Since the start of the “shale era” in the US (circa 2005), operators have been able to increase both the initial productivity (IP) and the ultimate recovery (EUR) of the wells they drill in unconventional reservoirs through a combination of the following:

• longer laterals (exposing more formation to the wellbore)
• improved drilling and completion techniques (shorter spacing between frac stages, more proppant per stage, better control over frac placement by using cemented liners, improved placement of the wellbore, etc.)
• highgrading (improved selection from the pool of candidate wells)

It now appears that the trend toward ever-better IP has come to an end as illustrated by the following chart, which tracks the three-month moving average of first-month production for US shale since 2014. While IP improved steadily over the 2014 to 2016 timeframe, IP is trending flat-to-lower since the start of 2017 –  at both the national level and in every major shale play for both oil and gas production*.

US Shale Well Initial Productivity - 3MMA

What’s changed? Since laterals continue to get longer and drilling and completion techniques continue to be refined, the decline in IP indicates that well quality deteriorated as activity increased last year. The fact that in 2017 the decline in well quality was already enough to offset improvements elsewhere suggests that IP will fall going forward as higher oil prices mean (1) ever-more marginal wells get drilled and (2) technology improvements -- lateral length, completion quality, etc --  are increasingly difficult to achieve.

What does this mean for US production and drilling activity? As IP comes down, ever-more drilling is required to replace lost production. For example, even in a moderately-falling IP scenario US drilling would have to increase at the rate of ~15% per year within 2-3 years in order just to keep US oil output flat. This means that the US will find it increasingly difficult to fulfill its new role as swing producer in the global oil marketplace.

Of all the factors that impact the oil market – global economic growth, inventory levels, electric vehicle adoption, etc. – it is likely that US shale well IP will be the key factor in determining where oil prices settle going forward. It’s this graph we’ll be watching closely. 

*Excluding gas production in the Eagle Ford