An oil price above USD100 per barrel (/b) drove exponential growth of US unconventional oil production until late 2014. Oil prices have more or less halved since then, but this output is still expected to continue rising through mid-year.
Some estimates project US crude oil output from all sources will top 10 million barrels per day (b/d) during 2015, largely because of still rising unconventional oil output. This would match or exceed Saudi Arabia’s recent daily oil output, which was itself near record levels.
All things considered, US unconventional reserves could provide a secure and robust source of hydrocarbons for more than a century at current extraction rates, even with existing technology. Their contributions to security and affordability of supply remain a game-changer for US industry and consumers, and for global energy markets.
The challenge ahead
Operators admittedly face market pressures. There has been a surge in non-OPEC oil production in recent years while key markets in developed and developing economies have slowed, stagnated or fallen.
Saudi Arabia has maintained oil output and will presumably keep pressuring US producers to drop production. The Middle Eastern state’s oil pumping costs are low, but the social cost of its oil production exceeds USD100/b. It uses cash reserves to cover the difference between that and oil prices.
Global oversupply has depressed exploration for US unconventional oil, while production has also been affected. Growth in US unconventional oil output in April 2015 was expected to be the slowest in more than four years. It is still growing though, and one reason to be optimistic about its long-term future is that the industry entered the oil price slump in good shape.
Sector is resilient
The sector has proved it can deliver spectacular production growth through technical and operational innovation, replication and learning.
Around 50% of oil-rich shale plays are now profitable at USD50/b. Quicker drilling and well completion times have protected profit margins. In the Eagle Ford region, rig efficiency is 18 times greater than in 2008, and 65% more than in 2013.
Drilling efficiency is rapidly approaching a plateau, however. Most operators will need other ways to drive cost efficiency and/or to increase production. Subsurface well optimisation is one. Innovations here include better downhole monitoring, reduced fracturing pressure and chemical use, improved well-spacing, non-aqueous fracturing, and enhanced oil recovery methods such as CO2 injection. Buoyed by high profit margins, operators have also invested in horizontal drilling and more efficient management of surface assets.
There is substantial upside to be gained from reducing cost in the highly fragmented supply chain. We expect that performance-enhancing measures, such as better management of suppliers, and greater standardisation, will become more common.
Unconventional oil and gas operators can bounce back nimbly from a period of low oil prices. Onshore operators have an advantage over offshore counterparts in that land rigs can be quickly re-deployed in favourable economic conditions. Though drilling of new onshore wells has slowed, there is a stock of drilled but uncompleted wells ready to be re-activated. Rig supply will likely fall throughout 2015.
On current scenarios, we now expect a period of healthy consolidation in the US unconventional oil and gas sector. Producers in the 50% of plays that involve less hydrocarbon rich rock need sustained prices of USD70–80/b to service debts. Small, heavily indebted players are particularly vulnerable to lower oil prices, and producers are planning for 12 to 18 months before a significant oil price rise. It is crucial for companies to use this period of reduced activity to review their operations and create robust strategies for safe, sustainable and efficient long-term operations.
Regulation is evolving
While it adjusts to market conditions, the industry is getting to grips with the demands of regulation and risk management. The regulatory regime is driven by federal agencies and implemented by 50 equivalent bodies in states, which sometimes add requirements. Safety and environmental regulation are largely prescriptive, relatively easily enforced and cover various industries.
Multiple agencies have considered adopting risk-based regulation that would include event likelihood, recognise a limit to resources and prioritise events by risk criteria. This seems less likely to be broadly adopted, though efforts are underway to address cross-jurisdictional regulatory differences.
We also see scope for government and industry to accept more self regulation and certification to ensure that operational risks in unconventional are adequately managed.
Regulation and operators’ practices, have mitigated most environmental, safety (process and occupational) and operational risks. However, there is continued opposition to hydraulic fracturing based on real or perceived risks stemming from its operations and from its social impacts. Bans are in force in some cities, such as Denton, Texas; in some counties; and in some states, such as New York and Vermont.
DNV GL is well positioned to help alleviate the environmental, safety and social risks that may impact sustainable development. We are seeing continued demand for services related to optimisation of surface assets, subsurface innovation/optimisation, implementation of our software tools and third-party verification.
This massive hydrocarbon market will also require innovative business development approaches, including using industry expertise to collaborate with customers on problem-solving through challenge selling, cross-organisational services and joint industry project solutions.
 'Annual energy outlook 2015', US Energy Information Administration (EIA), April 2015
 ‘Oil gains as dollar decline bolsters appeal to investors’, Bloomberg, 24 March 2015
 EIA Drilling Productivity Report, March 2015