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[Enterprising Investor]

In U.S. shale fields, including in Texas, oil flow slows (9/15/15)

By James Osborne

The flow of crude from what had been the country’s fastest-growing oil and gas regions, like Texas’ Eagle Ford shale, is declining rapidly, according to data released by the federal government this week.

The Energy Information Administration reports that across the country’s seven largest shale deposits, oil production is expected to fall to 5.2 million barrels a day next month, the sixth consecutive month of decline and a 6 percent drop since April.

The fall marks a dramatic turnaround for a U.S. oil industry that had almost doubled its production since 2010. Through the use of advanced hydraulic fracturing and horizontal drilling techniques, drillers had accessed deposits long known by geologists but thought too difficult and expensive to drill.

But the revitalization of the country’s oil sector flooded the world market. Combined with a struggling Chinese economy and steady production out of the Middle East, oil is now selling for less than half what it did in the summer of 2014.

Now drilling rigs are sitting idle, and producers are opting not to turn on the wells they drill, letting the oil sit underground until prices improve. With the oil bust now approaching its first anniversary, oil and gas companies around Texas and the country are getting more and more nervous, said Larry Oldham, an energy investor in Midland.

“At some point the production is going to come off a whole lot harder than it has,” he said. “It’s going to get ugly. A lot of companies have been unable to re-hedge. They’ve been unable to lock in higher prices, so their cash flow is going to get worse.”

By and large, most forecasts predict U.S. oil production will continue declining through mid-2016. At that point, the theory goes, the decrease in supply should push up crude prices and get drilling rigs back in the fields.

In a report Monday, the research firm Raymond James predicted U.S. oil production would fall by 200,000 barrels a day next year — a 2 percent decline — said energy analyst Pavel Molchanov.

“That’s the first time in quite a while U.S. oil production is actually down,” he said. “In 2017, it’s a bit academic at this point, but we think U.S. production will be growing again. But that will depend on what oil prices do.”

Among the seven shale deposits examined by the EIA, only one, the Permian Basin in West Texas, has not reported a decline. It is projected to produce 2 million barrels of oil a day next month, up 90,000 barrels from April.

Shale wells are notoriously quick to decline in the flow of oil and natural gas, necessitating constant drilling to keep up production. With the U.S. rig count at levels not seen since 2009, those declining rates were going to catch up with new production sooner or later.

Only in the Permian, the degree to which drillers have figured out how to do more with less has allowed them to outpace their competitors in other regions. In the Permian, the amount of oil produced per drilling rig has increased 61 percent since January. In the Eagle Ford and North Dakota’s Bakken shale, that ratio increased by less than 30 percent.

“The Permian is quite resilient. Not many energy stocks have had a good year, but the best ones are the companies with a lot of production in the Permian,” Molchanov said.

http://www.dallasnews.com/business/energy/20150915-in-u.s.-shale-fields-including-in-texas-oil-flow-slows.ece