And chasing new inventory isn’t the primary focus anymore. Companies now have decades of inventory of repeatable locations on their acreage, making them resource rich.
Instead, their challenge is figuring out how to maximize the monetary value of the resources they have. A unique feature of shale oil is its high decline rate, meaning the rate of oil production from a specific well that starts out high but falls very quickly in the first year of a well’s life. The industry’s average natural decline rate is about 6 percent on a global basis. But production from a well drilled in shale can decrease dramatically, falling about 60 to 70 percent in the first year.
The Bottom Falls Out
In the midst of these shifts, the global oil industry is in flux. In 2018, WTI crude oil peaked at $75 per barrel in the third quarter. But in the fourth quarter, it dropped to $42. Today, it’s at $59.
There were two basic causes: Slower drop-off in Iranian exports in the face of rising Saudi/OPEC production and rising production of oil in the United States.
Anticipating that more than two million barrels of oil from Iran would drop out of the market, Saudi Arabia and other OPEC members ramped up production. But then the Trump administration granted waivers to countries that allowed some to continue importing Iranian oil. That meant oil production was higher than anticipated when Saudi/OPEC and Russia increased production in 2018.
At the same time, U.S. oil production increased more than anticipated in the second half of the year.
The result? Crude prices dropped.
The price pressure continued into late December as Russia and OPEC reversed course and cut production. Meanwhile, Venezuelan and Iranian production continued to decline.
The Investor Mindset