Is A Shale Comeback On The Horizon?

  • Date: 12/06/20
  • Haley Zaremba, OilPrice.com

“Shale’s not broke, shale’s not gone, shale will come back. But I do think it comes back slower and maybe not grow as dramatically as before.” 

It’s been a tough year for U.S. shale. Even before the novel coronavirus pandemic pummeled oil markets, the shale revolution had been pronounced dead, with investors shying away from the Permian Basin and shale wells drying up across West Texas.  A slowdown in the U.S. shale revolution was inevitable. “The nature of shale wells is that they decline in production much more rapidly than conventional wells, leading to inevitable slowdowns such as what we are currently witnessing in the once almighty Permian,” Oilprice reported in the Fall of last year.  “Shale wells lose as much as 70 percent of their production in the first year, meaning that explorers have to constantly pour money into more drilling just to maintain production. By contrast, once up and running, conventional wells lose as little as 5 percent each year, providing a much more solid production outlook,” Bloomberg reported in the same month. 

And then COVID-19 arrived to kick U.S. shale while it was down, plunging the West Texas Intermediate (WTI) crude benchmark into previously unthinkable negative territory. On April 20, the WTI didn’t just slump, it plummeted below zero, closing out the day at -$37.63 a barrel. The severe downturn in oil markets hit the Permian Basin hard, and the U.S. shale industry has been subsequently swept by a massive wave of bankruptcies and fired and furloughed employees. 

Throughout the downturn, however, there have been some optimistic voices. Just two days after the WTI went negative, Oilprice reported on one industry expert that said oil could even hit $100 in the near future once demand bounces back and the supply isn’t there to meet it. Other experts predicted that the pandemic-fuelled recession could leave the U.S. shale sector with only its best players still standing, and that the post-COVID Permian could therefore be better and more resilient than ever. 

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Now, there seems to be even more cautious optimism in the field. “No company has more skin in the U.S. domestic shale game than ConocoPhillips and its CEO, Ryan Lance. Which is why, in the midst of this current, COVID-19 induced downturn, it was encouraging to see Lance talk optimistically about the prospects of an industry comeback taking place in the coming months,” Forbes reported this week. 

Forbes’ analysis is based on an interview that Lance had with IHS Markit Vice Chairman Dan Yergin, in which the CEO said that ConocoPhillips is considering beginning to reactivate shut-in wells in the Permian as their first steps to easing back into the market. “We’re thinking of slowly coming back into the market over the next few months and reducing the amount we’ve got curtailed because we’re seeing some strengthening in the price,” Lance was quoted. ConocoPhillips would be the biggest, but certainly not the first company to begin putting its Permian production back online. With this move they would “join other big Permian Basin producers like EOG Resources, Concho Energy and Parsley Energy” according to Forbes. 

This does not mean, however, that shale will bounce back in the immediate future. A “v-shaped” recovery curve is highly unlikely. “Shale’s not broke, shale’s not gone, shale will come back,” Lance was quoted. “But I do think it comes back slower because there is going to be pressure on companies to confine their capital program and maybe not grow as dramatically as before, because I don’t think the access to capital and investor community is going to be as robust as it was over the past decade.”

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