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Crude Economics
The Shale Retrenchment Begins

New U.S. well permits fell by 40 percent from October to November, according to an industry report. In the face plummeting oil prices, firms are scaling back investments, and that draw-down is especially apparent in American onshore shale formations. Reuters reports:

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October…The pullback was a “very quick response” to U.S. crude prices, which settled on Tuesday at $66.88 CLc1, said Allen Gilmer, chief executive officer of Drilling Info. […]

New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota’s Bakken shale.

The Permian Basin in West Texas and New Mexico showed a 38 percent decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28 percent and 29 percent, respectively, the data showed.

This isn’t a huge surprise, but neither is it a sign that the boom is going bust. Companies are still reacting to what has been a very rapid price decline, and may be acting out of an abundance of caution as they wait to see where prices stabilize. Even at its current level, plenty of shale formations can be profitably plumbed, and the industry is constantly seeking ways to increase profit margins and squeeze more oil out of shale for less investment.

But a 40 percent drop in new well permits is still a significant bump in the road, and a sign that the Saudi strategy of challenging U.S. shale for a share of this bear market is bearing some fruit. Winter is fast approaching for fracking in America.

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  • S.C. Schwarz

    If we, and the rest of the world economy, are getting oil at $60 a barrel then we have won, haven’t we? Meanwhile our nice shale oil sits there, safe and sound, and ready to be pumped if the Saudis, or anyone else, ever dares raise prices.

    The only thing we have to worry about is our own government which would dearly like to ban fracking and indeed hydrocarbons in general. They dared not do it before because they were afraid a direct attack on US oil and gas production would deepen an already very serious recession. But now, with the world price dropping, and the economy looking better, it may be time for them to make their move. Obama still has nearly two years and, as we have seen, he can do plenty of damage in that time.

    • Dan Greene

      “Meanwhile our nice shale oil sits there, safe and sound, and ready to be pumped if the Saudis, or anyone else, ever dares raise prices.’

      Well, the question is how much shale oil/gas there really is given the depletion rates of tight plays. I think that shale provides a brief (5-10 year) window before it too declines and energy prices go through the roof. The political goal is to act while this brief window is still seen to be open to depress energy prices and eliminate competitor governments (e.g., Russia and Iran). Shale gives us added strategic freedom of action but only for a very limited time, and then things get very ugly.

      Whether the Saudis are focused on taking back market share from the US, as the mainstream media across the board is claiming, or whether the debilitation of Russia and Iran is the operative reason behind the veneer of the Saudi-US fracking war is a question. But the bottom line is that US shale is evanescent and will be in decline long in the not-to-distant future very much contra the optimists/propagandists.

    • CaliforniaStark

      Agree with S. C. Schwarz; the Saudis are going to get a good taste of how market forces work. Once oil prices hit a certain level, U.S. production again goes into high gear.

      Despite an overproduction of oil causing the price to fall into the basement, a commentor on this board is solemnly telling us that we will run out of shale oil in 5-10 years, and energy prices will then “go through the roof.” Peak oil advocates have been claiming this will happen for over 60 years; and will likely continue to do so for at least the next 60 years.

      The fact that the Saudis are using overproduction as a weapon to lower oil prices, in an attempt to lower shale oil production in the U.S., seems to contradict the whole concept of peak oil.

  • Jacksonian_Libertarian

    I’m thinking you need to go back over the past 5 years and track how many drilling rigs have been in use before you say this is a retrenchment of American Oil Shale. If you did, you would find that the number of drilling rigs has been in decline for years, while at the same time production per well has been skyrocketing. The fact is you can drill dozens of wells from the same site into each layer of shale, with each horizontal leg heading off in a different direction.

  • FriendlyGoat

    I am not an economist or market wizard. (Everyone here will attest to that, without a doubt.)

    But I have a feeling that oil prices will not fall into the basement and stay there for years. OPEC can readjust its strategy at any time.
    American suppliers may find themselves acting not so differently as OPEC has acted in the past, as is the subject here. And the cheaper oil goes, the more it will be in demand.

    When, in modern history, did we not see the incorporated entities of the world outsmarting the consumers?

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