The Allure Of Shale Is Wearing Off

February 2016, Vol. 243, No. 2

Investment in U.S. shale continues to dwindle, with several large companies raising eyebrows with plans to slow drilling plans much further than expected.

Continental Resources, an Oklahoma-based shale company, has announced that it is largely zeroing out all plans to drill in North Dakota’s Bakken this year. Announcing its first annual loss since its inception in 2007, Continental Resources said that it would defer completions on just about all of its wells drilled in the Bakken. Continental will hold onto four rigs in North Dakota, but has no plans to deploy any fracking teams.

The company’s production has already started to decline, falling to 224,936 barrels per day in the fourth quarter of 2015, down from 228,278 barrels per day from the third, or about a decline of almost 2 percent. Continental has already said that it could lose about 10 percent of its production this year. But it will still be sitting on more than a hundred drilled but uncompleted wells, which will allow the company to ramp up output when and if oil prices rise.

Whiting Petroleum, another shale driller, also announced this week that it was drastically scaling back drilling plans. The Colorado-based company announced an 80 percent cut in spending, but more significant was its decision to completely suspend its plans to complete any more wells after the first quarter. That will leave it with 73 drilled but uncompleted wells in the Bakken, plus 95 more in the Niobrara. Just about all of the money that Whiting plans on spending this year will be merely on maintenance to keep existing operations going.

On the other end of the spectrum in terms of company size, Royal Dutch Shell revealed its plans to downgrade its emphasis on expensive shale operations, although it was not worded in those terms. The Anglo-Dutch supermajor says that it would fold its “unconventional” unit (i.e. shale) into its broader upstream business. Shell also announced that Mavin Odum, long-time top official from the North American arm of Royal Dutch Shell, will retire after more than three decades at the company.

The two announcements are consistent with Shell’s decision to takeover BG, which was a large bet on LNG and offshore oil plays, particularly in Brazil and Australia. It is also evidence that Shell is deemphasizing its attention and resources on North America, where it has placed several costly bets that have soured. In 2013, Shell cancelled plans to build a $20 billion gas-to-liquids plant in Louisiana. In 2014, Shell sold off shale acreage in Texas, Colorado, and Kansas, according to Reuters, while also divesting itself of Pennsylvania and Louisiana shale gas assets.

Last year, Shell pulled the plug on Arctic drilling after almost a decade of work and billions of dollars wasted. It also scrapped a major oil sands project in Canada in October because of low oil prices. Shell’s oil sands assets will be folded into its downstream refining unit.

But it is hard to deny the fact that Shell is in the midst of a dramatic overhaul. It was only a few months ago that Odum took over the unconventional unit after the company’s failed Arctic campaign. But the announcement this week is further evidence that Shell is not only backing off of U.S. shale, but more broadly the company is downgrading its emphasis on North America writ large. All of the North American standalone units are being placed under global umbrellas.

More importantly, Shell spent over $50 billion to takeover BG Group, which has assets in Australia, East Africa, and Brazil. Shell will sell off more than $30 billion in assets over the coming years to make the purchase fit with its restructuring plans.

Less than two weeks ago, Shell’s CEO Ben van Beurden was in Rio de Janeiro talking up the company’s opportunities in Brazil upon the completion of the takeover of BG Group. He said that Brazil was a “top three” country for Shell and it was also “the most valuable country in our portfolio” in terms of production potential.

For Shell, and others, that excitement no longer extends to U.S. shale.

By Nick Cunningham of Oilprice.com

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