Red Queen effect slows shale growth

Repeated downward revisions to EIA forecasts of US oil production have halved the expected rate of growth in the shale patch since the middle of this year.

Bullish EIA predictions for US crude production this year and next were revised down again this month as bottlenecks in the supply of materials, labour and equipment constrain shale oil output growth. Forecasts for October-December this year were cut by 170,000 b/d in the EIA's latest Short-Term Energy Outlook (STEO), restricting annual growth this year to 500,000 b/d, compared with 740,000 b/d in the June STEO. And output next year is now expected to increase by 610,000 b/d, down from 1.05mn b/d in the June STEO and 850,000 b/d last month (see graph).

Persistent supply chain delays and rising costs are impeding drilling and completion activities in the shale patch, making it harder for firms to offset capacity losses from rapid depletion rates at existing wells. Nearly three-quarters of a "fracked" shale oil well's initial production is lost in the first 12 months and a further half in the next 12 months. Operators must keep bringing new wells on stream fast enough to maintain output — this is known as the "Red Queen effect". "It takes all the running you can do, to keep in the same place," the Red Queen tells Alice in Lewis Carroll's Through the Looking-Glass.

Yet new well completions have stalled at 970/month since March in the seven major shale formations that the EIA monitors in its monthly Drilling Productivity Report (DPR). And legacy declines at existing wells have continued to accelerate after a post-pandemic surge in completions (see graph). DPR-7 decline rates are forecast to rise to 545,000 b/d next month, or 6pc of DPR-7 production, the EIA says — up from 467,000 b/d, or 5.5pc, in March. With little improvement in the output of newly completed wells over recent months, 79pc were needed last month to offset declines, against 73pc in March, slowing the rate of output growth.

Off with their wellheads

Shale oil output growth has slowed in recent months. DPR-7 oil output will rise by 103,000 b/d (1.1pc) next month, down from an average of 145,000 b/d (1.7pc) in August-September, the EIA says. Monthly DPR-7 output growth has averaged 57,000 b/d (0.8pc) this year, as new well output kept ahead of legacy declines. But earlier EIA forecasts of strong growth next year were dashed as shale drilling and completion activity came up against supply-chain constraints. The STEO expects US crude production to rise next year by an average of 0.3pc/month, compared with a June forecast of 0.6pc.

US oil rig counts have edged up in recent weeks, according to upstream service firm Baker Hughes (see graph). In all, 610 rigs were drilling for oil in the week to 14 October, the most since March 2020. Permian basin oil rig counts remain lower than in July-August. Firms face delays in procuring materials and equipment, according to the latest Dallas Fed survey of energy firms in Texas, New Mexico and Louisiana. "The biggest issue that our company is facing is a shortage of personnel and equipment from our oil field service vendors," one respondent says. Firms cannot "attract the skilled labour that we need to deploy more drilling rigs and more frac [hydraulic fracturing] crews," the head of North Dakota's mineral resources department, Lynn Helms, says.

Frac spread counts are also back at end-July levels, with 295 active in the week to 14 October, industry monitor Primary Vision says. But this is probably close to effective capacity. With a backlog of drilled-but-uncompleted (DUC) wells nearly exhausted, firms must drill most new wells from scratch. Just 1pc of new well start-ups were DUCs last month.

US crude output forecasts

DPR-7 well completions

Oil rigs and frac spreads