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

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.

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.

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.

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.


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3006192, ~/Articles/ArticleHandler.aspx, 9/3/2015 5:19:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:04 PM
CLR $30.36 Up +0.42 +1.40%
Continental Resour… CAPS Rating: ***
DVN $40.72 Up +0.39 +0.97%
Devon Energy CAPS Rating: ****
KOG $0.00 Down +0.00 +0.00%
Kodiak Oil & Gas C… CAPS Rating: *****