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Fracking Better
Innovation Keeping Shale Alive

The collapse of oil prices has hurt everyone in the business of producing oil, but not every crude extracting operation is created equal: some projects are more expensive than others. American shale falls under the category of high cost production, and as a result has been especially hard hit by bargain crude that has threatened to make fracking no longer profitable. But so far U.S. production has merely tapered, not fallen off a cliff, surprising many analysts who expected the industry to fold once oil prices dipped below $70 per barrel (America’s West Texas Intermediate is currently trading at $37.36 per barrel).

This surprising resilience—as we’ve noted several times in the past—can be put down to the ability of American shale producers to innovate new ways to drill more for less. And even now, more than a year into the bearish market, they’re finding ways to cut costs. Reuters reports:

Pioneer Natural Resources is increasing the length of stages in its wells, Hess Corp is raising the total number of stages, EOG Resources is drilling in extremely tight windows, while Whiting Petroleum Corp and Devon Energy Corp have loaded up more sand in their wells, fourth-quarter earnings call comments show.

Sector experts say these techniques could boost initial output per well by between 5 and 50 percent, demonstrating the resilience of the industry. . “We have got to keep moving ahead in terms of our knowledge base so that when things improve we can hit it with all cylinders,” Pioneer COO, Tim Dove, said on a recent quarterly results call.

The company plans to cut spacing between clusters, or small perforations that provide fluid and sand access to the formation, to as little as 15 feet – a move it said would have been “unheard of” in the past.

The International Energy Agency said late last week that it believed we may have already seen rock bottom in oil prices, as prices recovered into the $40 range on hopes that a petrostate-led production “freeze” and a drop in output from high cost producers (like American frackers) might help eat away at the glut of crude in the market. That enthusiasm was short-lived, however, as prices tumbled in trading yesterday as OPEC downgraded its expectations for demand this year, and reported that Iranian output grew more in February than it had during any month in the last 19 years.

Even if prices were to rebound, the problem of an oversupplied market won’t disappear—stronger prices will only encourage U.S. shale producers to once again ramp up production, something that, thanks to the nature of fracking, they’re capable of doing quite quickly.

All of this seems to be adding up to a new oil price reality: the days of $100+ per barrel prices are probably over. If this ~$40 crude is the new normal, the focus will shift to how well different producers can adapt. Most petrostate operations don’t require a robust price to turn a profit, but their national budgets have grown accustomed to much higher oil revenues than they’re currently getting. Russia, the Saudis, Venezuela—they’re all being being forced into a dire economic situation as a result of cheap oil. Meanwhile, here in the U.S., rig counts (an admittedly flawed metric) are dropping to levels not seen in more than 70 years. But if the shale boom proved anything, it’s that this industry can find a way to make a buck where no one thought it possible. Bet against American innovation at your own risk.

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  • Jim__L

    “Bet against American innovation at your own risk.”

    Now how do we get innovation to concentrate on the whole “structural unemployment” mindworm that has taken over our elites, and is probably the biggest driver of Trumpism?

    • Jacksonian_Libertarian

      High unemployment is a characteristic of a deflationary economy. Unless Trump acknowledges the fact of deflation and makes fighting it a priority, he is unlikely to be successful at being the Greatest Jobs President in history.

      I think foreign countries purchase of US Treasuries in order to manipulate their currency and gain a price advantage for their exporters, presents an opportunity to reimburse the American middle class for all their sacrifices, by increasing their networth. Have the Fed payoff all foreign holdings of US Treasuries, about $6+ Trillion and put that with the Fed’s $2+ Trillion in reserves from all the recent “Quantitative Easing”. And create individual and inheritable Social Security accounts for every naturally born citizen (immigrants should be required to fund their own accounts to become citizens) of about $30,000.

      This would have the effect of increasing everyone’s net worth by $30,000, fixing the stupid Ponzi Scheme Social Security system, and putting about $9 Trillion in capital into the Stock and Bond markets. It would also devalue the Dollar on world markets for the first time in 4 decades, reversing the trade deficit into a trade surplus for the first time in many people’s lives. In addition, it would have the effect of kicking the economy out of its present destructive deflation, and back into a growing economy’s inflation. And finally it would make America’s export sector boom, which would suck foreign investment into America, while at the same time dragging the rest of the economy out of the ditch, creating jobs.

      • Jim__L

        I agree that paying off the foreign-held portions of the national debt early, at an appropriate value considering their degree of maturation, is a very interesting idea.

        I’m not sure I agree with this being a “deflationary” economy. There are sectors that are definitely spiking in price these days. A lot of the rest of the inflation is happening in the equities market, as the free money from quantitative easing is sopped up by banks and other investors without actually stimulating the economy effectively.

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