EPRINC examines US shale play dynamics in a low-price commodity environment

US unconventional oil activity has proved to be very resilient despite low commodity prices, but future production levels remain in question. Financial worries are mounting for independent operators, said a thinktank paper published by the Oxford Institute for Energy Studies.

Shale production has started to decline, wrote Trisha Curtis, director of research, upstream and midstream, for the Energy Policy Research Foundation Inc. (EPRINC) and a visiting research fellow for Oxford Institute for Energy Studies.

Still, independent operators are managing to get higher initial production rates while cutting costs. Drilling and completion costs dropped considerably because service companies offered discounts.

Yet, crude oil prices on the New York Mercantile Exchange dropped below $40/bbl this year although prices had recovered to the mid-$40 range as of early November.

"This movement paints a bleak picture for future production," Curtis said. "A further reduction in capital expenditures, shrinking oil rig counts, reduced risk appetite among lenders, and the potential for rising interest rates are all weighing on future production levels in the US."

Specific plays examined

Baker Hughes Inc. eported the rig count for units drilling for oil continues to decline for the most part although some plays have been harder hit than others.

Curtis said Bakken formation drilling permit levels are considerably lower than 2014 while the number of wells awaiting completion continues to rise. Curtis acknowledged impressive well performance, saying it largely is a direct result of enhanced completions in core acreage positions.

"Bakken production is largely controlled by the top 10 producers," she said. "This lack of producer diversification will have an impact on future drilling activity levels and future production as many of these companies delegate capital to other assets, which require drilling to hold acreage."

The Permian basin has proved the most resilient oil play relative to its peers-the Bakken and South Texas Eagle Ford.

"Activity levels remain high in comparison, but Texas and New Mexico production is beginning to show the first signs of decline," Curtis said. "Many companies in the Permian basin are still in the early innings of developing their assets," meaning they need to drill to hold acreage.

Of the three major unconventional oil plays, the Eagle Ford "has shown the most tangible signs of weakness-production has dropped over 150,000 b/d from March," she said.

The top 10 Eagle Ford producers contribute most of the liquids production, and many have concentrated assets in what Curtis called "the volatile oil and condensate windows."

Production has declined, and producer optimism also is waning, she said. High crude and condensate discounts already pressured Eagle Ford revenues before the price downturn and are further exacerbating the strain on revenues.