Shale oil wells are gushers in their first year, then deplete rapidly. Shale companies therefore, have to keep ploughing more money into production just to keep output flat, a phenomenon known as the “Red Queen Syndrome,” named after Lewis Carroll’s ‘Alice’s Adventures in Wonderland’.
Shale wells typically bleed off 70 to 90% in their first three years and drop by 20 to 40% a year without new drilling.
A recent IEA Report confirms this, stating that the world’s oil and gas fields are declining at a faster rate than previously thought, leaving the energy sector facing a costly battle to maintain output.
In fact, since 2019 oil and gas groups have spent $500,000 on oil and gas production, nearly 90 percent of annual investment, simply to arrest the decline in existing fields.
“The situation means that the industry has to run much faster just to stand still,” IEA boss Faith Birol was quoted saying.
It’s a 180-degree turn by the agency, which previously warned of a “staggering glut” of crude.
The IEA analyzed data from 15,000 oil and gas fields and concluded that production is growing more precarious because of an increasing reliance on shale oil and gas, where fields need continuous new drilling to maintain their output.
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In its Tuesday report, the IEA also suggested that if oil companies stop spending altogether, global oil production will contract by 5.5 million barrels a day, around the combined output of Brazil and Norway. The decline for natural gas has risen to 270 billion cubic meters per year from 180 bcm/yr.
US shale oil and gas would collapse by 35 per cent in the first year after drilling stopped, the FT said.
Reuters reported that after reaching peak production, the average annual decline in output was 5.6% for conventional oil fields, and 6.8% for conventional gas fields.
Declining output from oil and gas fields means that oil production will gradually become concentrated in the Middle East and Russia, where large fields decline more slowly.
My Oilprice colleague Tsvetana Paraskova recently penned a piece titled ‘US Oil Patch Sheds Jobs as Producers Face Weaker Prices’.
US shale jobs fell 1.7% in August, producers slowed drilling, deferred completions, and pushed efficiency after about a 12 percent year-to-date oil price slide.
Chevron plans a 20 percent workforce reduction and ConocoPhillips up to 25 percent, even as companies try to maintain output with lower capex.
The US shale patch is seeing the deepest jobs cuts in three years as producers respond to lower oil prices with slowing drilling activity and greater efficiencies through consolidation and cost cuts, Paraskova wrote.
As the price of oil is dangerously close to breakevens for many smaller independents, the US shale patch is in a wait-and-see mode.
In an earlier article, Paraskova pointed out that momentum in the US shale patch is fading, with various shale CEOs stating that production is peaking.
In a Q1 letter to shareholders, Diamondback Energy “Continue to believe that, at current oil prices, U.S. shale oil production has likely peaked and activity levels in the Lower 48 will remain depressed,” CEO Kaes Van’t Hof said.
Diamondback dropped four rigs in the second quarter, reducing activity from 17 to 13 rigs. The company currently expects to run 13 to 14 rigs and five completion crews for the rest of this year.
The US oil-directed rig count has declined by approximately 60 rigs this year, including 59 rigs in the second quarter alone, and the Permian Basin active completion crew count has declined to around 70 active crews, down by over 25% from 2024, the executive added.
At depressed oil prices, efficiency gains could sustain oil production in the US shale patch, but not for too long. The drop-off in operating rigs and frac crews will show up in a few months’ time.
If oil prices remain at current levels or lower, US shale drillers will further slow activity levels, as their main goal these days is preserving cash and returning it to shareholders, not boosting production at any cost.
The total number of active drilling rigs for oil and gas in the United States fell again the week ending Aug. 29, according to Baker Hughes data.
The total rig count in the US slipped to 536, down 47 from the same time last year. The rig count is still near four-year lows.
By Andrew Topf for Oilprice.com
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