American Innovation
Why You Shouldn’t Bet Against Shale

After mounting a recovery from its $45 per barrel low in January, the price of oil has been sliding again as both the Iran deal looms (the lifting of Western sanctions would allow Iran to considerably boost its exports) and the Chinese stock market reels. The U.S. benchmark West Texas Intermediate (WTI) price is hovering around $52 per barrel, a level that a year ago many would have said would be too low for U.S. shale producers to continue to profitably operate.

And yet, here we are. Reuters reports that, even at $50 per barrel prices, a number of shale firms are planning to boost production:

On Wednesday, Pioneer Natural Resources Co. became the first big company to publicly confirm it was drilling more wells, saying it had already added two rigs in the Permian Basin of Texas this month and would keep on adding two a month as long as the oil price “remains constructive.”

Smaller shale oil producer WPX Energy Inc, whose operations are focused on North Dakota’s Bakken shale, said this week that its decision to add two rigs later this year was unaffected by a nearly $8 drop in crude prices since June to toward $50 a barrel. […]

Last week the U.S. oil drilling rig count rose for the first time since December, inching up by 12 to 640 across the country.

The American shale industry would still love to return to those heady days (that now seem so far-off) of $100+ per barrel oil, but it’s surprising analysts and competing suppliers with its resilience. Relative to most conventional oil plays, shale production is expensive; Saudi-led OPEC hasn’t cut production in today’s bear market in part because it hoped to squeeze out fracking firms, but has so far been disappointed.

There’s even more bad news on the horizon for that petrostate cabal: shale companies are refining a process—called refracking—to squeeze more hydrocarbons out of each well. Bloomberg reports:

The short life span of [fracked] wells, long thought to be perhaps the single biggest weakness of the shale industry, is being stretched out. Early evidence of the effects of restimulation suggests that the fields could actually contain enough reserves to last about 50 years, according to a calculation based on Wood Mackenzie Ltd and ITG Investment Research data. […]

Years of working on traditional wells have shown that they can be restimulated multiple times, [said Mike Vincent, a well-completion engineer who teaches the technique to industry workers]. In the industry’s lingo, a well that has been blasted five times is a “Cinco de Fraco.” Eight times gets you an “Octofrac.” When done right, the procedure not only boosts the flow of crude, but can also increase the estimate of reserves held in the well. Vincent said it’s common to see oil recovery climb 60 percent or more.

Presented with a profitability problem, the shale industry is hard at work to step up to the challenge. Experimenting with and improving techniques like refracking, or drilling multiple horizontal wells from a single pad, could be just the thing U.S. shale needs to compete in an increasingly crowded global market. That ought to terrify the world’s petrostates.

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