Big deals in US shale may not mean boom times are back | FT Energy Source

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Are boom times back for US shale, or are we witnessing the gradual decline of the nation's shale industry? High energy prices have generated bumper profits for fossil fuel supermajors, and some are spending big to acquire significant producers in shale. Two recent mega deals stand out.

ExxonMobil has agreed to buy the shale group Pioneer Natural Resources for $60bn. While Chevron will shell out $53bn for Hess Corporation. Shale production involves hydraulic fracturing, or fracking, which pumps chemicals underground at high pressure, forcing oil and gas from fractured shale rock.

It's much like the cement in your driveway. It's extremely poor porosity, extremely poor permeability, but it's completely full of oil, which is locked into this rock.

Most US shale production is centred on the prolific Permian oil field, straddling Texas and New Mexico. But the impact of America's so-called shale revolution has been most dramatic to the north, across the rolling prairies of the Midwest.

So the Bakken or Williston basin is a shale formation in North Dakota and right up in the northern part of the US.

It's an extremely rural part of the country, dominated by pasture, cattle production, open areas.

The Bakken shale is an unconventional oil play. We had been drilling vertically through that thin layer of shale over a large area of North Dakota for decades and decades. By 2010, we had cracked the code, which really unleashed vast areas of North Dakota's Bakken shale.

New technology, including rigs able to drill down and across shale deposits, led to a surge in output.

You can imagine almost like a straw that descends vertically into the area where the minerals are located and then branching out horizontally. These lateral segments have been lengthened and lengthened and lengthened.

In the decade to 2020, the Bakken boom saw North Dakota's oil production soar to new heights.

Production rocketed in North Dakota from about 200,000 barrels a day up to almost 1.5mn barrels a day.

Peak production, peak growth were crazy times in North Dakota.

Extremely high prices, high wages, a lot of physical activity.

You had drillers and pipefitters and all sorts of labourers swarming into the state, and North Dakota actually went from being the oldest state by population in the US to being the youngest.

Not only did the shale boom transform sleepy rural towns, it also helped the US become the number one oil producer in the world.

It's had a big impact on the geopolitical situation. The US has become less reliant on allies in the Middle East to pump oil and keep prices under control.

Such factors have also helped the industry overcome environmental objections. Fracking can pollute the air and water table with toxic compounds, such as methane, nitrogen oxides, and benzene. It can also add pressure to fault lines triggering Earth tremors.

The truth is that the United States runs on fossil fuels predominantly, and there is no other substitute. So we need to continue to produce, and that might be as we transition to other energy sources.

So it wasn't any transition to greener energy that ultimately killed off the shale boom, but a collapse of demand and oil prices triggered by a Covid pandemic that saw work and travel lockdowns brought in across the world.

Rigs were wound down. Workers were laid off. It's a time of huge disruption and destruction for the industry. But whereas other basins, such as the Permian, in Texas and New Mexico, have recovered in many ways from that downturn, the Bakken hasn't.

The more prolific Permian's oil output was recently projected to be around six times that of the Bakken, where a maximum forecast output of up to 1.3mn barrels per day, in 2023, is well down from its 1.54mn per day pre-pandemic peak. Even in the Permian production is expected to max out by 2030, but in the Bakken in particular many of the most productive or profitable wells have already been drilled.

The low-hanging fruit has been picked. We have a very, very fast depletion rate. So unlike conventional oil, where you might see a steady increase and then a high level of production for years, sometimes decades, with shale oil, it's much more fast. Most of it's production is in the first three to five years, and then after that, there's a precipitous drop.

And this time around, the substantial capital required for the equipment and expertise to drill new wells is also harder to come by.

For the publicly-listed drillers, Wall Street has insisted on a new mantra of capital discipline.

Investors and other stakeholders are laser focused on maximising shareholder returns and not, as it was in previous cases, maximising production growth. The future for the Bakken is still a really important part of the energy supply mix in the United States, but its most prolific days are probably behind it.

Chevron's acquisition of veteran Bakken operator Hess Corporation, for example, may appear to be a significant vote of confidence in shale. But as part of the mega deal, the energy giant will also get its hands on a prized Hess asset, the bumper Stabroek oil discovery off the Coast of Guyana, predicted to produce some 11bn barrels of oil. Back in North Dakota, the body representing almost 600 related businesses remains optimistic shale's best days aren't behind it and hopes that alternative techniques, like pumping CO2 underground, might access more oil and gas from existing shale plays.

I don't think those folks that look at the Bakken and say that it's past its prime are looking at the technology and the advancements over the last 16 years. Out of every 100 barrels of oil in the ground, we're still leaving 85. The size of the prize will attract the investment.

But many analysts believe the recent round of big acquisitions suggests a trend towards consolidation, as producers look to squeeze the best of what's left both in the Bakken and across the premier Permian Basin to the south.

The Permian is still going strong but, increasingly, analysts are saying that the end is in sight. It's entering its twilight years, where production will start to flatline and, ultimately, begin to drop off.

In short, few are predicting a return to the boom time of the kind that transformed America's Midwest.