Tayvis Dunnahoe
Exploration Editor
For all of their promise, unconventional resource basins in the US are experiencing a shift in momentum. On Apr. 8, Baker Hughes Inc.'s rig count settled at 443-the lowest number on record since the company began releasing these data in 1949. This marked 31 of the last 33 weeks the rig count declined, bringing the total deficit to 1,477 units since Dec. 5, 2014 (OGJ Online, Apr. 8, 2016).
Crude oil prices have edged up slightly, with WTI settling at $40.46/bbl as of this writing. Despite recent upticks in price, the industry as a whole may still be searching for the bottom.
Cutting cost
A typical response to bust cycles is rate reductions across the board. A recent survey by Citadel Advisory Group showed that nearly one in five of 500 companies operating across the spectrum in the US oil and gas sector had cut rates by more than 50% for their top three customers. Overall, 61% of respondents had reduced fees by 20% compared with July 2014. This was coupled with an excess of 30% reductions in revenue for 65% of respondents, with only 2.6% of companies showing an increase in profits.
Rig count in the US has dropped by 55.5% from the same period in 2015, and Citadel's survey attributes a loss of more than 50% in work volume for a majority of the companies working in basins throughout the US.
While the bottom line is a point of focus for both operators and service companies in view of cost reduction, human capital has not been overlooked in the process. Since 2014, 41% of the companies surveyed cited workforce reductions by more than 30%. With an eye on short-term savings, about 75% of the respondents are considering further reductions in staff within the next three months. The cyclical nature of the oil and gas industry is unavoidable, and the consequence of cost reduction during a downcycle poses problems for future recruitment in more stable environments (OGJ Online, Oct. 12, 2015).
Waiting it out
Among the companies surveyed, none of the respondents expected WTI to exceed $51/bbl by June 30 of this year. The unconventional resource market has seen down dips before; however, none of these were of the magnitude the industry is currently experiencing.
An inherent benefit to unconventional resource development has been the factory drilling approach, which means activity can ramp up quickly. As exploration and development declines in the face of fewer investments, activity can return rapidly with stabilized prices. That being said, there is a difference between price recovery and increased development activity.
In all likelihood, oil prices will need to sustain $60-70/bbl for 6 months or more to qualify as stable. Halted projects and new exploration may suffer from industry hesitation until these parameters are met.
Upending the downcycle
From a journalist's perspective, 9 years of covering this industry is now coming full circle. As of May 2007 when I began covering this industry, unconventional resources were becoming mainstream news. By 2010, the Massachusetts Institute of Technology's Energy Initiative referred to shale gas as a "bridge to the alternative energy future."
At that time, advanced drilling technology and innovative reservoir engineering transformed shale discovery and extraction into what many referred to as a "paradigm shift" in the oil and gas industry. By 2012, the leading proponents of "peak oil" quietly readjusted their theories as their timeline was invalidated by exponential increases in domestic reserves.
While unconventional resources continue to hold the same promise as before the price decline, the industry is finding its way around an oversupply. As rigs are stacked, shale production will decline in the near term, and the paradigm of exponential reserves replacement is changing. On the backside of that, the industry will need to make adjustments during a time of destabilization while also considering how it can adapt and regrow when the market recovers.
