Oil prices have surged more than 75 per cent in the US this month. But don’t expect a quick rebound in supply from shale explorers.
The quick turnaround in oil markets is exposing the shale industry’s Achilles’ heel: lightning-fast production declines. Shale gushers turn to trickles so quickly that explorers must constantly drill new locations to sustain output.
And they haven’t been doing that. Drilling activity touched an all-time US low after Covid-19 lockdowns crushed global energy demand and explorers slashed spending to survive a crash that has erased tens of thousands of jobs and pushed some companies into bankruptcy.
It’s a phenomenon that’s ultimately attributable to the very geology of shale.
Just like a shaken bottle of champagne explodes when its cork is popped, a fracked shale-oil well erupts with an initial burst of supply.
The froth is short-lived, however, unlike old-fashioned wells in conventional rocks that are characterised by steadier long-term production rates. To offset the decline curve, shale explorers used to keep drilling. And drilling. And drilling.
“We just have no new drilling and these decline curves are going to catch up,” said Mark Rossano, founder and chief executive of private equity company C6 Capital Holdings.
“That hits really fast when you’re not looking at new production.”
Shale explorers have been turning off rigs at a record pace because the oil rout has gutted cash flow needed to lease the machines and pay wages to crews.
Going forward, management teams may be hesitant to rev the rigs back up again despite higher crude prices because of fears of flooding markets with oil once again and triggering yet another crash.
Left unchecked by new drilling, oil production from US shale fields probably would plummet by more than one-third this year to less than 5 million barrels a day, according to data company ShaleProfile Analytics.
That would drastically undercut US influence in world energy markets and deal a major blow to president Donald Trump’s ability to wield crude as a geopolitical weapon.
Such is America’s reliance on new drilling that 55 per cent of the country’s shale production is from wells drilled in the past 14 months, according to ShaleProfile.
“These are much bigger wells than your small onshore conventional wells. We’re in a whole other ball park here,” said Tom Loughrey, founder of shale-data company Friezo Loughrey Oil Well Partners.
“We have these relatively large and numerous shale wells, but they decline fast.”
To get an idea of how dramatically shale wells peter out, consider this: less than 20 per cent of this year’s expected drop in overall US crude output will come from shuttering existing wells, according to IHS Markit.
Rather, the vast majority of the supply drop will be the direct result of cancelled drilling projects.
“If you want to be a high flyer and a fast grower, you do that by adding lots of new wells,” said Raoul LeBlanc, an IHS analyst.
But when the drilling stops, slumping output produces “a hangover effect.”
Oil must merely trade above producers’ daily operating costs for them to avoid shutting in existing wells, according to Tai Liu, BloombergNEF analyst.
Most shale players we assessed can therefore avoid shut-ins if WTI clears $15 a barrel, though some need $20 or above.
The calculus for economic shut-ins does not include interest costs as those generally reflect previously incurred debt burdens.
Some explorers are taking more drastic action than others.
While Parsley Energy and Centennial Resource Development have said they’re halting all drilling and fracking, companies such as EOG Resources and Diamondback Energy plan to continue adding new wells, albeit at a severely reduced pace.
Much of the shuttered production probably will be turned back on by the end of this year, Federal Reserve Bank of Dallas president Robert Kaplan said during a Bloomberg Television interview.
Companies often don’t disclose their decline rates until asked, and even then, not everyone is happy about it.
Shale pioneer Mark Papa, who founded EOG and until recently led Centennial, once reprimanded an inquisitive analyst.
“Subash, we don’t disclose decline rates,” he said during a February 2019 conference call in response to a question from analyst Subash Chandra who was with Guggenheim Securities at the time.
“That’s kind of one of those things – kind of an entrapment question, so that’s just something that we really don’t want to talk about.”
Asked about his company’s decline rates earlier this month, Cimarex Energy chief executive Tom Jorden responded, “I hate it.”
MATCH INFO
Uefa Champions League final:
Who: Real Madrid v Liverpool
Where: NSC Olimpiyskiy Stadium, Kiev, Ukraine
When: Saturday, May 26, 10.45pm (UAE)
TV: Match on BeIN Sports
UAE currency: the story behind the money in your pockets
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ESSENTIALS
The flights
Emirates flies from Dubai to Phnom Penh via Yangon from Dh2,700 return including taxes. Cambodia Bayon Airlines and Cambodia Angkor Air offer return flights from Phnom Penh to Siem Reap from Dh250 return including taxes. The flight takes about 45 minutes.
The hotels
Rooms at the Raffles Le Royal in Phnom Penh cost from $225 (Dh826) per night including taxes. Rooms at the Grand Hotel d'Angkor cost from $261 (Dh960) per night including taxes.
The tours
A cyclo architecture tour of Phnom Penh costs from $20 (Dh75) per person for about three hours, with Khmer Architecture Tours. Tailor-made tours of all of Cambodia, or sites like Angkor alone, can be arranged by About Asia Travel. Emirates Holidays also offers packages.
The specs: 2018 Nissan 370Z Nismo
The specs: 2018 Nissan 370Z Nismo
Price, base / as tested: Dh182,178
Engine: 3.7-litre V6
Power: 350hp @ 7,400rpm
Torque: 374Nm @ 5,200rpm
Transmission: Seven-speed automatic
Fuel consumption, combined: 10.5L / 100km
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MOUNTAINHEAD REVIEW
Starring: Ramy Youssef, Steve Carell, Jason Schwartzman
Director: Jesse Armstrong
Rating: 3.5/5
Killing of Qassem Suleimani
More on Quran memorisation:
GAC GS8 Specs
Engine: 2.0-litre 4cyl turbo
Power: 248hp at 5,200rpm
Torque: 400Nm at 1,750-4,000rpm
Transmission: 8-speed auto
Fuel consumption: 9.1L/100km
On sale: Now
Price: From Dh149,900
Manchester City 4
Otamendi (52) Sterling (59) Stones (67) Brahim Diaz (81)
Real Madrid 1
Oscar (90)
UAE currency: the story behind the money in your pockets
HUNGARIAN GRAND PRIX RESULT
1. Sebastian Vettel, Ferrari 1:39:46.713
2. Kimi Raikkonen, Ferrari 00:00.908
3. Valtteri Bottas, Mercedes-GP 00:12.462
4. Lewis Hamilton, Mercedes-GP 00:12.885
5. Max Verstappen, Red Bull Racing 00:13.276
6. Fernando Alonso, McLaren 01:11.223
7. Carlos Sainz Jr, Toro Rosso 1 lap
8. Sergio Perez, Force India 1 lap
9. Esteban Ocon, Force India 1 lap
10. Stoffel Vandoorne, McLaren 1 lap
11. Daniil Kvyat, Toro Rosso 1 lap
12. Jolyon Palmer, Renault 1 lap
13. Kevin Magnussen, Haas 1 lap
14. Lance Stroll, Williams 1 lap
15. Pascal Wehrlein, Sauber 2 laps
16. Marcus Ericsson, Sauber 2 laps
17r. Nico Huelkenberg, Renault 3 laps
r. Paul Di Resta, Williams 10 laps
r. Romain Grosjean, Haas 50 laps
r. Daniel Ricciardo, Red Bull Racing 70 laps
If you go
The flights
Emirates flies from Dubai to Seattle from Dh5,555 return, including taxes.
The car
Hertz offers compact car rental from about $300 (Dh1,100) per week, including taxes. Emirates Skywards members can earn points on their car hire through Hertz.
The national park
Entry to Mount Rainier National Park costs $30 for one vehicle and passengers for up to seven days. Accommodation can be booked through mtrainierguestservices.com. Prices vary according to season. Rooms at the Holiday Inn Yakima cost from $125 per night, excluding breakfast.
Benefits of first-time home buyers' scheme
- Priority access to new homes from participating developers
- Discounts on sales price of off-plan units
- Flexible payment plans from developers
- Mortgages with better interest rates, faster approval times and reduced fees
- DLD registration fee can be paid through banks or credit cards at zero interest rates
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The specs
Engine: 3.8-litre, twin-turbo V8
Transmission: eight-speed automatic
Power: 582bhp
Torque: 730Nm
Price: Dh649,000
On sale: now
UAE currency: the story behind the money in your pockets
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
Director: Laxman Utekar
Cast: Vicky Kaushal, Akshaye Khanna, Diana Penty, Vineet Kumar Singh, Rashmika Mandanna
Rating: 1/5
Fatherland
Kele Okereke
(BMG)
The specs
Engine: 3.0-litre six-cylinder turbo
Power: 398hp from 5,250rpm
Torque: 580Nm at 1,900-4,800rpm
Transmission: Eight-speed auto
Fuel economy, combined: 6.5L/100km
On sale: December
Price: From Dh330,000 (estimate)
UAE currency: the story behind the money in your pockets
Match info
UAE v Bolivia, Friday, 6.25pm, Maktoum bin Rashid Stadium, Dubai
KEY HIGHLIGHTS
Healthcare spending to double to $2.2 trillion rupees
Launched a 641billion-rupee federal health scheme
Allotted 200 billion rupees for the recapitalisation of state-run banks
Around 1.75 trillion rupees allotted for privatisation and stake sales in state-owned assets
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UAE - India ties
The UAE is India’s third-largest trade partner after the US and China
Annual bilateral trade between India and the UAE has crossed US$ 60 billion
The UAE is the fourth-largest exporter of crude oil for India
Indians comprise the largest community with 3.3 million residents in the UAE
Indian Prime Minister Narendra Modi first visited the UAE in August 2015
His visit on August 23-24 will be the third in four years
Sheikh Mohamed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, visited India in February 2016
Sheikh Mohamed was the chief guest at India’s Republic Day celebrations in January 2017
Modi will visit Bahrain on August 24-25
