Shale Plays Today

Our Mid Atlantic energy guru today writes about the success and decline of the shale phenomenon.  We are always grateful for his perspective.  -dh

In January, we ran the note below about the Bakken. Four months later, production has dropped in three out of four months despite higher prices, the number of rigs is stagnant, the number of uncompleted wells has moved up only slightly, and the number of inactive wells is up over 10%.  During the last year, the prime locations have been targeted for drilling, to improve cash flow. According the North Dakota DMR, the weather in January held back some activity, but it probably did not affect the number of rigs operating by too much. There is a chart by Art Berman below that shows the trend even more

Bottom Line, production is starting to show the effects of field decline, and the volume of activity does not appear to be ramping up anytime soon. We have used the phrase “Traveling Circus” to describe the movement of the Shale Cast from one “great basin” to the next one. This started with the E&Ps that followed Aubrey McLendon from the Barnett to the Woodford to the Haynesville to the Marcellus to the Utica to the Eagle Ford to the Bakken to the Scoop, then on to the Permian. It would appear that the Traveling Circus is fully ensconced in the Permian, while the secondary acts are working the Bakken and elsewhere along the trail.  The Bakken may yet pick up again, but it is going to have benefit from the promise of a higher sustained price than now.


We have been following the development of the Bakken for several years. We see it as a good petri dish to study the growth of a formation, and its eventual maturing and decline. The article below does a concise job of documenting its history to date.

There are a couple of good takeaway points below about the Bakken, given the roller-coaster ride of oil prices during its development.

  • At $100/bbl oil up to 2014, rigs were drilling everywhere. Cash flow was plentiful, and producers were flowing in. Operations were less than efficient, but who cared? The serial destroyers of capital (E&Ps) were in their glory.
  • Once the price dropped like a stone in 2014, so did the number of rigs. The volume of daily crude oil production did not drop nearly as much, owing to DUCs and efforts to squeeze production out of existing wells, in the name of cash flow.
  • Production has started up again, with a reasonably small number of rigs overcoming the decline rate to increase production. But this time, it is being done by using experience to focus on sweet spots and using bigger and more efficient drilling methods.

In our Immutable Principles, two of the tenets are:

  • The biggest, best oil and gas areas are developed first (relative to the technology available).
  • Once a field goes into decline, it will not increase production beyond this peak in the future without capex infusions that will prove to be uneconomic.

The Bakken may be an exception to these to rules, with qualification. Had the price of oil not dropped so precipitously, it is quite probable that the volume that would have been drilled over the past three years would have the field now in permanent decline. So the “peak” was deferred by extraneous circumstances. Also, now that the focus has is largely limited to “sweet spots”, this should make the actual peak occur not too long in the future (if it indeed, does go higher). The existence of excess takeaway capacity makes it more likely that the Bakken will actually achieve a new high. But unless crude oil prices go to the moon (above $85) an a sustained basis, we see a decline in the Bakken following any new high fairly quickly.

The Wall Street Journal: 

Oil Is Above $70, but Frackers Still Struggle to Make Money
American shale drillers are still spending more money than they are making, even as oil prices rise. Of the top 20 U.S. oil companies that focus mostly on fracking, only five managed to generate more cash than they spent in the first quarter, according to a Wall Street Journal analysis of FactSet data.