3 Surprising Slides That Show What’s Holding Back America’s Oil Boom

The steep production decline rate from legacy oil wells are really holding back production growth in America as well as producers like Kodiak Oil & Gas, Devon Energy, and Chesapeake Energy.

Jun 24, 2014 at 1:00PM

This past April North Dakota finally hit the magical mark of a million barrels of oil production per day. The state had expected to hit that mark late last year, but Mother Nature had other plans and really wreaked havoc on the plans of oil and gas drillers like Kodiak Oil & Gas (NYSE:KOG). But as much as producers blame the weather for holding back America's energy boom, that's not the main culprit. Instead, it's the steep production declines at the wells previously drilled by Kodiak Oil & Gas, Devon Energy (NYSE:DVN), and Continental Resources (NYSE:CLR) that's really holding back booming production growth.

The production dance: Four steps forward, three back
Unconventional shale wells have a very steep decline rate. Because of that three out of every four barrels of oil added in the Bakken and Eagle Ford Shale plays are simply going to replace the declining production of wells drilled over the past few years. This has producers like Kodiak Oil & Gas and Continental Resources drilling more wells just to maintain production rather than to grow it.

The following graphic from the U.S. Energy Information Agency shows the dramatic impact the decline rate will have on the Bakken Shale's production growth rate from June to July of this year.

Bakken Decline

Source: EIA 

As the slide portrays, the EIA sees new wells drilled this month adding 92,000 barrels of oil per day to the Bakken's production stream. But declining production from legacy wells drilled over the past few years will take a big bite out of this growth. According to the EIA these wells will lose 72,000 barrels of oil production per day. The net result is that oil production out of the Bakken Shale will only be up 20,000 barrels per day.

Despite this, both Continental Resources and Kodiak Oil & Gas are growing production at a brisk pace. Continental Resources is still on pace to triple its 2012 production by 2017, while Kodiak Oil and Gas still expects strong 35%-45% production growth, even if that's lower than its previous guidance. But that growth would be even more robust if it wasn't for these decline rates. 

Same theme, different play
We see the same issue in the Eagle Ford Shale, which is an area that Devon Energy recently made a big splash as it acquired a position in the play. The EIA sees a big decline in legacy production there holding back growth as this next graphic portrays.

Eagle Ford Decline

Source: EIA 

As that slide shows production from new wells will add 138,000 barrels of oil to the Eagle Ford's daily production rate over the next month. But production declines from legacy wells will result in just 24,000 barrels of oil production actually being additive to the Eagle Ford's overall oil production rate.

This makes it harder for companies like Devon Energy to grow Eagle Ford production as the company needs to first make up the production decline from older wells. As this next slide shows, Devon Energy sees staggering first year decline rates of upward of 90% in some of its Eagle Ford Shale wells.

Devon Energy Ef Decline Rate

Source: Devon Energy Investor Presentation  

Further, as that slide also notes production from these new wells will continue to steadily decline each year. That forces Devon Energy to drill a good portion of future wells just to maintain production levels each year before it can even drill wells that are additive to production.

Investor takeaway
Steep decline rates from unconventional shale wells really hamper growth. Overall, three out of every four barrels of new oil that Kodiak Oil & Gas, Devon Energy, and Continental Oil produce simply replace the production from previously drilled wells. That being said, these companies are able to overcome the decline rates and still grow production by double digits, which is a pretty healthy clip even if it's not as strong as it would have been if the wells didn't decline so fast. 

OPEC is absolutely terrified of this game-changer
Steep decline rates are one reason why OPEC's not all that worried about America's shale boom. However, there is one energy game-changer that has it absolutely terrified. You can learn all about it in an exclusive, brand-new Motley Fool report where we reveal the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock.

 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers