Tuesday, December 1, 2020

Shale: the nefarious effects of high-grading in 2020

 Goehring & Rozencjwag analyse the impact of high-grading in shale production over the last couple of years:

!To understand the relationship between drilling retrenchment, high-grading, productivity growth and production, consider an energy company that is forced to cut back its drilling activity in response to falling oil prices and reduced cash flows. It is logical to assume a company will stop drilling its least productive wells first. The remaining drilling activity becomes concentrated in the most productive areas and the average productivity rises. The larger the gap between a company’s least productive rig and its most productive rig, the more this phenomenon positively impacts average productivity and future production.


Between 2008 and 2019, we have experienced four periods of drilling retrenchment in the oil shales. During the 2009 slowdown, the Bakken, Eagle Ford, and Permian lost 60% of their rigs. However, the difference between the most productive and least productive rig was so great that drilling productivity soared by 75% and total production from new drilling activity only fell by 35% -- much less than the fall in the rig count. In 2013, the three basins lost 15% of their rigs. Once again, the material difference between the most and least productive rig caused productivity to jump by 60%. Production from new drilling activity actually accelerated by 35%. In 2016, drilling activity declined by a massive 80% in the three basins. Productivity was able to skyrocket by 200% as companies were still able to lay down a large number of relatively unproductive rigs. Oil production from new drilling activity slowed by only 50%, again much less than the 80% drop in the rig count.


We used our neural network to shed some light on these periods of drilling retrenchment. We divided all of the drilling activity in the three plays into two tiers based upon acreage quality. According to our neural network, in 2009, 50% of all shale activity took place in Tier 1 areas. In 2013 and 2016 Tier 1 drilling still only represented 50% and 60% respectively. Today, that has changed dramatically. We believe that by 2019, Tier 1 activity approached 75% of all drilling. The following map shows the drilling activity on the Midland side of the Permian basin in 2013 and 2018. As you can see, operators have honed in on the best parts of the play and are hardly drilling the less productive areas at all. The same trend is true in the Bakken and Eagle Ford and we invite those that are interested to please reach out for similar drilling activity maps.

We also calculated the spread between the best wells and worst wells drilled during previous downturns. In 2013 we estimate the top half of all shale wells were 200% more productive as the bottom half. By 2019 this spread had collapsed to only 90% more productive. As rigs are laid down, our research tells us that the narrowing in drilling productivity will have a large impact on shale oil production growth. In previous drilling downturns, the E&P industry had the luxury of being able to lay down a significant number of relatively unproductive rigs. Years of high grading has taken this luxury away. Today, far fewer rigs are drilling unproductive wells compared to the downturns of 2009, 2013 and 2016 - a phenomenon clearly shown on the map above."

You can read the rest of the piece via the below link:


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