US shale producers chase productivity gains

Quality not quantity is now the primary objective for most US shale oil producers as they strive to improve capital efficiency.

Improving well productivity is becoming the major challenge for the sector as firms face up to growing constraints on output growth. Rising costs, oil service supply-chain bottlenecks and well-performance issues have forced operators to scale back their plans and focus on improving yields. "We have been not satisfied with the 2022 well performance and have made a significant step change to our well-return thresholds going forward," Pioneer Natural Resources chief executive Scott Sheffield says, echoing comments by other publicly owned companies during the recent round of third-quarter earnings calls.

Pioneer plans to use its extensive portfolio of contiguous acreage in the Permian Midland basin to focus on drilling longer wells that also exploit multiple stacked rock layers. "Our development strategy has fully transitioned to a full stack approach, which includes drilling up to six highly productive zones," Sheffield says. By drilling 15,000ft (4,572m) laterals, Pioneer says it can generate 20pc higher returns than from 10,000ft wells and aims to bring more than 100 of these wells on line next year compared with 50 or so this year.

Other top shale producers are also prioritising longer laterals for the same reasons and are busy buying up adjacent land rights to extend their reach. In the US, the mineral rights for oil extraction belong to the landowner so firms must secure contiguous acreage to drill longer wells. Diamondback Energy recently bought two Midland basin firms - FireBird Energy and Lario Permian - with complementary land assets. "We have a significant amount of long lateral development ahead of us," the firm's chief financial officer Kaes Van't Hof says.

Optimising well productivity is also a strategic goal for shale firms. Longer laterals, better well spacing and stacked developments not only improve returns but also slow decline rates. "Importantly, this resource capture allows us to sustain a high-margin production from these assets for many years to come and does not require us to accelerate drilling activity across other parts of the portfolio to maintain our overall productive capacity," Devon Energy chief executive Rick Muncrief says. Devon's underlying decline rates have improved significantly since its 2020 merger with WPX Energy.

All's not well

Well productivity in the shale patch has stalled since the pandemic (see graph). Average oil output from newly completed wells across the seven shale formations covered by the EIA's monthly Drilling Productivity Report (DPR) has remained just under 700 b/d since mid-2021 after nearly tripling in 2014-20. Part of the reason for this may be the high proportion of older drilled-but-uncompleted (DUC) wells used to create new capacity out of the massive DUC backlog accumulated during the pandemic. But the DUC share of new well completions has fallen from about a quarter in mid-2021 to virtually none today. Last month saw a small increase in the DUC count for the first time since mid-2020.

Another reason may be the poorer quality of new wells as much of the increase in activity since the pandemic was driven by private firms - many of which are smaller and own less-productive assets than bigger publicly owned firms. "Privates today are like 55pc of the drill rigs," Liberty Oilfield Services chief executive Chris Wright says. But private firms are using up their inventory of shale drilling locations faster than public firms, consultancy Enverus Intelligence Research says. Enverus estimates private firms risk exhausting their drilling inventory in 3-8 years compared with nearly 15 years for bigger public firms.

By David Long

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