speed of the transition to renewable energy will not be sufficient to compensate for the other two factors, and that we will see an increase in the oil prices to $80-100/bbl by 2020, which will enable new production to be brought on stream profitably.
baud147258 8y ago
> There's some data that indicates volumes drop off pretty dramatically over time at the individual well level. If this is true, then it requires perpetual investment of new capital in new wells just to maintain constant production volumes. I discussed a few years ago this with my brother who's working in the oil industry. And he said that much, this type of well have much shorter lifespan than traditional oil well and new wells are required every few years. Of course it's just an anecdote from someone who's not even involved in that part of the industry, so take it with a grain of salt.

ec109685 8y ago

It would be good to overlay that with the price of oil. That is clearly a driving factor in how much they can pump out of the wells and whether they’ll drill new ones.

mirimir 8y ago

TFA claims that: > The once-powerful partnership between fracking companies and Wall Street is fraying as the industry struggles to attract investors after nearly a decade of losing money. Is that inaccurate? I'm guessing that fracking was profitable until oil prices crashed. So is the financial debate about if, when and how much oil prices will increase?

panarky 8y ago
Oil prices aren't particularly low by historical standards. https://imgur.com/a/twnV7GZ https://imgur.com/a/twnV7GZ So I'd guess that the "decade of losing money" is due to poor economics of individual wells, where production dramatically falls over time. That requires more and more capital for new wells just to maintain constant volumes. If you only look at aggregates it can appear there's a boom, when in reality it's a bit of a shell game that only works as long as you're constantly drilling new wells.
- mirimir 8y ago
  > Oil prices aren't particularly low by historical standards. True. But I think that fracking only became financially viable (or at least, plausibly so) when oil prices were at historic highs. Similarly for tar sands. But there have also been subsidies, to help ensure adequate domestic production. For the oil and natural gas industries overall. And this will be the go-to technology as traditional oil and gas reserves dwindle. At least for petrochemicals.
  - xref 8y ago
    Shale became economically viable due to fracking, whereas previously shale had to be steam heated to release the oil which is extremely energy intensive and thus expensive, which is why Shell tried it in the 70s but abandoned the tech.
  - hermitdev 8y ago
    Fracking is a more expensive means of extraction than traditional drilling. IIRC, the oil is also of lower quality. I dont recall the precise price, but fracking is only profitable if crude is over ~$80/barrel.
    - CuriouslyC 8y ago
      The number for at least one major petrochemical company is closer to $30/barrel
- Nasrudith 8y ago
  Really it is a matter of diminishing returns of cheaper oil - the easier wells and methods of extraction get depleted and while it is possible to reduce the extraction costs through technological advancement it is very unlikely it will ever reach historic lows. Just like how surface deposits of copper and bronze and especially native ore were quickly depleted in areas with long term civilizations.

cascom 8y ago

Couple of points: - yes decline curves are fairly steep, requiring constant investment to maintain production (often referred to as the drilling wedge) see pg.20-21 [1] - However, almost all of a new well's cost is the drilling and completion costs on the front end vs the lease operating expense to produce oil/gas once the well is online -IRRs are pretty high on individual wells (see. pg. 15 [2]) - since decline curves are so steep the pricing environment when the well comes online is tremendously important to well economics [1] https://d1io3yog0oux5.cloudfront.net/_be06fc1138095794ea39e91c0db9899c/anteroresources/db/641/5541/pdf/Credit_Suisse_Conference_Presentation_February_2019+vF5.pdf https://d1io3yog0oux5.cloudfront.net/_be06fc1138095794ea39e9... [2]http://investors.eogresources.com/Cache/1500112768.PDF?O=PDF&T=&Y=&D=&FID=1500112768&iid=4075407 http://investors.eogresources.com/Cache/1500112768.PDF?O=PDF...

D_Alex 8y ago

I would love to show you an unbiased analysis of long-term economics of individual shale wells, I have a few. But, confidentiality. I can say that: First of all the picture is quite complex, and of course not all wells are the same. Second - talking "in general" - the break-even oil price for shale oil wells has declined quite dramatically, from around $80-100 in 2014 to $40-50 today, with current wells costing less and producing more than wells of 4 years ago. However, third: The improved economics are not primarily a result of technological advances. Rather, the lower well cost is largely due to lower rig rates and cheaper and more efficient labour. The lower rig rates are not sustainable in the long term, they are low only because it is better to have the rig working and earning at least a little money (not enough to justify buying a new one in the future) than rusting away in a yard. Labour productivity gain is partly explained by the fact that the only the most experienced and efficient crews are now working, and higher well productivity is partly due to only drilling the very best prospects. The quality of crews and prospects is a barrier to raising production further. In summary, I believe the shale boom is an economic oddity. Whether it continues for any length of time depends on the oil prices. At the current prices, it is not sustainable. Corollary: If the oil price is effectively set by the true cost of shale oil, we should expect that the price of oil will rise to $80-100/bbl in the medium term.

ianai 8y ago
How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I’m trying to figure out whether the current situation is likely to grow prices relatively linearly or more suddenly - if technological improvements aren’t possible.
- D_Alex 8y ago
  >How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I don't think the ageing workforce is a huge problem, if that is what you are asking. The labour pool can smoothly absorb new entrants to replace the retirees. The problem is that if a rapid expansion of workforce is needed - eg in response to increased demand for rigs if oil prices jump into the $80-100/bbl range - the quality of the labour pool will suffer, the productivity will decline and costs will increase. Are the prices likely to grow suddenly? In some scenarios (eg effective OPEC action, ME conflicts) - certainly. More interesting is what ought to happen in a "business as usual" scenarios. I see it as a race between the decline in production from major "conventional" fields, the growth in energy demand esp from India, China and the "little tigers", and the transition to renewable energy and the "electric economy". My pick is that the speed of the transition to renewable energy will not be sufficient to compensate for the other two factors, and that we will see an increase in the oil prices to $80-100/bbl by 2020, which will enable new production to be brought on stream profitably.

baud147258 8y ago

> There's some data that indicates volumes drop off pretty dramatically over time at the individual well level. If this is true, then it requires perpetual investment of new capital in new wells just to maintain constant production volumes. I discussed a few years ago this with my brother who's working in the oil industry. And he said that much, this type of well have much shorter lifespan than traditional oil well and new wells are required every few years. Of course it's just an anecdote from someone who's not even involved in that part of the industry, so take it with a grain of salt.