“We have just started to get into the manufacturing and harvest mode of the shale revolution,”
I keep going on about productivity because as Krugman says, it’s not everything, but it’s nearly everything. This article from Bloomberg highlights how Encana is pushing the technical boundaries of shale further with a new Cube process (pictured above).
Basically, you do a whole pile of layers at the same time. I have no idea if it will be successful or not, but these companies will learn a lot from this and not all this knowledge will be wasted even if the process itself is a failure. Economists talk of dynamic capabilities, where companies build a knowledge base, in a path dependent manner, by trying to do new things; and this is a classic case. This article from 1994 is as relevant now to this as it was to the semiconductor industry which led to the original observations (remember Moore’s Law).
Which is why Encana can show this:
On a per dollar basis no one in offshore is showing those sort of gains. A large part of the cost reductions have come as equity in assets has been wiped out through oversupply. This is a genuine ‘learning-by-doing’ productivity gain. I have consistently said that once the US economy starts to turn this into a manufacturing industry there will be a consistent reduction in per unit costs, it is the raison d’etre of American capitalism (which to be clear I don’t think is an amazingly astute observation).
The simulations show that the U.S. supply response is much larger now due to the shale revolution. Given a price rise to $80 per barrel, U.S. oil production could rise by 0.5 million barrels per day in 6 months, 1.2 million in 1 year, 2 million in 2 years, and 3 million in 5 years. Nonetheless, it takes many months before a substantial portion of the full supply response is online, longer than the 30 to 90 days typically associated with the role of “swing producer” such as Saudi Arabia.
The thing is this research used well data from 2010-2015, so if you look at the productivity gains over the last two years then shale is even more responsive. A comparison with offshore, given cycle times and unit costs are so different, would be interesting, but methodologically challenging I think. The point is shale is undeniably a swing producer and with a much lower capital commitment (i.e. low CapEx/ high OpEx) than the industry has had before and gives E&P companies an optionality that offshore doesn’t (but not the high flow/low lift costs advanatges of offshore).
This is where the US economy is so good. Look at this data from Precision Drilling Corp:
These cummulative gains are huge. Day-in, day-out, this is an economy, and in this case an energy production system, focused on driving down unit costs. I get you can run into limits, but we appear to be someway off them here. As I say, I think it takes a brave person to bet against this, and from an investors point-of-view such productivity gains are enormously attractive.