Abandon ship! Riggers flee the collapsing shale oil industry

If ever you wondered what a mass flight of capital might look like when the big end of town finally decides that the fossil fuel industry is coming to an end, then the collapse of the shale oil industry in the US might give an insight.

Last week, in our Graph of the Day: Collapse of US shale oil industryĀ we highlighted the 25 per cent slump in rig numbers in the US shale oil industry over the last three weeks. It’s gotten worse since then.

In the week to February 6, another 84 rigs were pulled out, a number only topped by the 93 pulled the week before. As Mark Lewis, from Kepler Chevreux noted, this is unprecedented, and it make cause a total rethink of the shale oil model, and by association, the shale gas model too.

Lewis notes that the number of rigs has collapsed 30 per cent, mostly in the last 5 weeks.Ā From its peak of 1,609 on October 10 last year, the Baker Hughes rig count has now fallen by 469 to stand at 1,140. Of these, 342 rigs have been dropped since the start of the 2015 calendar year.

“Five of the largest seven weekly drops in the rig count since 1987 have now occurred in the last five weeks,” Lewis notes. “This really is unprecedented.”

rigs update

However, the fact that shale-oil operators are laying off rigs at such a rapid rate suggests to us that the market will have to start re-appraising the sustainability of the US shale-oil model in the near future.

Lewis notes that the shale model has essentially been a financial and production treadmill. Because each well only lasts a year or two, it requires constant investment and new wells. But as prices fall, and all the cheap wells are exploited, then the industry disappears down a hole. This is what is happening now.

The significance is that the US shale oil industry has been the big swing factor in the global oil industry over the last decade. Without it,Ā the global supply of crude oil would have declined over the last decade.

“The problem with relying so heavily on continuing growth in shale-oil production is that the decline rates of shale-oil wells are much higher than those for conventional oil wells, and this means that a large number of new wells must be drilled every year simply in order to offset ongoing natural decline,” Lewis notes.

“This drilling treadmill gives rise to a capex treadmill, whereby constant infusions of new capital are required in order to enable the drilling to continue.”

Lewis says the price collapse in oil, and the sharp drop in the number of rigs, means that the re-appraisal of the shale model has begun. As long as prices remain at current levels, we would expect the rig count to keep dropping,” he says.

 

Comments

8 responses to “Abandon ship! Riggers flee the collapsing shale oil industry”

  1. adam Avatar
    adam

    maybe someone educated on this can chime in:

    Isn’t the shale model perfect for a volatile oil market exactly because they can spread the CAPEX across the full term of the whole field?

    So like we’ve just had where crude prices plunge they just don’t renew their drilling contracts, lock up the facilities and then hire them back on when things lift back up?

    If you’ve sunk X billion on a deep sea rig and prices fall below costs of production then you’re really in trouble.

    I’ve seen a lot of hurrah around oil prices below shale costs of production and how this will “end shale oil” – why is a short term shutdown really a problem?

    Maybe I’m missing something…

    1. Giles Avatar

      Yeah, they leaving cos they losing money. Next time round, if and when prices rebound, markets will not be so keen to provide finance. Remember, fossil fuel companies don’t like investing their own money. Too risky. They need Other People’s Money.

      1. wideEyedPupil Avatar
        wideEyedPupil

        I read once somewhere that FF industry was one of the few industries that didn’t have to go to the bank and could self-fund massive projects like for eg. LNG Hub facilities shared by a group of oil corporations. And hence they could survive the GFC and keep investing. Yet it seems like all the projects not getting up ATM are failing at the point of provision of bank finance.

  2. Raahul Kumar Avatar
    Raahul Kumar

    I hope this happens worldwide, because Veerappa Moily, the Minister for Renewables is huge on shale oil, his enthusiasm about dirty sources of energy is limitless. Not just saving the Planet Earth, not just saving the USA, but also saving 1.2 billion Bharatis.
    Hopefully no Shale oil will ever be drilled here.

    http://articles.economictimes.indiatimes.com/2013-03-25/news/38010093_1_shale-gas-oil-secretary-vivek-rae-oil-ministry

  3. Rob G Avatar
    Rob G

    Nothing is more pleasing than seeing fossil fuels bleeding money. With such a dramatic hemmoraging occurring it’s nice to think of all the harm they have inflicted on the world coming back at them.

  4. Bob_Wallace Avatar
    Bob_Wallace

    That graph is very similar to the NG drilling crash of early 2012.

    We’re going to be hearing some weeping and wailing coming out of nuevo oil country as the boom town comes crashing down.

  5. Peter Thomson Avatar
    Peter Thomson

    The falling oil cost is the real driver here. It is having an effect on the North Sea oil industry too, with some established wells unable to produce economically and new exploration all but halted. Plans to frack shale in the UK and across Europe have been impacted too. Oil needs to be back up around US$100 a barrel for shale and new deep-ocean drilling to be economically feasible, something that will happen eventually.

    But I really hope we are seeing the writing on the wall fossil oil. The cost of renewable oil resources such as algal oil and biochar is falling, and I hope it continues to fall in the same way that solar has been doing. There is a long way to go yet, but at some point the cost of production will fall to the same range as that of the remaining fossil oils, and that will be the end for fossils. I really hope we get there some time in the next decade.

  6. aggri1 Avatar
    aggri1

    In my view, the graph is rather misleading, if you don’t look carefully (the y-axis truncation!). I don’t like it when the climate deniers do it and I don’t like seeing it here either… A 20% fall (~300 from ~1500) could still make a story, but drawing the graph like that suggests the author is trying to make it seem bigger than it really is. šŸ™

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