Has the peak of the shale revolution come and gone?

The shale revolution transformed the United States into the world’s biggest producer of oil and natural gas in a little more than a decade. But now the industry is facing the prospect that the shale boom has peaked and the best days are behind it as drilling activity declines, jobs dwindle, and many of the prime oil-producing spots are depleted .

Shale’s future is still a matter of debate, but there’s little doubt the energy sector has suffered through a weak 2019 with a more challenging 2020 on the horizon amid middling oil prices, abundant supplies, rising bankruptcies, growing climate change concerns and historically low Wall Street sentiment. The trends are dire enough that energy analysts at the New York investment research firm Evercore ISI this month declared, “The oil ‘shale revolution’ is over. Finally.”

The U.S. shale sector stubbornly persevered through the brutal oil bust that started in late 2014, returning to growth mode two years later. But since the end of 2018, drilling activity has steadily declined, with the number of operating rigs plunging 20 percent nationally over the past year. The rig count in the heart of the shale boom, the Permian Basin in West Texas, is down 15 percent.

“It appears we’ve already peaked,” said Evercore ISI analyst James West. “Investors are damn near catatonic. U.S. shale is not a panacea for production growth. It’s quickly coming to a close.”

Doom and gloom

West and other analysts argue that shale was always unprofitable for most companies as they burned through billions of dollars from investors and lenders to expand rapidly, then failed to deliver returns. As a result, the industry drove production to record levels — but at the cost of losing investors and access to capital.

A steady flow of capital is particularly vital for developing shale fields, which require an endless treadmill of drilling. After initial bursts of large volumes of crude, the wells deplete faster than conventional wells, requiring the constant drilling of new wells to keep up production.

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Doug Terreson, another Evercore ISI analyst, compared the dynamic to the Red Queen’s warning to Alice in Lewis Carroll’s “Through the Looking-Glass”: “It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” Ultimately, Terreson and West contend, shale drillers will be more active in the state of Delaware — where many firms file for bankruptcy — than in the Delaware Basin, the Permian’s still-booming western lobe.

Not everyone sees it that way. Oil and gas companies continue to find new ways to innovate, reduce costs and produce more oil with fewer rigs and people.

The Permian is now the world’s largest oil field. And the country’s top three shale fields — the Permian, the Eagle Ford in South Texas and the Bakken in North Dakota — easily account for more than half of the nation’s record oil production of about 12.5 million barrels a day.

“I don’t think you would use boom to describe shale right now, but it’s certainly not a bust,” said Andrew Dittmar, an analyst with Enverus , an Austin energy research firm. “Some are expecting the death of shale in its entirety, and I don’t think that’s remotely true.”

Shale’s Texas birth

George P. Mitchell drilled his first successful shale well more than 20 years ago in the Barnett Shale near Fort Worth. After many years of trial and error, success came from combining the decades-old technologies of hydraulic fracturing, called fracking, with horizontal drilling to crack open the shale rock and release natural gas. Mitchell eventually sold his company in 2002 to Devon Energy of Oklahoma City for more than $3 billion.

The shale boom really started to take off in 2006, initially focusing on natural gas as it spread from the Haynesville shale in East Texas and Louisiana to the Eagle Ford shale. Outside of Texas, the Marcellus Shale in Pennsylvania and the Bakken also took off.

As the shale revolution shifted from gas to crude oil earlier in this decade, the focus turned to the Permian Basin, triggering a new land rush in West Texas and southeastern New Mexico. But rapid growth is leading to diminishing returns for many companies as the most prolific oil reservoirs are drained and newer wells prove less productive.

Oil companies have responded by drilling longer horizontal wells — some extending more than three miles — and vastly increasing the amount of water and sand pumped into wells at high pressures crack shale to release oil and gas. But most industry analysts believe that productivity per foot of well has peaked — or is close to peaking — and will begin to decline .

Companies also have responded by drilling more wells in closer proximity, which has created new challenges in determining how to space the wells. Drill them too far apart and the operators risk leaving oil in the ground. If they’re too close, one well can bleed into the other, vastly diminishing the value of the second well.

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The Dominator project of the Midland oil and gas company Concho Resources is a case in point. Concho drilled 23 wells too closely together on its Permian acreage, resulting in volumes more than 30 percent below expectations.

Shale pioneer Mark Papa, who previously led Houston’s EOG Resources and now heads the Colorado company Centennial Resource Development, used a baseball analogy to describe the state of the shale industry — “Probably in the seventh inning of a nine-inning game.”

While production from the Permian is expected to keep rising as world’s biggest oil companies — including Exxon Mobil, Chevron, Royal Dutch Shell and BP — gobble up acreage and smaller companies, output has nearly plateaued in the Eagle Ford and Bakken. Oklahoma’s SCOOP and STACK shale plays and Louisiana’s Austin Chalk have disappointed thus far.

Wyoming’s Powder River Basin appears to have promise, but it’s no Permian.

The coming transition

The days of $100 per barrel oil, a level last reached in 2014, are over, analysts said, but the industry has evolved, gained efficiencies and learned to profit with crude above $60 per barrel. But after rising for the better part of two years, oil prices have fallen and remain stuck between $50 and $60 per barrel, lately closer to $50. Some companies can make money at those prices; many can’t.

The pressure on oil prices is mostly downward — barring major breakthroughs in U.S. trade wars. Oil production is rising even as global economic growth and energy demand weakens, leading analysts to forecast that oil may fall below $50 in 2020 and stay there through much of the year. Few companies can make money at those prices.

“We’re going to go through a pretty painful transition period for the next year or two,” said Matt Portillo, managing director of exploration and production research at Tudor, Pickering, Holt & Co., a Houston investment bank.

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Shale capital spending already has fallen an average of about 8 percent this year, according to Tudor, Pickering, Holt, and Co., and could fall up to another 25 percent next year. Layoffs would abound from the West Texas oilfield to the white-collar corporate centers in Houston. They’ve already started. Texas has shed about 5,000 oil and gas jobs over approximately the past three months, according to the Texas Workforce Commission.

jordan.blum@chron.com

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