U.S. crude oil production hit a record high of 13.1 million barrels per day as recently as mid-March, but total output since has tumbled to 11 million bpd. (©Dave Cutler)
GILLIAN RICH 06/25/2020
The biggest-ever shutdown of U.S. shale oil production sets the stage for another historic feat: turning it back on again. But for battered oil stocks, reopening the taps is the tricky part.
Shut-ins, or the closing off of wells, will hit U.S. production for years to come. So will recent halts in new drilling. The immediate fallout is clear. After hitting a record high of 13.1 million barrels per day as recently as mid-March, total U.S. crude oil production has tumbled to 11 million bpd.
Some shale oil industry leaders warn of permanent damage. Geology and Wall Street may determine the long-term effects.
"This is an unprecedented downturn," said EOG Resources (EOG) CEO Bill Thomas in an earnings call last month, a few weeks after oil prices went negative for the first time. "U.S. oil production is in severe decline, and it could take years for domestic production to turn around. We believe that the historic and prolific oil production growth by U.S. shale may have been forever altered."
Shale oil stocks have defied doomsayers before and have helped the U.S. achieve once unthinkable feats. Shale producers boosted U.S. oil production over that of Saudi Arabia and made the U.S. a net oil exporter again.
But massive economic collapse in the global coronavirus recession triggered widespread well shut-ins. The U.S. presidential election is also a concern for independent oil companies. Democratic nominee Joe Biden has outlined aggressive clean energy goals and plans to curtail new fracking permits.
The boom times for shale, and perhaps oil stocks, may be over.
Individual well shut-ins for days and weeks at a time are routine. They usually happen to perform maintenance or to fix a problem with a fracking job. Oil companies also shut in wells in times of low oil prices, such as during the Saudi price war of 1986.
But that was before the shale oil boom. The body of knowledge on prolonged shut-ins of shale wells is thin vs. conventional wells, adding to the uncertain outlook for reopening thousands of wells today.
Moreover, the scale of what's going on now is unprecedented, IHS Markit said in a May report, calling it the "Great Shut-In." The market tracker estimated 1.75 million bpd of existing U.S. oil production would be gone by early June. Other analysts have forecasts above 2 million.
"Not even the United States' huge network of storage facilities and associated infrastructure was enough of a buffer for a crisis on this scale," said Raoul LeBlanc, vice president of financial services at IHS Markit, in a statement. "Negative oil prices and the collapse of WTI futures contracts were a potent signal that stronger measures, namely shut-ins, were needed to curb oversupply."
ConocoPhillips (COP) alone is shutting in more than 2,000 wells. S&P Global Market Intelligence estimates that Conoco's shut-in production will total 420,000 barrels per day in June.
"Not even the United States' huge network of storage facilities and associated infrastructure was enough of a buffer for a crisis on this scale," said Raoul LeBlanc, vice president of financial services at IHS Markit, in a statement. "Negative oil prices and the collapse of WTI futures contracts were a potent signal that stronger measures, namely shut-ins, were needed to curb oversupply."
ConocoPhillips (COP) alone is shutting in more than 2,000 wells. S&P Global Market Intelligence estimates that Conoco's shut-in production will total 420,000 barrels per day in June.
The market tracker sees Exxon Mobil (XOM) shutting in 320,000 bpd and Chevron 240,000. Among top shale oil stocks, Continental Resources (CLR) will shut in an estimated 140,000 bpd of production in June, and EOG Resources about 100,000.
IHS expects 500,000 bpd will stay off the market long term, until U.S. oil prices are above $50 per barrel again. That will likely take years. The Energy Information Administration sees U.S. oil prices averaging just $35.14 this year and $43.88 in 2021.
IHS sees most of the rest of the production coming back by the summer and fall. But a timeline of several months means trouble for shale wells.
A short shut-in may help a well come back even stronger. In its Q1 earnings call, EOG Resources said that when wells restarted, oil production increased for an average of 23 days before falling back to a typical decline rate.
But wells can suffer permanent damage in longer shut-ins.
"When you're talking about 30 days vs. 60 days vs. 90 days, there's a problem," Lyle Lehman, founder of fracking consulting firm Frac Diagnostics, told IBD.
Most of the damage during a well shut-in occurs between 30 and 60 days, he says. The geology of U.S. shale fields makes the wells especially susceptible to damage after prolonged shut-ins.
Shale is a fine-grained sedimentary rock with very low permeability. That means the liquids and so-called proppants, like sand or ceramics, that are used to crack open shale will remain stuck in the well, causing damage to the rock fractures from which oil normally would flow.
But EOG's CEO was unconcerned when speaking to analysts in May.
"On these shale wells, there's absolutely no damage when you shut them in and bring them back on for — whether it's two weeks or two months," Thomas said. "We feel very confident about that."
The good news for shale oil stocks is that the Permian Basin, where the vast majority of U.S. drilling activity is concentrated, has better geologic traits than other formations do.
Lehman says that the Haynesville field in east Texas and southwestern Arkansas has the worst permeability. The Bakken formation in North Dakota is in the middle, and the Permian is near the top.
But none of the plays have such great permeability that damage from shut-ins would be minimal, he warns. Such damage can hasten a well's rate of decline. More oil will be left in the ground and unrecoverable — unless more invasive and expensive methods are used.
In west Texas, the output decline rate on shale wells is already steep, at about 40% a year, according to Lehman. After shut-in damage, a reopened well could see that annual decline rate worsen to 48%.
Because shale oil wells decline quickly, companies must keep drilling new wells just to keep output from falling. During the boom years of shale oil stocks, banks were eager to offer loans, stoking production growth. That's changing now.
"Will money pour back into the sector? It's a very, very capital-intensive sector. And we don't think that's going to be the case," Energy Aspects Chief Oil Analyst Amrita Sen told Bloomberg TV in May.
If lending remains tight, "Shale growth will really never go back to a million barrels per day again," she added, echoing EOG's CEO. "You're going to look at 200,000 to 300,000 barrels per day growth. So it's a paradigm shift for now."
Meanwhile, shale oil stocks are dealing with the hangover from those debt-happy years. Low crude prices and slashed production mean little cash is coming in.
Some producers have already sought bankruptcy protection. In April, Whiting Petroleum (WLL) filed for bankruptcy. And in May, Chesapeake Energy (CHK) and Oasis Petroleum (OAS) warned about their ability to stay in business.
If U.S. oil prices stay at $30 per barrel, 70 companies could file for bankruptcy, Rystad Energy has predicted. And if oil falls to $20 per barrel, that number could double to 140.
Even when U.S. oil prices climb back toward 2019 levels, "very few" shale producers will be able to expand production because of their high debt levels, Pioneer Natural Resources (PXD) CEO Scott Sheffield said on an investor call in May.
Some shale production has continued despite low oil prices, especially when companies have lease contracts that require them to continue pumping no matter what. Diamondback Energy (FANG) said in May it's keeping one completion crew active in Q2 to meet its current lease obligations.
Other companies don't want to cut shale oil production before rivals do and help them out, says Ryan Giannotto, director of research at GraniteShares.
"So it's this big game where everyone says, 'If I can just last one day longer than the competition, then I'm all set,'" he said.
With oil prices rebounding and holding above $30 a barrel lately, some shale oil stocks are taking early steps to open the tap again. In June, Parsley Energy (PE) said it will bring back the "vast majority" of the 26,000 barrels per day it shut in just a month prior.
EOG also said in early June it plans to "accelerate our production into what we see as a price recovery in the second half of the year."
That doesn't mean boom times are ahead. While reopening existing wells, Parsley is not doing any new drilling or fracking. EOG is similarly bearish on new drilling.
"We see very little capital flowing into the industry. And we see higher declines from all the shale players throughout the rest of the year," EOG exploration chief Ken Boedeker told an RBC Capital Markets conference. "Starting to drill in the high $30s? I'm not sure I see that."
Shale is a fine-grained sedimentary rock with very low permeability. That means the liquids and so-called proppants, like sand or ceramics, that are used to crack open shale will remain stuck in the well, causing damage to the rock fractures from which oil normally would flow.
But EOG's CEO was unconcerned when speaking to analysts in May.
"On these shale wells, there's absolutely no damage when you shut them in and bring them back on for — whether it's two weeks or two months," Thomas said. "We feel very confident about that."
The good news for shale oil stocks is that the Permian Basin, where the vast majority of U.S. drilling activity is concentrated, has better geologic traits than other formations do.
Lehman says that the Haynesville field in east Texas and southwestern Arkansas has the worst permeability. The Bakken formation in North Dakota is in the middle, and the Permian is near the top.
But none of the plays have such great permeability that damage from shut-ins would be minimal, he warns. Such damage can hasten a well's rate of decline. More oil will be left in the ground and unrecoverable — unless more invasive and expensive methods are used.
In west Texas, the output decline rate on shale wells is already steep, at about 40% a year, according to Lehman. After shut-in damage, a reopened well could see that annual decline rate worsen to 48%.
Because shale oil wells decline quickly, companies must keep drilling new wells just to keep output from falling. During the boom years of shale oil stocks, banks were eager to offer loans, stoking production growth. That's changing now.
"Will money pour back into the sector? It's a very, very capital-intensive sector. And we don't think that's going to be the case," Energy Aspects Chief Oil Analyst Amrita Sen told Bloomberg TV in May.
If lending remains tight, "Shale growth will really never go back to a million barrels per day again," she added, echoing EOG's CEO. "You're going to look at 200,000 to 300,000 barrels per day growth. So it's a paradigm shift for now."
Meanwhile, shale oil stocks are dealing with the hangover from those debt-happy years. Low crude prices and slashed production mean little cash is coming in.
Some producers have already sought bankruptcy protection. In April, Whiting Petroleum (WLL) filed for bankruptcy. And in May, Chesapeake Energy (CHK) and Oasis Petroleum (OAS) warned about their ability to stay in business.
If U.S. oil prices stay at $30 per barrel, 70 companies could file for bankruptcy, Rystad Energy has predicted. And if oil falls to $20 per barrel, that number could double to 140.
Even when U.S. oil prices climb back toward 2019 levels, "very few" shale producers will be able to expand production because of their high debt levels, Pioneer Natural Resources (PXD) CEO Scott Sheffield said on an investor call in May.
Some shale production has continued despite low oil prices, especially when companies have lease contracts that require them to continue pumping no matter what. Diamondback Energy (FANG) said in May it's keeping one completion crew active in Q2 to meet its current lease obligations.
Other companies don't want to cut shale oil production before rivals do and help them out, says Ryan Giannotto, director of research at GraniteShares.
"So it's this big game where everyone says, 'If I can just last one day longer than the competition, then I'm all set,'" he said.
With oil prices rebounding and holding above $30 a barrel lately, some shale oil stocks are taking early steps to open the tap again. In June, Parsley Energy (PE) said it will bring back the "vast majority" of the 26,000 barrels per day it shut in just a month prior.
EOG also said in early June it plans to "accelerate our production into what we see as a price recovery in the second half of the year."
That doesn't mean boom times are ahead. While reopening existing wells, Parsley is not doing any new drilling or fracking. EOG is similarly bearish on new drilling.
"We see very little capital flowing into the industry. And we see higher declines from all the shale players throughout the rest of the year," EOG exploration chief Ken Boedeker told an RBC Capital Markets conference. "Starting to drill in the high $30s? I'm not sure I see that."
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