Lucrative Leftovers
American Oil Producers Punch Back in Price Fight

For Saudi Arabia and the rest of the world’s petrostates, facing off against upstart U.S. oil producers must feel like playing a game of whack-a-mole. A year ago, conventional wisdom said most shale plays needed an oil price upwards of $70 per barrel to stay profitable. When prices tanked, OPEC elected not to cut production in an attempt to fight for a share of the suddenly crowded market, hoping that shale producers would be forced to curtail their own output.

Clearly, something went wrong with that strategy. True, U.S. output is now flagging and analysts expect it to dip further next year, but we haven’t seen a dip in production anywhere near big enough to put a significant dent in the global market’s oversupply. The American oil industry’s ability to innovate has shocked the Saudis and stymied their strategy, and even now we’re seeing evidence of new techniques being employed to help keep the crude flowing in today’s bear market. Drillers are now finding that they can drill or even re-frack vertical wells from mature fields to help stay afloat, as┬áReuters reports:

[O]ld vertical wells…can quickly be drilled, injected with water or fracked for a second time to increase production at low cost. Overshadowed by the fracking boom that delivered record oil and gas volumes, vertical wells are making a comeback as investors and producers shift focus away from production growth to capital discipline in the downturn.

“It makes more sense to develop vertical wells in a lower price environment because they are not growth plays but they are a very strong cash flow asset,” said Benjamin Shattuck, principal analyst at Wood Mackenzie. “They are going to give you that cash flow that you need today.” […]

Squeezing crude from shallow mature fields allows the shale companies to produce more at a lower cost. They can use less powerful rigs that are cheaper to rent and shorter wells can be bored and brought into production in as few as 10 days, whereas a big horizontal well would normally take a month or more to complete.

Horizontal well drilling has, along with hydraulic fracturing, stolen the limelight in the U.S. oil industry of late as it’s allowed producers to tap shale formations across the country. But companies are seeing now that, in the haste to get the shale boom off the ground, they perhaps left behind some productive vertical plays that can be re-tapped and re-fracked relatively cheaply.

This is far from the first creative U.S. solution to┬áthe problem of continuing to produce oil at sub-$50 per barrel prices, and you can be sure that it won’t be the last. When the Saudis strong-armed OPEC onto a collision course with shale producers, they were banking on the fact that American companies would blink first. They’re now re-learning an old lesson: Don’t bet against American innovation.

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