Report addresses shale producers’ ability to ramp-up activity

By Luke Geiver | January 31, 2017

Rig activity ramp-up and the increasing deployment of frack crews in the Permian Basin of West Texas and Eastern New Mexico has energy researchers at Rice University’s Baker Institute for Public Policy asking the question: how well will shale energy producers be able to scale-up activity in 2017?

In a recently released report, “Assessing Shale Producers’ Ability to Scale-up Activity,” a team from the Baker Institute highlighted the elements, challenges and opportunities for shale producers to complete drilled but uncompleted wells or drill new wells. “The Permian Basin is already adding rigs and will likely continue to see a majority of new interest, but as prices stabilize other plays such as the Bakken, Eagle Ford and Niobrara will follow,” the report said.

The revamped activity levels could put a crunch on service company equipment and manpower availability which in return could increase the price operators pay for pressure pumping and other well-related services. An increase in service prices may impact breakeven prices, driving them higher and reducing the operators’ ability to reach certain rates of return at oil prices in the $50 to $60 range.

While it is certain service costs will rise as activity continues to increase in places like Texas or North Dakota, the researchers said it is uncertain to what extent productivity gains made during the downturn by many exploration and production firms will last. According to the report, the dollar per barrel cost declined during a two-year window—2014 to 2016—by 63 percent. The dollar per well cost declined by 34 percent, the report added. This indicates that production per well drilled increased during that two-year span. Of the per barrel cost reductions that took place from 2014 to 2016—69 percent came from productivity gains and 31 percent came from service cost reductions.

Some of the productivity gains came as operators moved into what they assumed was their most productive acreage. The gains that occurred are also attributed to enhanced completion designs. The question for the Baker Institute researchers is what happens to breakeven prices (at current oil prices) if the well productivity gains and dollar per barrel costs are not maintained? If productivity gains realized in the last two years, then per barrel costs would only rise by 52 percent, but if the gains are not maintained, per barrel costs could rise by 169 percent. “Hence, the degree to which productivity persists is a critical element in understanding the responsiveness of shale to price increases,” the report said.

Other variables that could impact the ability of producers to maintain a prolonged ramp-up effort include oilfield worker availability, the ability to unstack cold stacked equipment and the need for service companies to rise prices after undergoing massive service fee cuts.

The full report can be viewed here