High oil prices could trigger systemic industry inflation

By Staff | January 30, 2018

While oil prices above $60 a barrel have led to increased activity in the U.S. oil and gas industry, shale oil analyst Artem Abramov cautions that the longer prices remain in this range, the greater the likelihood of systemic inflation across the industry.

Abramov is vice president of analysis with Rystad Energy headquartered in Oslo, Norway. The independent energy consulting services and business intelligence data firm has offices in the U.S. and other countries around the world.

Abramov heads Rystad Energy’s shale well data research team, which is responsible for empirical analysis of well production profiles, completion techniques and economic indicators. He’s product manager for the company’s North American shale well database, co-author of the NASReport and a key contributor to the North American shale section of Rystad Energy’s Oil Market Trends Report.

Abramov recently spoke to North American Shale Magazine about key trends in the oil gas industry Rystad Energy’s research has identified for 2018.

What impact will oil prices have on the U.S. shale industry in the coming year?

In the short term, oil price is very important because when we observe these material shifts in oil prices—as we’ve seen in recent months—we see significant changes in the activity. In the medium- and longer-term, there are factors which destroy some of the short-term impacts. High activity always leads to service cost inflation, especially for the key service segments of the shale industry—the pressure pumping and fracking operations. These parts of the industry are really stretched right now. If we remain in the $60-plus price environment, the demand for growth will be even faster than the service industry is able to deliver. When this happens, we always have systematic cost inflation. From an operator’s perspective, the same level of oil prices gradually leads to certain depletion in the returns due to the high costs

Are you concerned about increased gas production from some of the more prolific shale plays?

Gas production in the medium term can become a serious issue in the Permian. A lot of our research efforts are dedicated to the gas infrastructure in the Permian Basin because there are significant volumes of associated gas with the oil. The gas eventually has to find a market and, right now, the Permian Basin in approaching takeaway capacity restraints. If they don’t get any new pipelines by early 2019, we’ll have a stressed situation with activity. There are several major pipeline projects which are expected to take Permian gas directly to Mexico, but a couple of these projects were delayed, so there might be some bottlenecks.

Has shale oil and gas reached an inflection point at which initial production and ultimate recoveries will begin to decline?

Yes. Prior to 2017, productivity was improving for five or six years in the majority of the plays, which was partially due to high-grading activity, but also because of longer laterals, higher frack sand loading and a larger number of frack stages. In 2017, this trend stopped in a majority of the plays. To a large extent, it was a portfolio effect. The activity in 2017 was revived in some non-core parts of the basins. Operators who don’t’ have access to the core acreage began contributing to well productivity in different places. When we go to individual acreage we still observe—especially in the Permian Basin—a lot of improvements. In the Delaware of West Texas and New Mexico, a significant share of the current activity remains in early test mode, especially in the eastern Delaware. So there are still improvements ahead of us and we are yet to see complete inflection points for shale well productivity, but many areas are in a very mature state of development.

What is your outlook for the SCOOP/STACK shale plays of Oklahoma?

It’s very similar to the Permian in terms of having many stacked layers. In many regions, there are up to five or six different intervals which operators can target from the same surface location. In the last two or three years, we saw a lot of progress. Continental is one of the companies that’s actively experimenting with various well designs and configurations. I would say they were able to achieve some of the best well results in the U.S. land last year. In SCOOP and STACK, we will see a lot of advancements going forward. Once of the issues is in terms of the total country perspective, it will never become as significant as the Permian Basin or the Bakken. Some people say that the SCOOP and STACK is just a rounding error when talking about the total U.S. oil and gas production. This is just because the area is geographically smaller than in some of these other plays. The quality of the acreage is at the same level, the total inventory is not as large. That’s why it will never become the most significant shale play in the U.S.

Are you keeping an eye on the Marcellus and Utica as well?

The Marcellus and Utica formations of the Appalachian Basin are the most important part of the U.S. gas supply. More than 30 percent of total U.S. gas production is produced in the Marcellus and Utica. This is the most cost-competitive source of the gas supply in the U.S. The only constraint is the infrastructure because it’s always lagging behind the actual production growth since 2010, 2011. This year, we’re getting quite a significant expansion in the takeaway capacity, up to 6 million cubic feet a day. This additional capacity will be fielded fairly quickly. This year we don’t really need all this additional gas because the domestic gas demand hasn’t changed too much, whereas LNG export capacity is lagging a little bit behind. It won’t be until 2019 that all this additional gas can be exported as LNG. That’s why this year we expect that gas prices will remain fairly depressed. We don’t see a lot of upside for the gas prices, which is good from a consumer perspective. But, of course, operators aren’t able to realize very high margins