| March 8
March 8 Top shale oil producers are lifting
their crude and gas reserve estimates for the first time in two
years - even as many major oil companies are cutting the same
projections and taking write downs on more expensive fields.
Rising confidence in the growth prospects of the U.S. shale
patch is in striking contrast to the retreat of the world's top
oil firms from the high-cost oil sands of Canada.
The increase in reported shale reserves is driven by new
drilling efficiencies, leaner operations and improved well
completion techniques, industry experts said.
"Many wells that were not profitable a year ago have become
profitable" because those advances have cut the cost of
producing from shale, said Per Magnus Nysveen, a senior partner
at consultancy Rystad Energy.
The top 20 U.S. shale firms - a group that includes Pioneer
Natural Resources Co and Chesapeake Energy Corp,
- hiked their proved oil reserves by nearly 7 percent on average
in 2016, according to a Reuters review of year-end financial
While shale producers reap the benefits of technological
advances, oil majors that bet billions of dollars on giant
long-term projects in Canada have taken a hit.
On Thursday, Royal Dutch Shell plc became the
latest energy giant to quit on oil sands. Shell said it would
remove 2 billion barrels of oil from its reserves and take a
$1.3 billion to $1.5 billion after-tax impairment in a retreat
from most of its Canadian oil sands operations.
Exxon Mobil Corp and ConocoPhillips last
month reported total reductions of nearly 5 billion barrels of
proved reserves from oil sands projects after deciding they
could not be pumped at current prices.
Overall, the 10 U.S. oil companies with the largest holdings
in conventional oil fields reduced their reserves by 13.4
percent in 2016, according to a Reuters' analysis of year-end
In 2015, the same shale firms, a group which do not operate
in conventional oil fields, reported that proved reserves had
fallen by 13 percent on average as low oil prices made many
Firms operating in shale oil fields use hydraulic fracturing
to tap oil in rock formations that cannot be accessed by
conventional drilling methods.
The reserves reflect oil and gas that can be profitably
tapped in the next five years and are valued by investors as a
measure of future revenue growth. Greater reserves also can give
the companies more borrowing power.
The 2016 shale reserve gains, while modest, came as
conventional drillers were paring back their own estimates as
oil prices remain below the levels needed to make output from
higher cost fields profitable. The cost of pumping a barrel of
oil from Canada's oil sands is much higher than the cost of
producing oil from shale.
The reported 2016 increases in shale reserves are based on
U.S. Securities and Exchange Commission rules and use an average
West Texas Intermediate oil price of $42.75 per barrel in
The oil price on Thursday fell below $50 per barrel amid
worries about growing crude inventories, especially from shale
Shale producers' reported natural gas reserves were based on
a $2.49 per million British Thermal Units (MMBtu) average price
in 2016, down from $2.58 a year earlier.
Recent production increases from U.S. shale fields have
rattled OPEC producers aiming to pare global crude inventories.
In remarks to industry executives at an energy conference in
Houston this week, Saudi Oil Minister Khalid al-Falih warned
that OPEC won't accept shale oil rivals getting "free rides"
from its production cutbacks.
The implied threat was that OPEC could reverse the output
cuts, which took effect in January, and flood the world market
with oil, kicking off another price war. The curbs have boosted
oil prices and in turn revived the shale industry in the United
States after a two-year downturn.
BOOST FROM TECHNOLOGY
The technological improvements in shale fields include the
ability to drill further into the earth, both vertically and
horizontally, creating more underground sites in each well for
"Reserve growth really comes down to better well design,"
said Michael Dynan, vice president for portfolio and strategic
development at Schramm, a manufacturer of drilling rigs.
Such changes are helping oil firms tap more oil and gas
while keeping spending low. Continental Resources Inc
says it found twice the reserves per dollar spent in 2016 than
More recently, producers have also embraced big data
analysis techniques that are providing "a lot of insight into
how best to drill a well, where to locate a well and the
fracking techniques to use," said Binu Mathew, who heads digital
products at GE Oil & Gas, which is merging with Baker Hughes Inc
Such advances are only the beginning of the shale oil
industry's efforts to wring more oil from wells for less money,
said Stephen Ingram, southern region director of Halliburton
Co's completion and production business.
Another factor in aiding reserves is the sharp decline last
year in fees charged by oilfield service suppliers.
Oilfield service firms are looking to take back some of the
discounts they extended during the downturn, but shale producers
say they expect to hold the line on expenses as they continue to
Some of the reported gains in reserves are coming from
un-drilled acreage, which makes them less certain. At least six
of the companies Reuters analyzed reported a rise in proved
reserves based on undeveloped properties in 2016.
Investors have increasing faith in the profit potential of
such undeveloped properties, however.
"Confidence is very high that they are going to be turned
into proved, producing assets," said Todd Heltman, a senior
energy analyst at investment firm Neuberger Berman.
Still, some investors worry that shale firms are becoming
too aggressive about booking undeveloped reserves.
"There is no geological risk here, but if your wells don't
live up to your expectations, you have negative reserve
revisions," said Bill Costello, a portfolio manager at Westwood
Holdings Group, referring to downgrading proved reserves to
(Editing by Gary McWilliams, Simon Webb and Brian Thevenot)