US October oil shale permits drop: is the slowdown here?

Reuters New York | Updated on December 03, 2014 Published on December 01, 2014

The data suggests that production is likely to eventually succumb to lower prices.   -  Reuters

US oil producers have been racing full-speed ahead to drill new shale wells in recent years, even in the face of lower oil prices. But new data suggests that the much-anticipated slowdown in shale country may have finally arrived.

Permits for new wells dropped 15 per cent across 12 major shale formations last month, according to exclusive information provided to Reuters by DrillingInfo, an industry data firm, offering the first sign of a slowdown in a drilling frenzy that has seen permits double since last November.

The Organization of Petroleum Exporting Countries last week agreed to maintain its production quota of 30 million-barrels-per-day, despite a 30 per cent drop in oil prices since June, triggering an additional 10 per cent decline. That move, many analysts believe, was squarely aimed at US oil producers driving the country's energy resurgence: can they continue drilling at the current pace if prices don't rise?

"Currently, the market is focused on US shale as the place where spending and production must be curtailed," Roger Read, a Wells Fargo analyst, said in a note Friday. "There is little doubt, in our view, that lower oil and gas prices will result in lower spending and lower shale production in 2015 to 2017."

Playing into Saudi's hands

A cutback of US production could play into the hands of Saudi Arabia, which has suggested over the past few months that it is comfortable with much lower oil prices.

Most analysts predict US oil producers can maintain their healthy production rates in the first half of 2015 - thanks in part to investments made months ago.

Some oil service companies have suggested that a slowdown might be held off, as they continue to buy key drilling components. But, the data suggests that production is likely to eventually succumb to lower prices.

"The first domino is the price, which causes other dominos to fall," said Karr Ingham, an economist who compiles the Texas PetroIndex, an annual analysis of the state's energy economy. One of the first tiles to drop: the number of permits issued, Ingham said.

Texas issued a record number of permits, 934, before dropping to 885 in October. The 885 is still more than double levels seen in the same month in 2010 when the shale revolution was just starting, but it shows a cooling off that hasn't been seen to the same degree in the past two years.

A drop in the rig count is expected two to four months after a decline in permits - and production growth would likely start to slow six months later.

"This is a pull back from the acceleration. People are being careful," said Allen Gilmer, chief executive officer of DrillingInfo. While permits have declined at other times, Gilmer says there is currently an early indication of a slowdown in the rig count.

DrillingInfo said for 10 shale formations, a permitting slowdown was noted in October. For one formation, data was not available, and for two, the Barnett shale in Texas and the Bakken in North Dakota, permits rose slightly.

The permitting slowdown was particularly pronounced in two Texas formations, the Permian Basin and Eagle Ford shale, which saw new permits decline by 13 and 22 per cent respectively.

Texas economy

This year, shale has bolstered the Texas economy, with oil production in Texas up 23 per cent in August from a year earlier, according to the Texas Petro Index, released last month.

Oil and gas jobs are at an all-time high in the state, said Ed Longanecker, president of Texas Independent Producers & Royalty Owners Association - some 414,000 according to TIPRO, a figure that has risen for each of the past five years. Economic disruptions are expected as the price decline trickles down.

"As oil prices fall, there is going to be a response, and it will ultimately turn up in the numbers," said Ingham.

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Published on December 01, 2014
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