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If your criteria for success is production growth, the North American Shale revolution has been a game-changer.

"Annual U.S. crude oil production reached another record level at 12.23 million barrels per day (b/d) in 2019, 1.24 million b/d, or 11%, more than 2018 levels. In November 2019, monthly U.S. crude oil production averaged 12.86 million b/d, the most monthly crude oil production in U.S. history", according to the U.S. Energy Information Administration (EIA).

U.S. crude oil production has increased significantly during the past 10 years, driven mainly by production from tight rock formations (shales) developed using horizontal drilling and hydraulic fracturing to extract hydrocarbons. Annual U.S. production in 2010 was less than 6 million barrels per day. At is the previous peak in 1970, U.S. crude oil production was 9.64 million barrels per day.

For more regional details: "Texas continues to produce more crude oil than any other state or region of the United States, accounting for 41% of the national total in 2019. Texas crude oil production averaged 5.07 million b/d in 2019 and reached a monthly record of 5.35 million b/d in December 2019. Texas's production increase of almost 660,000 b/d in 2019—driven by significant growth within the Permian region in western Texas—was 53% of the total U.S. increase for the year. Texas crude oil production has grown by 3.9 million b/d, or 333%, since 2010."

Colorado and North Dakota also set record production levels in 2019 of about 514,000 b/d and 1.4 million b/d, respectively. The Niobrara shale formation drove production increases in Colorado, and continued production in the Bakken region caused increases in North Dakota. 

Production in Oklahoma increased by 32,000 b/d in 2019 but did not surpass Oklahoma's record production of 613,000 b/d set in 1967."

But bankers seem to have other success criteria, like return on investment, positive cash flow, and profitability. The tremendous production growth on the North American shales upset the global market, to say the least. In September 2019, the United States became a net petroleum exporter for the first time since monthly records began in 1973. Needless to say, the oil and natural gas prices have been on a roller-coaster ride over the last five years, mostly down. Each time the prices fall, operating costs have to adjust to stay profitable, even if you are only looking a cash flow numbers. The Stock market has not been pleased about return rates on their investments and has started to pull back loans, not considering the ESG investors pulling out of fossil fuels. In 2019, the energy sector was the worst-performing sector in the S&P 500 index of big American firms, as I had been in 2014, 2015, and 2018.

According to invesing.com, the truth is that there is no one price at which the U.S. shale industry is profitable. Whether or not a company can make a profit on a barrel of oil depends on a host of different variables such as its operating expenses, the severance tax charged by the state, the interest it must pay on its loans, ease of oil recovery, and the drilling and completion costs of its particular wells.

The problem is not that we are running out of oil; the problem is that we are having trouble making money from producing tight oil. The U.S. Energy Information Administration (EIA) estimates that more than 300 billion barrels of shale oil might be technically recoverable, making up approximately 10% of total crude oil resources. But as a famous Saudi Oil Minister once said, "the stone age didn't' end because we ran out of rocks and the oil age will not end because we ran out of oil." the industry has to make a profit, not just produce more oil, and the industry has to do it with a lower environmental footprint.

With the mad rush to drill more wells to stay ahead of lease obligations and production decline, complete them to produce more oil, quicker, some in the industry forgot two critical lessons: the rocks have a say (i.e., the reservoir is essential) and the banker has a voice (you have to make money for you and for him).

The focus for the oil & gas industry over the past few years was on production growth. Well, that was achieved. The next challenge was to show how to drill a large number of wells much quicker. Well, that was accomplished as well. Then the challenge was to find the optimum way to complete the well (lateral length, frac stages, water, and proppant). Well, that is still a subject of experimentation, but there are several solutions available. Now the problem is to make money for your investors. That will make a return to understanding the subsurface and reservoir (sweet spots) and lower costs to make a profit. The need now is to incorporate petroleum economics and the physics of reservoir management. Can your platform do that?

This week, Datagration acquired Mosaic Petroleum Analytics. The integration of Mosaic's unconventional resource workflows with Datagration's flagship platform, PetroVisor™, will enable E&P companies to make better investment decisions based on physics-based modeling, predictive analytics, stressed economics, and knowledge automation.

Post by Datagration™
January 20, 2021