This month, the energy consulting firm Wood MacKenzie gave an online presentation that basically debunked the whole business model of the shale industry.

In this webinar, which explored the declining production rates of oil wells in the Permian region, research director Ben Shattuck noted how it was impossible to accurately forecast how much oil a shale play held based on estimates from existing wells.

“Over the years of us doing this, as analysts, we’ve learned that you really have to do it well by well,” Shattuck explained of analyzing well performance. “You cannot take anything for granted.”

For an industry that has raised hundreds of billions of dollars promising future performance based on the production of a few wells, this is not good news. And particularly for the Permian, the nation's most productive shale play, located in Texas and New Mexico.

Up until now, the basic premise of the fracking business model has been for a company to lease some land, drill until finding a high-volume well, hype to the press this well and the many others it plans to drill on the rest of its acreage, and promise a bright future, all while borrowing huge sums of money to drill and frack the wells.

Throughout the seminar, Wood MacKenzie analysts emphasized that companies can't reliably predict future oil production by “clustering” wells, that is, estimating volumes of many future wells based on the performance of a small number of nearby existing wells, and described the practice as potentially “misleading.”

Shattuck called out how the old business model of firms borrowing money from investors while hoping for future payouts on record-breaking wells no longer works. He summed up the situation:

“We’re transitioning to a point in time, where the investment community was enamored of the next well and how big it might be. That has changed for a variety of reasons. One very important reason is the next well might not be bigger. It might be smaller.”

The fracking industry is now being asked to produce positive financial results — not just promises of new super wells, or cube development, or artificial intelligence. And yet the industry couldn’t deliver profits while drilling all the best acreage over the last decade. Now, shale companies need to do that with oil wells that may not produce as much.

Seven years ago, Rolling Stone referred to the fracking industry as a “scam” while profiling the “Shale King” Aubrey McClendon, the man generally credited with inventing the business model the shale industry has used the past decade. Today, McClendon's old company Chesapeake Energy is in danger of going bankrupt.

Perhaps investors are finally catching on.

Are Child Wells the New Normal?

Last year I covered the issue of child wells, or secondary wells drilled close to an existing “parent” well, and the risk they posed to the fracking industry. Child wells often cannibalize or damage parent wells, leading to an overall drop in oil production.

At the time, I cited a warning about this situation from Wood MacKenzie, which said, “Closely spaced child well performance presents not only a risk to the viability of the ongoing drilling recovery but also to the industry’s long-term prospects.”

Over a year later, has the shale oil industry abandoned this approach or are child wells still an issue?

During this month's webinar, Ben Shattuck answered that question, making a statement that should strike fear in the heart of shale investors and the owners of all this shale acreage:

“We know we’re on the cusp of a child-well world.”

One of the biggest problems with fracked oil well production is child wells, and according to Shattuck, that looks like the new normal. When the bug in an unprofitable business becomes the main feature of the business model, its future is definitely at “risk.”

In the Eagle Ford shale, average production per foot of well length and per pound of “proppant” has been falling steadily. Mr Kibsgaard blamed the decline on a rising proportion of child wells, which are now up to about 70 per cent of all new wells drilled https://t.co/uG58KcNNJp — Alexander Stahel (@BurggrabenH) October 19, 2018

Fracking’s Fatal Catch-22

As long as shale firms could keep borrowing and losing money to drill new wells, producing more oil was simple. When profits weren’t a concern, the debt-heavy business model worked. But similar to the dot com boom and bust, the fracking industry is learning that if you want to stay in business, you need to make a profit.

Without a doubt, drilling and fracking shale can produce a lot of oil and gas in the right geological regions. It just usually costs more to get the oil and gas out of the rock than the fossil fuels are worth on the free market. Now, however, the much-lauded “shale revolution” is facing two big issues — the best rock has been drilled and few are eager to loan money to drill the remaining acreage.

E&E News recently highlighted what this reality means for Texas's Eagle Ford shale play, where production is now 20 percent lower than at its peak in early 2015. For an oil basin that's only been producing oil via fracking for just over a decade, that is a pretty grim number. However, an analyst quoted by E&E News highlights the secret to making money while fracking for oil: Simply stop fracking.

“Generating free cash is easy: Stop spending on new wells,” said Raoul LeBlanc, vice president for North American unconventionals at IHS Markit. “The catch is that production will immediately move into steep decline in many cases.”

#IHSMarkit forecasts capital spending for shale drilling & completions to fall by 10% to $102 billion this year. By 2021, we’ll see a near $20 billion decline in annual spending. What’s causing this? Raoul LeBlanc comments- https://t.co/7q1QTiWZVs @HoustonChron — IHS Markit Energy (@ IHSM arkitEnergy) November 8, 2019

Ah, the catch. To generate cash while fracking requires companies to stop fracking and sell whatever oil they have left from rapidly declining wells. Because fracked wells decline quickly even when everything goes perfectly, if a producer isn't constantly drilling new wells, then the oil production of a field drops off very quickly — the “steep decline” noted by LeBlanc.

That's exactly what happened in the Eagle Ford shale, an early darling of the fracking industry, and most of the top acreage in the Bakken shale play in North Dakota and Montana has already been drilled, and will likely see similar declines.

LeBlanc emphasizes this point again in the Journal of Petroleum Technology, where he is recently quoted saying that the decline rates in the Permian region have “increased dramatically” for new fracked wells.

A year and a half ago, DeSmog launched a special series exploring the finances of the fracking industry, putting a spotlight on its financial failings. At the time, optimism about the future of fracking was still filling the pages of the financial press.

The initial article kicking off the series closed with a quote from David Hughes, a geoscientist and fellow specializing in shale gas and oil production at the Post Carbon Institute. For years, Hughes has been warning about the optimistic estimates for shale oil and gas.

Hughes told DeSmog that with the finances of fracking, “Ultimately, you hit the wall. It's just a question of time.”

With the industry on the cusp of a “child-well world,” that wall appears to be approaching quickly — unless you still believe the industry promises that fracking's big money is right around the corner.

Main image: Oil fields near Stanton, Texas. Credit: Formulanone, CC BY-SA 2.0