The US crude oil production is reaching a turning point.

The whole mantra of the

shale oil miracle could be closer to its end, than many people can imagine. If confirmed,
perhaps not far from now, the crude oil barrel could reach unprecedented record highs as
a consequence of such collapse. Let’s not forget that US proven oil reserves of 39.230
MMStb, have a life span of only 7 to 9 years at current output of 12.1 MMBD, although
production decay will be felt much earlier, depending on the prevailing reservoir
withdraw rate.
Facts:
Because of the inherent native entrapment conditions, main driving mechanism
for primary production in most; if not all shale oil/tight assets, is a combination of fluid
and rock expansion. Depending on the prevailing thermodynamic variables, a segregated
gas cap can also play an important role, in the final interstitial fluid displacement.
Shale/tight formations exhibit secondary porosity and permeability alignments, with
cracks, micro-cracks, fractures, and micro fractures, which constitutes the main fluid
“storativity” and flow channels, together with surface adsorption/desorption mechanisms.
As a function of stress orientation, flow properties can be adversely influenced, as
main flow channel can disappear or drastically reduce its ability to transport, with
increasing pressure drop. Therefore, the stress field can be affected by a reduction in
effective/pore pressure, which in turn is proportional among other variables, to stage of
depletion, and production rate. As the production gradient expands because of natural
depletion, surface gas desorption as well as interlayer dissolved gas (depending on phase
envelope) adversely evolves rendering an accelerated and undesirable energy loss. As a
result, productivity drops, meaning that more units of pressure are needed to produce the
same unit of volume of fluid.

According to hard data, associated gas production liberated from tight shale oil
plays is growing faster than expected, particularly since March’2017. Not by coincidence,
in August’2017 Pioneer Natural Resources officially announced that its gas-to-oil ratio
(GOR) was increasing faster than initially expected. Exactly two years later from
March’2017 up until March’2019, associated gas production in the US tight oil plays, has
grown by a factor exceeding 10 (1.2 BScf/d versus 13 BScf/d).
 Combined rig productivity between new and DUC wells, has been consistently
decreasing since mid’2016 when it reached over 3.600 B/D per active oil rig, to land
recently below 1.900 B/D per active oil rig, pointing at a substantial and concerning rig
efficiency reduction of over 43% (rig/well/productivity) in a 3 year period.
The main concern is that, it is particularly complex to embark into any EOR/IOR
projects in these kinds of assets, no matter what sort of fluid you are considering as a
displacing phase. It is complex firstly because of the resulting unfavorable marginal, and
unit cost, and secondly, it is difficult because of the low volumetric yield
(injectivity/productivity) typically achieved in both; tight and very tight formations. In
summary, the more associated gas is liberated/segregated, the more rich liquid fractions
are left behind within the reservoir. The more rich liquid left behind, the more gas is
produced and the more energy is wasted to produce the same volume of fluid.
It could be easy to conclude as well, that those assets showing early gas
production, will most likely have to reduce the expectations on recoverable reserves,
hence decreasing the overall financial value of the given corporation with it, impacting
access to fresh CAPEX, and/or increasing the cost of borrowing money, thus the unit
cost, and finally reducing profit margins.
Implications:
Considering how tight market balance currently is, the implications in the short
term are very concerning, and by short term we mean 30 to 36 months. There are few or
no options left to reliably replace a sudden-conservative fall of say 10% (1.2 MMBD) in
the US field crude oil production over a period 30 days, as response time could be a very
concerning factor. Certainly, there is today a spare capacity of some 3 MMBD, from
which KSA supposedly holds 70% of the total spare potential, while the remaining 30%
is spread among little peaces within other OPEC members. But that is today!
 Let’s not forget that at current output, the world has oil reserves for about only 30
to 40 years more, although first depletion/exhaustion signals will certainly be felt well
before.
Reservoir production declines with time; hence time is the real challenge. Only a
handful of countries will maintain in the next 5 to 10 years enough flexibility to ensure
future supply: Libya, Kuwait, Irak, EAU, KSA, Canada, Iran, and Venezuela. Only 2 out
of the total are within the American continent, and only one; Venezuela, has the right
location, access, volume, and variety of crude oils the main regional consumers need.
But timing as we said before is fundamental in such eventuality, as market signals
could easily send the barrel well above US$100, US$150 or even US$200 without any
previous warning. Markets will sense that bottom will not stop @ 1.2 MMBD, but easily
triple or quadrupled such volume towards the 5 MMBD to 6 MMBD mark. Domestic as
well as global implications could be massive, and a domino effect could take place,
dragging down major economies all around the world. US economy will immediately
suffer the consequences facing massive jobless claims. US economy could experience a
sizable depreciation of the dollar and the NYSE will see lows never seen before.
Politically speaking, the prior underlines the importance to target countries
divided, countries with abundant resources, incompetent, and corrupt governments,
politicians, and conflicting political parties, willing to ease the access to their resources.
In the particular case of Venezuela, if Venezuelans were smarter, instead of
dividing, should bring the country together, aligning their interests to take advantage in
the solely benefit of its citizens. Unfortunately that has not been the case; not before nor
now. Venezuelan politicians and pseudo educated individuals show no mercy for the
country
So far Guaido’s cronies have done nothing but prepare “the soil” to do what they
know to do best, as derived from the ongoing actions in CITGO, after only 3 months of
“tasteless”, and devastating management. As per reliable internal sources, there is a
stressful atmosphere between some board members, and the acting CEO. There is also a
lack of transparency, absence of planning, and of course a lack of interest to benefit
Venezuela, but to finance the solely needs of the “in charged” political team. All signals
suggest a progressive destructive atmosphere within #Citgo.
As bad as it has been, it seems that Maduro’s government will not come to an end
by the result of the sanctions themselves, as they still have a number of alternatives to
access hard currency other than PDVSA. As a matter of fact, PDVSA has ceased to
render enough profits to finance the government’s public spending long ago, particularly
since early to mid 2017 when the real action in the “Arco Minero” and the Central Bank
actually started.
Most likely the Venezuelan political turmoil will end up as always, negotiating
quotas of power, or doing business as usual at the expense of betraying the trust, the
hope, and perhaps the lives of the always appealing although naive believers.
Millan Arcia Einstein: Senior Upstream Adviser and SME. Has published over 11 highly
specialized technical papers internationally, and more than 200 energy related articles in a
number of journals, blogs and newspapers. Has been quoted in Aporrea.org,
NoticiasVenezuela.org, Plattsblog, Platts, Las Armas de Coronel, The Slush Pit (Oklahoma Oil &
Gas News), Energy Economist, and Los Angeles Times, among others.
E-mail: emillan7@hotmail.com
Twitter: @EinsteinMillan