Shale R&D cuts cast shadow on future of US oil production

PDC Energy

25/05/2023 10:00

By Liz Hampton
       May 25 (Reuters) - 
    Shale technology advances that propelled the U.S. to the top
global oil producer spot with world-beating growth rates are
falling fewer and farther between as drilling budgets shrink and
with them, the research and development that might deliver the
next great leap.  
    Inventions, such as directional drilling and hydraulic
fracking, spurred U.S. oil production to the world's highest in
2018, and boosted its shale production to over 8 million barrels
per day last year, from 2.6 million bpd a decade earlier. 
    Output gains, however, have dwindled as tight-fisted
producers spend only enough to maintain output amid rising
costs, while favoring giving cash to shareholders as dividends
and stock buybacks. 
    The lack of investment has oil growth slowing as some of the
most productive areas tap out. The best shale sites have been
drilled and executives and analysts worry there is not enough
high-quality inventory to last another decade.     
    Oil service firms, also paying down debt and shareholders,
are shifting investments to less-polluting electric drilling
rigs and fracking equipment, and technology like
carbon-sequestration. That leaves less money for developing the
tricks that could turn secondary properties into big producers. 
   
    "The technology interests are in new frontiers of geothermal
and hydrogen, and biofuels," said Daniel Yergin, a Pulitzer
Prize-winning oil historian and vice chairperson of S&P Global
 SPGI.N . "I don’t see any other transformative technology at
this time that is really going to change the global market." 
    Producers are turning to acquisitions to expand future
production. On Monday, Chevron Corp  CVX.N  agreed to pay $7.6
billion in stock and acquired debt for smaller rival PDC Energy
Inc  PDCE.O , a move that will add 10% to its oil and gas
reserves. Chevron slashed its R&D to $268 million last year from
$435 million in 2020. 
    
    WITHER R&D SPENDING?    
    SLB  SLB.N , the world's largest oilfield services firm and
historically a major innovator, spent an average of 3% of
revenues on research and engineering in the 10 years to 2017,
according to a Reuters analysis of its financial filings. That
spending topped out at 3.6% of revenue in 2016. 
    Since then, SLB's R&D spending dropped to an average of 2.3%
of revenues with some of that funneled into a New Energies group
that focuses on developing lower-carbon forms of energy for its
oil clients.
    "Who spends on the effort to make a tier 2 oil property into
a tier 1?" asks Arjun Murti, a partner at energy consultancy
Veriten and a former Goldman Sachs analyst. His answer: "No
one."  
    SLB did not provide a comment on its research and
development spending.     
    Richard Spears, who sits on the boards of several oilfield
services firms, said most are allocating their limited cash to
make their tools more rugged, funding international growth, or
paying down debt. 
    "This is not technology development," he said. "Buyers are
valuing tomorrow's technology at zero or even at a negative
because full commercial development takes capital … and the
return of that capital is in doubt," Spears added.
    The lack of new technology is apparent in production
forecasts. The Permian - the largest U.S. shale basin and
oilfield - will expand output by 400,000 bpd this year, as
new-well productivity ebbs, estimates energy technology firm
Enervus. That compares to an increase of about 1.1 million bpd
in 2018.    
    "That combination of horizontal drilling plus fracking and
completions that took shale to global prominence was unique.
Outside of digital tools, there may never be another industry
advancement like that in our lifetime," said David Forsberg,
founder of energy venture fund Ascent Energy Ventures.
    The absence of new breakthroughs has companies looking to
old tricks to squeeze more oil out of their properties. 
    Pioneer Natural Resources Co  PXD.N , once the fastest
growing shale oil producer, is testing out enhanced oil recovery
- a technique that has been around for decades - that pumps
water or gas into a well to push out more oil.
    Scott Sheffield, Pioneer Natural's CEO, views it as a way of
addressing the oil that is often left behind. With companies
getting only about 6% of oil out of the ground in the Permian,
squeezing out more will prolong the shale field.   
    "There are always little things, whether it is re-fracs or
enhanced oil recovery on shale wells," said Dane Gregoris, 
managing director for Enverus. "But that is not going to give
you growth. It's not scalable enough to reverse the growth
declines that the U.S. will begin to experience." 

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Research & development spending declines      https://tmsnrt.rs/3qbo2xE
Research & development spending declines     https://www.reuters.com/graphics/OIL-TECHNOLOGY/CHART/klvygrxkmvg/
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 (Reporting by Liz Hampton in Denver
Editing by Marguerita Choy)
 ((Liz.Hampton@thomsonreuters.com; +1 832 571 8115; Reuters
Messaging: Reuters Messaging: liz.hampton.reuters@reuters.net))