The US Shale Revolution Reaches New Lows

Downhole technology and surface efficiencies have made the cost to produce a barrel of US Shale Oil lower than ever

A universal goal for oil operators is to produce every barrel of oil from the subsurface at the lowest possible cost – lower $/BO. ?On the one hand, you don’t want to let a desire to reduce cost result in sub-par production; on the other hand, you don’t want to maximize production regardless of cost.?There is an optimum we call Happy Valley! Over a decade of shale frac’ing and two recessions, though, the crossbar for this metric has continued to push down.?While some have been burnt to stay below this lower bar, one result is that it is now cheaper than ever to bring a barrel of US shale oil to the surface.

As we recently showcased on Liberty Investor Day, this cost reduction per barrel has been achieved by working both the numerator and the denominator of the $/BO ratio.?The graph below shows, for all major liquid-rich basins for the last decade, well cost on the top left, 365-day well production on the bottom left, and the resulting $/BO ratio on the right.?As the cost per 365-day produced barrels dips further below WTI prices, this graph shows that the breakeven period for wells in all basins has been reduced from multiple years to significantly less than a year.

On the numerator side, the $, Lium LLC.’s vast completion activity database has reported drilling and completion cost of US shale wells in liquid-rich basins has been reduced from $7.3 to $4.6 million, a 37% reduction in 8 years.

During our Investor Day, we discussed a range of technological developments at Liberty to help us pump longer every day in Project 1440, with developments that reduce downtime and improve throughput.?For example, widespread use of monoline is achieving a reduction in flowline replacement cost and reduces downtime for wear and tear on iron.

One result of all these combined efforts is that our employees move mountains of proppant downhole in less time.?The graph below shows data from Bloomberg with US oil production improvements per US oil workers, showing a 2.5-fold increase in oil production per industry employee from about 1,200 to 3,000 BOE per month. ?At Liberty, proppant pumped per employee per year has increased 10-fold during that same period.

Progress has also been made to increase the denominator, the BO.?Average shale well production during the first 365 producing days has improved from 69,000 BO in 2012 to 145,000 BO in 2020, a 110% increase!

Part of this production increase is due to longer laterals.?However, production per lateral foot has also increased, but not as fast – from 12.1 BO/ft to 17.7 BO/ft, a 46% increase.?In the violin graph below, most of that production gain came in earlier years, while on average BO/ft from 2016-2020 has been relatively flat.

To increase production by that much, frac designs have changed considerably – as I show in the table below.?All of these big-picture frac design metrics help to increase frac extent and intensity.

To achieve higher frac intensity, operators in earlier years decreased stage spacing.?More recently, they have somewhat relaxed on this design parameter to save cost while achieving improved frac intensity through more effectively contributing perforation clusters.?If you care to dive into our Investor Day presentation deck, you will find a Delaware Basin design example where it was possible to achieve a 9% year 1 production uplift by simply reducing cluster spacing from 24 ft to 16 ft!

Frac network extent has been increased through higher proppant mass and larger fluid volumes, although both have mostly increased with lateral length, while stabilizing on a basin-specific target for the metrics of lbs/ft and bbl/ft.

When we combine that 37% D&C cost reduction with the 110% well production increase, you get a whopping 70% reduction in $/BO!?For well cost to break even in its first year (assuming simple math without taxes, royalties, etc.), we on average needed $106/bbl in 2012, while we can now achieve this at only $32/bbl.

Far from being in limbo, the US shale industry is dancing and staying below the bar.?With the growth-at-all-cost boom behind us and fiscal discipline winning hearts and minds, technology will continue to make US oil & gas a better competitor.?How low can you go?