US shale as swing producer

April 27, 2015
Many are talking about US light, tight oil (LTO) as possibly becoming a new source of swing supply for the world oil market.

Many are talking about US light, tight oil (LTO) as possibly becoming a new source of swing supply for the world oil market.

"The swing producer role held by Saudi Arabia since the mid-1970s appears to be in flux," said Rice University's James A. Baker Institute researchers in a paper earlier this year. "At times when the Saudis decline to adjust production in line with market signals, such as at present, that role may revert to higher-cost areas of production, including some in the US."

The paper, "Effects of Low Oil Prices on US Shale Production: OPEC Calls Tune and Shale Swings," was written by Jim Krane, a Wallace S. Wilson fellow at the Baker Institute, and Mark Agerton, a graduate student fellow at the Baker Institute.

They based their findings on statistics from Drillinginfo, a monthly index, and from Baker Hughes Inc., provider of the closely watched US weekly rig count.

LTO investments typically are smaller and faster to execute than big conventional projects that can be accompanied by large shutdown costs, Krane and Agerton said.

"Low barriers to entry allowed small, independent producers to rapidly move into the market and start drilling," Krane and Agerton said of unconventional plays. "The same low barriers allow them to exit quickly if investing becomes unprofitable."

On the other hand, Krane and Agerton note economic reasons why LTO production might respond more slowly than some have suggested. Operators stand to benefit from service companies' discounts during oil-price slumps, and some operators also have locked in certain commodity prices through hedging contracts.

"The nimble characteristics of US shale producers may provide global markets with alternate and useful source of spare capacity," Krane and Agerton concluded.

Spare capacity

David Havens, oil services analyst with CLSA Americas LLC in New York, agreed US unconventional oil can be seen as a form of spare capacity.

"It does have a probability of success of over 90%," Havens said of unconventional operations. "Yes, Saudi Aramco can switch theirs on faster, but the elasticity of supply in the US is among the best in the world."

Havens calls industry's budget cuts and subsequent production declines "good first steps," but he also notes, "The evolution of US unconventional oil supplies is not going to be managed this quickly and absolutely."

Separately, J. Marshall Adkins of Raymond James & Associates Inc. of St. Petersburg, Fla., noted on Apr. 13 that the total US rig count has fallen more precipitously than he had imagined.

"However, we think the first-half downward correction was too much, too fast relative to what was needed to rebalance the system. That means we expect the rig count to gradually rebound in the second half of 2015 and continue to grow through 2016."

For 2016, RJA forecast a rig count average of 1,176 rigs, Adkins expects the recovery will be disproportionately slanted to horizontal rigs in the Permian, Eagle Ford, and Bakken plays.

Horizontal rigs represented 78% of the active rigs drilling in the US according to Baker Hughes statistics for the week ended Apr. 10. RJA estimates horizontal rigs will represent 83% of active US rigs by Dec. 31, 2016.

*Paula Dittrick is editor of OGJ's Unconventional Oil & Gas Report.