If oil production from unconventional resources really is a target of decision-making by the Organization of Petroleum Exporting Countries, as some observers say, the exporters' group has dedicated nearly a year to perverse strategy. Elevating the crude price with production restraint greatly helps producers of oil from shale and other formations requiring horizontal drilling and massive hydraulic fracturing.
In fact, conflict between OPEC and shale producers is not the governing dynamic of the modern oil market. That distinction belongs to new abundance of promptly available oil.
Behaving rationally
Producers in both supposedly opposing camps are simply behaving rationally. The 12 OPEC members committed to supply management, newly extended through 2018, want to make money selling oil. They resorted to price support last Jan. 1 when defense of market share proved too painful. Ten nonmember exporters are collaborating. But tight-oil producers in North America, also wanting to make money, drill more when the crude price rises and less when it falls, and production follows without traditional delays for exploration and development. In a fundamentally oversupplied market, their additions undermine whatever success production restraint achieves. This is an inconvenience of competition to which all producers must accustom themselves.
Portrayal of the market's last 3 years as a fight unto death between OPEC and shale always has been simplistic. While defending market share instead of the crude price for 2 years starting in November 2014, OPEC hurt itself and the offshore and oil-sands industries at least as much as it damaged oil from unconventional resources. Yes, the price slump to which OPEC initially refused to respond sent more than 100 small producers in the US and Canada into bankruptcy and lowered tight-oil production. But that part of the producing industry has largely regrouped. Its costs have fallen, and its efficiencies have improved. When crude prices rose this year after global inventories finally began to fall, drilling and production followed. OPEC expects US production of tight oil to recover by 430,000 b/d this year and rise by 620,000 b/d in 2018.
How long and by how much can production grow from reservoirs able to provide incremental supply as quickly as operators drill and fracture wells? The yet-unanswerable question must have received attention in a technical workshop OPEC held a week before the ministerial meeting last month in Vienna.
Reasons exist to think tight-oil production gains will moderate soon. Much of this year's increase occurred in the Permian basin, a relatively young unconventional play where operators drilled to hold leases. That stimulant to activity will subside as the play matures. Meanwhile, operators feel pressure from investors to focus on positive free cash flow instead of production growth. Many must trim capital investment to make that happen. Contraction of equipment, supplies, and the workforce during the industry swoon of 2015-16 limits growth in places. And costs are rising as contractors break free of sacrificial pricing.
But the technical progress crucial to tight-oil supply hasn't lapsed. Operators continue to improve productivity and estimated ultimate recovery well by well, learning as they work. They drill longer well laterals and fracture more stages. In place of the highly engineered proppants and frac fluids they once favored, they now inject cheaper sand and slickwater—in higher volumes and under greater pressure than before. They use sophisticated drilling methods to keep laterals in the best rock and often deploy passive seismic arrays to monitor fractures. They even have adjusted perforation strategy. A few years ago, operators wanted fractures to extend far from wellbores; now, they want to frac more rock but nearer to laterals and to drill laterals closer together.
Knowledge, know-how
With unconventional hydrocarbons, production depends on knowledge and know-how rather than geologic discovery. And operators are just beginning to leverage those variables with data analytics.
For anyone clinging to the simple view, tight oil isn't just a moving target; it's an ever-changing one. And the more it changes, the bigger it becomes.
