Discussion - Oil & Gas

DISCUSSION: What is the best leading indicator of shale production?

The recent boom in shale oil and gas production in the US has dramatically improved the economic and energy security prospects on North America.  Texas alone saw a 20% increase of its oil production in 2013, which was a record year for the US in terms of oil and gas production growth. However, recent claims have been made that Texas’ production is about to slow down.  Economist Karr Inghamv  made a presentation at the Houston Petroleum Club on the 29th of January arguing that production would fall due to, among other things, a decrease in rig counts. [1]

Others disagree.  The Drilling Productivity Report released by the US Energy Information Agency three months ago argues that new well productivity in the US would stem from higher drilling efficiency, despite the decrease in the rig count. But while productivity improvements are part of the information explaining past trends, they don’t tell us very much about where total production is going. [2]


So, if the count of drilling rigs isn’t the silver bullet for estimates of future oil and gas production, what is? The EIA already seeks for trends in production and depletion through the use of additional metrics, such as: drilling efficiency, well productivity, and field depletion. Other parties refer to oil field service job growth or interest rates.  However, none has emerged as the ‘new’ industry standard for understanding future production trends.

Without understanding the key drivers of future shale oil and gas production, the US lacks visibility on the longevity of the shale boom and its economic benefits. Rig counts and rig efficiency are not wholly satisfactory leading indicators, so what is?

  • Growth in the number of new wells?
  • Local Industry Employment?
  • Capital investments?
  • Real Interest Rates?

DISCUSSION: What data available to us today gives us the best estimate of shale oil and gas production over the next 3-5 years…

  1. http://fuelfix.com/blog/2014/01/29/texas-oil-boom-could-be-nearing-slowdown-economist-says/
  2. http://www.eia.gov/pressroom/presentations/sieminski_10292013_drilling.pdf

9 replies »

  1. Great question, Celine.

    My favorite right now would be well productivity TIMES number of new wells (call it productivity adjusted well count), and track that over time. Rapid depletion rate in shale suggest that to even get to a steady state it is vital to keep drilling an equal number of productivity-adjusted wells each year. If we don’t, it will show up in production drops in less than a year. (It’s just math, which you can confirm with a quick excel model.)

    I still think there must be something that would allow us to peer farther over the horizon on future number of wells, but open to ideas and suggestions for data sources.

  2. Dear Celine, interesting post.

    An index related well productivity and growth in the number of new wells (the derivative) seems interesting to me. Drilling efficiency and field depletion can be built-in in the well productivity output.


  3. To go beyond the horizon of existing wells, (which I agree can be analysed in terms of weighted productivity measures, taking into account reasonably well-understood field depletion rates), there are two broad sets of metrics that could be worth looking into:

    1. Evidence that there will be an incentive to produce: oil price futures, potential export licensing for crude, interest rates

    2. Evidence that actual production activity is being planned: this might take more detective work, but could involve looking at licensing, employment indicators (particularly around discovery/planning) or even supply chain activity (purchase orders for drill equipment?)

  4. Platts also has an interesting article on the topic (http://www.platts.com/latest-news/oil/houston/feature-analysts-predict-more-drilling-in-us-21004891)

    “If more equals better, then 2014 will likely be another sizzling year for the drill bit in the US, with a cascade of funds chasing a horde of anticipated initial public offerings, expanded oil-company development programs, greater drilling efficiencies and more horizontal wells than ever, analysts and upstream experts say. (…)Barclays said new technology and a “growing inventory of undrilled wells” top its short list of things to watch for in the new year.

    • Celine – my problem here is that I can’t see the leading indicator. Most of this Platt’s report is accumulated projections from a few sources, but I don’t have any idea what they are based on.

      Also, any idea if the well counts they are citing are new wells in the year or cumulative wells?

  5. Interesting post, Celine.

    Yesterdays’ EIA – Today in Energy article [http://www.eia.gov/todayinenergy/detail.cfm?id=15351] does much to inform the issue of production increases being driven by gains in drilling efficiency (data is broken down by the 6 major shale plays). An additional metric that might be useful to follow is the relationship between total frac stages and production.

    One of the drivers for future increases in productivity that may be particularly difficult to account for are disruptive improvements in E&P technology. The increased efficiency discussed in this article has been driven by, among other factors, improvements in precision, increased length of the lateral components in horizontal drilling, and tighter spacing of frac stages. It will be interesting to see what further improvements lie ahead.

  6. I am no petroleum engineer but believe some of the following metrics might be interesting to look at. Rig counts(a good start)–>Wells per rig–>30 day average production rate–> IP additions–> Depletion rates. As mentioned in other comments, frack stages, length of laterals, number of new wells added could also be of interest to look at. Since even steep depletion can be mitigated by well design and recovery techniques, technological advancements will play a very important role. In addition, it will be useful to dive into the sub-play level as production potential within one shale play can vary from place to place. I know some companies use EURs(Estimated Ultimate Recovery rates) to project shale productions over the whole life cycle of wells. But a silver bullet real-time indicator of shale production might be hard to come up with given the geological difference between various shale plays and the different types of drilling rigs( on shore, off shore, horizontal and vertical). Admittedly, I still follow rig counts…

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