Can Unconventionals Come to the Rescue?

Put pressure on the United States to increase oil and natural gas production and the burden mainly falls on unconventional resources. Will operators be up to the challenge?

Near-term projections call for U.S. oil output to grow by 1 million barrels per day. A difficult operating environment will make that increase a struggle, but the very nature of unconventionals offers cause for optimism.

Production Challenges Abound

For U.S. and Canadian operators, current challenges include economic restrictions, supply chain and oilfield service problems, manpower shortages and infrastructure limitations, according to Al Salazar, vice president of intelligence at software and research firm Enverus in Austin.

“U.S./Canadian unconventionals are constrained by producer discipline and supply chain/OFS issues. Consensus expectations are that Lower 48 oil-supply growth on an exit-to-exit basis will be about 1 MMb/d for both ’22 and ’23 – about 80 percent of that growth comes from the Permian,” Salazar noted.

“Currently, Russian oil that has been self-sanctioned, untradeable or shut-in is estimated to reach around 3 MMb/d this summer. This supply shock outweighs possible near-term U.S. and OPEC supply responses, meaning that prices will have to rise and demand be rationed for the market to come back into balance,” he said.

Salazar will present an overview of global energy, geopolitics and key signposts for unconventional producers at the Unconventional Resources Technology Conference in Houston, at the topical breakfast “State of the Union for Unconventionals – Impact to Global Energy Markets” on June 22.

Today, American independents’ litany of “drill, drill, drill!” and “produce, produce, produce!” has shifted to “production with profitability.” The industry goal now is almost “profit by any means” – so costs have to be minimized, at a time when most costs have increased sharply.

Also, many oil companies in 2022 have encountered shortages of supplies and equipment due to a quick rebound in post-pandemic demand as well as supply-chain problems. And operators are still dealing with spot shortages of technical-and-trades workers for contract work.

“Public companies face investor pressure to exhibit capital discipline. The simple operating mantra of, ‘I see high price, I take high price and produce more,’ is now frowned upon by the investment community,” Salazar observed.

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Put pressure on the United States to increase oil and natural gas production and the burden mainly falls on unconventional resources. Will operators be up to the challenge?

Near-term projections call for U.S. oil output to grow by 1 million barrels per day. A difficult operating environment will make that increase a struggle, but the very nature of unconventionals offers cause for optimism.

Production Challenges Abound

For U.S. and Canadian operators, current challenges include economic restrictions, supply chain and oilfield service problems, manpower shortages and infrastructure limitations, according to Al Salazar, vice president of intelligence at software and research firm Enverus in Austin.

“U.S./Canadian unconventionals are constrained by producer discipline and supply chain/OFS issues. Consensus expectations are that Lower 48 oil-supply growth on an exit-to-exit basis will be about 1 MMb/d for both ’22 and ’23 – about 80 percent of that growth comes from the Permian,” Salazar noted.

“Currently, Russian oil that has been self-sanctioned, untradeable or shut-in is estimated to reach around 3 MMb/d this summer. This supply shock outweighs possible near-term U.S. and OPEC supply responses, meaning that prices will have to rise and demand be rationed for the market to come back into balance,” he said.

Salazar will present an overview of global energy, geopolitics and key signposts for unconventional producers at the Unconventional Resources Technology Conference in Houston, at the topical breakfast “State of the Union for Unconventionals – Impact to Global Energy Markets” on June 22.

Today, American independents’ litany of “drill, drill, drill!” and “produce, produce, produce!” has shifted to “production with profitability.” The industry goal now is almost “profit by any means” – so costs have to be minimized, at a time when most costs have increased sharply.

Also, many oil companies in 2022 have encountered shortages of supplies and equipment due to a quick rebound in post-pandemic demand as well as supply-chain problems. And operators are still dealing with spot shortages of technical-and-trades workers for contract work.

“Public companies face investor pressure to exhibit capital discipline. The simple operating mantra of, ‘I see high price, I take high price and produce more,’ is now frowned upon by the investment community,” Salazar observed.

“Past instances of management mistiming markets and destroying capital when seeking to cash-in on lofty pricing environments remains a painful scar for energy investors,” he said.

Insufficient transportation and export infrastructure also proves to be a hurdle for U.S. operators as pressure builds to increase global oil and gas supply. Salazar noted that supply growth “is ultimately constrained by the lowest common denominator: infrastructure.”

“Should U.S. producers want to increase production materially, they face looming infrastructure pressures. Takeaway capacity in key producing basins such as the U.S. Northeast (for natural gas) and Gulf Coast (oil) serve to temper overly aggressive production forecasts,” he said.

‘You Get What You Drill’

There’s still room for optimism in U.S. unconventional resources development, however.

Tom Blasingame, professor in the Department of Petroleum Engineering at Texas A&M University in College Station, developed a chart correlating West Texas Intermediate oil prices with the U.S. land rig count and U.S. crude production.

Blasingame slightly lagged and advanced some data to emphasize the correlation of peaks and troughs. And the chart clearly demonstrates that drilling more wells leads to higher production – not exactly a surprising revelation.

“In short, you get what you drill,” he acknowledged.

But the data also makes important points about unconventional resources. First, unconventional wells provide more output, faster. That’s because they are typically big, booming wells with high initial production rates and steep decline curves.

So, the key to boosting U.S. production from unconventional reservoirs would seem to be drilling a whole lot of wells – except the number of core wells and laterals drilled in relation to output keeps falling, and the reason is no secret.

“There are less wells being drilled because we can drill much longer (laterals) – 10-12 years ago, 3,000-4,000 feet was the norm. Now it is 10,000-12,000 feet, with monster wells at 19,000-20,000 feet,” Blasingame observed.

Blasingame will discuss unconventional resources and their place in the future energy mix at the topical luncheon, “Holistic Look at the Opportunities and Challenges Faced by Unconventionals – A Fireside Chat,” on June 20 at URTeC.

“I would say that for the sake of a statement of energy independence, the U.S. can well exceed production of its own needs of oil and gas for the foreseeable future. Pushing to export has not been a significant business model until recently with LNG, and obviously this is quite viable,” Blasingame said.

“Considering that there are ‘easier’ places to produce oil, I am not sure we would want to become a part of OPEC, but we certainly could,” he added.

In December 2015, Congress effectively repealed a U.S. oil export ban and allowed the free export of American crude worldwide. While the United States still imports considerably more raw crude than it exports, it also ships out a large amount of finished product.

“The U.S. is already a formidable exporter of both gas/LNG, refined product and oil. We expect about 5-7 (billion cubic feet per day) of LNG export facilities to be added in the U.S. around mid-decade on top of the approximately 11-12 Bcf/d exported today,” Salazar said.

“As for crude and refined products, the U.S. already exports a significant amount of crude, on par with Iraq and twice as much as Kuwait,” he noted.

Uncertainty Persists

An emphasis on full-cycle profitability, current economic uncertainties and the longer-term unpredictability of oil and gas prices continue to restrain development plans, in the U.S. and elsewhere. Lingering memories of the last price downturn remain strong in the industry.

“Currently, markets are plagued by the recession boogieman, soaring inflation and uncertainty with regards to Russian energy supplies. In a perfect world, oil prices would be in the mid-$70s, where demand and supply can peacefully coexist and grow sustainably,” Salazar said.

“Unfortunately, price stability doesn’t appear to be in the cards – at least in the near-term, given low crude and product inventories and indefinite uncertainty associated with Russia’s energy supplies,” he observed.

Even if continued high oil and gas prices encourage increased drilling and production, U.S. energy companies will still have to deal with a host of physical, day-to-day operating challenges.

“U.S. unconventional resource operators face significant oilfield services and raw material pressures. The lack of pipe, sand and crews are sticky issues that appear to have no near-term resolution in sight,” Salazar noted.

“Overall, $100/barrel oil is well supported, but costs are rising and profit margins aren’t as frothy as one would think,” he said.

President Biden has pledged to tap into the U.S. Strategic Petroleum Reserve for at least the next two calendar quarters in a significant way, “to ease draw-down pressures on already low OECD (Organization for Economic Co-operation and Development countries) crude and product stocks,” Salazar observed.

“However, this ‘Biden Band-Aid’ is a transitory measure, leaving significant uncertainty for (the fourth quarter of) 2022 and beyond. Should sanctions on Russia grow stiffer and more oil become stranded, the less likely U.S. and OPEC supply growth are able to address it,” he said.

Despite the challenges, there’s little doubt that U.S. operators can step up production from unconventional reservoirs. Two other important questions remain: How much can infrastructure expansion accommodate increased deliveries? And just how much can operators step up their game?

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