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Not dead yet: 'Big Shale' takes downturn to 'get better at what we do'

Most of the U.S. oil industry is reeling. Big Shale is reloading.

As the top dogs of the shale oil industry reported earnings last week, they said they will plan to mix ambition with austerity. This year they want to chop well costs 15 to 20 percent, while raising productivity in the rock. They're already preparing game plans to raise oil output later this year, if prices justify it.

The crash in oil prices, nearly 60 percent at its March nadir, was supposed to cut off U.S. shale at the knees. Instead, it might just be putting the industry's biggest players through a financial boot camp.

"I think that's ultimately probably a good thing for the industry, and I think it probably does emerge a bit more healthy than it was prior to the downturn," said Mark Hanson, an energy analyst with Morningstar.

"I think the implication longer term is you likely see probably more cost-competitiveness," he said. "And I think that probably leads to a cap on oil prices longer term, in part just because there's so much resource that can be brought online at low prices ... once these efficiencies flow through the U.S. shale complex."

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Continental Resources Inc. and Pioneer Natural Resources Co. both plan to produce more oil in 2015 than in 2014, despite smaller budgets.

Profits were down compared with the start of 2014. But EOG is preparing a "fracklog" of wells that can release oil when the price is right. Pioneer said it hopes to add two rigs per month in the Permian, starting in July. Continental said if West Texas Intermediate hits $70 a barrel this year, it would likely raise its budget and output.

If OPEC wanted to slow down U.S. shale, it's working: The top seven U.S. shales are on track to produce less oil in June than in May, according to the U.S. Energy Information Administration.

But the predicted wave of bankruptcies and buyouts hasn't yet come to pass, raising the question of how quickly shale can bounce back.

"I think what happens as a result of this downturn, and this is probably true for the entire industry, we get better at what we do," Timothy Dove, Pioneer's president and chief operating officer, told analysts last week. "We basically reduce our break-even cost, and we emerge better in terms of our cost structure as a result of it. And that's what we're going to be. We're going to be better because of the downturn."

Fitter, more productive

This doesn't discount the pain that's being felt across the wider industry. Capital budgets have been slashed by an estimated 40 percent, and thousands of layoffs have occurred in the oil patch. The smallest producers find themselves scrounging for capital to keep production going, knowing that Wall Street and industry buyers are circling above them.

But at the aggregate level, shale costs are coming down. One reason: The oil industry's contractors are cutting prices just to keep business. Second, the most technologically adept companies are finding ways to get more oil per capital buck.

The overall U.S. rig count is down about 50 percent since October, but that indicator means less than it used to. Rigs have become more productive, on average: Take Pioneer, which has cut rigs in one part of the Permian Basin but still expects output there to rise 20 percent this year.

Continental, the largest leaseholder in the Bakken Shale, is targeting a 20 percent drop in average well cost this year, to $7.7 million. It has been testing new production techniques that, it claims, could raise a well's ultimate output 25 to 45 percent over today's average.

EOG claimed its economics are better at today's $65 oil than at $95 oil in 2012. In the Eagle Ford, where it's the largest acreage holder and oil producer, 95 percent of its wells will get "high-density" completions that it claims can increase their output by almost a quarter.

What might this mean for oil prices?

For now, oil markets seem encouraged by the dribbles of data suggesting that U.S. oil growth has finally tapered. WTI briefly topped $62 last week -- a 2015 high -- and has since skittered to $59. Analysts still expect stronger pricing in late 2015, as U.S. demand warms up and supply growth is muted.

But one lingering question is how a leaner U.S. shale patch will respond to any price recovery.

According to Bloomberg Intelligence, major U.S. shales have a 3,400-well fracklog: wells whose oil production is being withheld until companies see a price they like.

Eric Lee, a commodities strategist with Citigroup, said oil rigs can come off the sidelines and have wells producing in six months to a year.

"Thus, shale can keep a lid on prices for a while on a sustained basis (prices could be high for a period before shale supply comes back and pushes prices back down)," he said by email.

Twitter: @SaqibSansU | Email: srahim@eenews.net

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