Unconventionals Persist, Despite Everything

In a world that has seen rock-bottom oil prices, a sharp decline in energy demand, constrained funding for oil and gas and a worldwide COVID-19 pandemic, the future for unconventional resources looks –

Challenging. Although, not too bad.

That might seem counter-intuitive, but many analysts say the outlook for unconventionals remains positive even as the oil industry goes through a period of struggle and woe.

“We think the U.S. shale sector remains the major source of supply growth in the long term. While the coronavirus situation raises questions about long-term demand, we still see peak demand in the second half of this decade,” said Alexandre Ramos-Peon, senior analyst-shale for Rystad Energy in Oslo.

“Also, a large amount of production will be lost from base decline in the coming years from mature fields worldwide, so significant supply growth is necessary,” he added.

Industry Consolidation

For unconventional operations, especially in shale, the future definitely holds a two-part story.

The first part involves a near-term financial squeeze and “industry consolidation” – a polite way of saying bankruptcies, buyouts and layoffs.

“The demand destruction we’ve seen this year sort of wipes out five years’ of demand growth,” noted Sarp Ozkan, senior director of energy analytics for Enervus in Houston.

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In a world that has seen rock-bottom oil prices, a sharp decline in energy demand, constrained funding for oil and gas and a worldwide COVID-19 pandemic, the future for unconventional resources looks –

Challenging. Although, not too bad.

That might seem counter-intuitive, but many analysts say the outlook for unconventionals remains positive even as the oil industry goes through a period of struggle and woe.

“We think the U.S. shale sector remains the major source of supply growth in the long term. While the coronavirus situation raises questions about long-term demand, we still see peak demand in the second half of this decade,” said Alexandre Ramos-Peon, senior analyst-shale for Rystad Energy in Oslo.

“Also, a large amount of production will be lost from base decline in the coming years from mature fields worldwide, so significant supply growth is necessary,” he added.

Industry Consolidation

For unconventional operations, especially in shale, the future definitely holds a two-part story.

The first part involves a near-term financial squeeze and “industry consolidation” – a polite way of saying bankruptcies, buyouts and layoffs.

“The demand destruction we’ve seen this year sort of wipes out five years’ of demand growth,” noted Sarp Ozkan, senior director of energy analytics for Enervus in Houston.

“The speed at which these consolidations will happen has to be quicker, but it’s going to be a while before companies feel like they’re comfortably back in the black,” he said.

Ozkan thinks oil prices probably will have to stabilize in the $55-$60/barrel range before operators can get back to more normal unconventional production operations. In the meantime, a shakeout seems unavoidable.

“The financial health of companies already tottering may be in its last phase,” Ozkan said.

A Leaner, Stronger Unconventionals Sector

One bright spot from the consolidation will be a healthier industry segment after a survival-of-the-fittest readjustment takes place, Ramos-Peon observed.

“As this crisis will likely take its toll on the most financially and operationally exposed companies, the door will be open for major consolidation rounds, leading eventually to operational synergies and financial optimization of resources,” he said.

There’s even a chance unconventionals will emerge from the COVID-19 downturn more competitive with the rest of the oil industry, Ramos-Peon said.

“Reserves remain enormous in some basins like the Permian. Break-evens are competitive, even in the high 30s (dollars per barrel). We will see material high-grading of activity, and possibly a moving away from the least prospective basins,” he noted.

“Further, with cost deflation that will come in the pressure pumping, proppant and drilling markets, global competitiveness might even increase,” he said.

Post-Pandemic Production

Analysts in general don’t foresee a quick resurgence in production growth from operating improvements, the kind of growth that has defined the unconventionals sector in recent years. In the near term, operators are more likely to focus on business and economic challenges as they try to get back on their feet.

“We’re seeing cost-cutting in services costs. We’re seeing cost-cutting in automation. There’s a lot of efficiencies in the way business is being done, but not that much more efficiency in operations,” Ozkan said.

“Regulatory or ESG (environment, social and governance) concerns – around flaring, for example – might put an additional break on the growth pace. We will therefore not see such rapid growth as in 2018, which might actually be a good thing for the market,” Ramos-Peon noted.

U.S. oil production reached 13 million barrels per day early in 2020, according to the U.S. Energy Information Agency, before operators started to shut in wells and reduce activity in response to lower prices. Baker Hughes’ count of active U.S. rigs had fallen to 339 by mid-May, down from 987 a year earlier.

There’s no consensus about how long the crude-output curtailment will last, or how far production might ultimately fall. Rystad Energy predicts the industry will see a healthy bounce-back by the fourth quarter of next year.

“We now expect U.S. production to return to 12 million bpd by the end of 2021, from a bottom of 10-to-10.5 million bpd sometime during the third quarter of this year,” Ramos-Peon said.

Some other analysts aren’t as optimistic. One concern is that energy demand will never fully recover because of permanent changes to consumer habits, travel and business spending.

The COVID-19 pandemic and its aftermath “really might change the world. Of course, it’s too early to tell what the long-term effect of the coronavirus is going to be,” Ozkan said.

Undoubtedly, the pandemic has accelerated some trends in the industry that were already under way, especially a reduction in investment and a stronger focus on profitability. Ozkan said companies with proved developed producing assets in unconventionals are best positioned to weather the current disruption.

“When operators are thinking about shale, they’re going to be thinking about returns rather than growth. That means a different trajectory for production,” he noted.

“Companies that are going to do well in this environment are going to be folks that have a lot of PDP volumes in their portfolios. That’s what spins off cashflow reliably,” he said.

Inevitable Demand Return

The second part of the unconventionals outlook story is much brighter, and it’s all about the long term. At some point the disruption from the pandemic will abate, energy demand will return and the world will once again need to make up for declining production from conventional reserves.

“Shale will likely contribute the lion’s share of the growth – in particular, as this crisis impairs the supply capacity from other regions, and as shale by its nature operates on shorter cycles,” Ramos-Peon said.

“Over the last couple of years the industry has moved to a largely cash-flow-positive position, proving that, if done properly, the shale business model is viable,” he added.

However, obstacles abound in the near term. Ramos-Peon said current conditions “are strenuous for all participants, in all regions globally. In the particular case of the U.S., the unconventional E&P industry faces reduced access to credit, and investor pressure.”

Ozkan said the oil industry of the future will be leaner, more cautious, more focused on returns. It will move away from independents putting together packages of unconventional production to sell to larger companies.

“We’re going to see a lot less of the ‘prove-and-flip’ mentality,” he predicted. “The new world for unconventionals means there will be a lot of changes in the way people do business.”

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Comments (1)

Unconventional Resources
Dissolved natural gas is present in saline aquifers in every petroliferous basin. Wells can be drilled for 5 to 10 percent of the cost of fracked shale wells. For example, one vertical well drilled to 5,000 feet can produce about 20 cubic feet of methane per barrel of produced water. Wells pumped at 1,000 gallons per minute would produce on the order of 700 MCF per day, with separation as simple as pumping into a tank, taking gas out the top, and water out the bottom. If that well could be drilled and completed for $750,000, it would pay back (at $2.00 per MCF) in about one and one half years. Production would then continue for 30 to 40 years before recompletion in a shallower or deeper horizon. Water from two or three wells would be disposed of in one additional well into the same aquifer, preserving aquifer properties and avoiding settlement commonly associated with pumping from unconsolidated reservoirs. The total acreage of prospective basins in the USA is 442,820 square miles. If wells were eventually to be developed on 80 acre spacing throughout the entire area, then there is room for 3,542,560 wells. If each produced an average of just 300 MCF per day, they would produce more than a Trillion Cubic Feet per day, or 379 TCF per year. That would supply almost 15 times the current annual USA demand for natural gas. Let's never give up on so-called depleted fields. More gas is left in the water than was ever produced.
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6/4/2020 11:13:39 AM

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