Balancing Oil and Gas Production Timelines
The oil and gas industry's ability to respond to price fluctuations is hindered by complex and time-consuming production processes. This article explores the various stages of oil and gas production, from well site selection to hydraulic fracturin, and the challenges faced in adding new fields. It also examines the constraints on production growth, including supply chain disruptions, labor shortages, and capital availability.
Basics
Complexity characterizes the oil and gas industry's response to changes in energy prices. While higher prices would typically incentivize increased production, oil and gas producers are cautious about diving into new drilling due to the intricate process and upfront costs involved. This cautious approach leads to a sluggish response in production, causing market imbalances and requiring significant price fluctuations to restore equilibrium. This chronic volatility discourages producers from making rushed, long-term supply decisions. This article explores the timelines and complexities of developing additional oil and gas production, particularly in shale fields and offshore locations.
Well Site Preparation and Drilling Process
Identifying suitable well sites is a time-consuming and intricate process, even in established oil and gas reservoirs. Petroleum engineers strive to maximize production from a reservoir while minimizing the negative impact of each new well on output from nearby wells and optimizing drilling location inventory.
In regions like the Barnett shale near Dallas, it takes one to three weeks to prepare a drilling site. This preparation includes activities like clearing, fencing, excavating the fracking pond, and mobilizing necessary equipment. Subsequently, drilling preparations, which also last one to three weeks, are undertaken.
Drilling Timelines: Shale vs Offshore
The drilling of a modern shale well typically spans two to four weeks. Over recent years, drilling efficiencies have led to longer lateral drilling rather than shorter drilling times, reflecting an industry-wide shift toward horizontal wells. For instance, Pioneer Natural Resources Company (PXD), a prominent Permian Basin producer, was taking 14 to 25 days to drill wells with a depth of 10,000 feet and a horizontal lateral of 20,000 feet by 2018.
In contrast, offshore well drilling presents a different set of challenges. It can extend over three to four months and costs between $120 million to $160 million per well, with the most intricate projects potentially taking up to a year. Offshore wells are significantly more expensive than their onshore counterparts, with West African offshore drilling costs reaching up to 30 times those of U.S. shale drilling.
Oil and Gas Production Process
After the drilling phase, the drilling rig is removed, and the well is prepared for hydraulic fracturing. Wells in shale formations require high-pressure flushing with engineered fluids to create fractures in the rock and maintain their openness, thereby releasing oil and gas. This process takes approximately one week after drilling completion, and the hydraulic fracturing process itself takes about ten days, depending on the length of lateral segments.
Following hydraulic fracturing, the addition of production tubing takes an additional week, succeeded by two to three weeks of flowback. Flowback marks the initial production stage in which oil and gas are mixed with water and sand.
Challenges in Developing New Oil and Gas Fields
While it is possible to drill and bring new wells online relatively quickly in established reservoirs, the timelines for production from entirely new fields are far more extended. This is due to the extensive permitting requirements and the necessity of building infrastructure like pipelines and storage facilities.
Studies have shown that the world's largest oil and gas fields take an average of 5.5 years from discovery to initial production and require 17 years of production, on average, to reach their peak output. Chevron Corporation's (CVX) Gorgon natural gas development project, located off the coast of Australia, serves as an illustrative example, taking 30 years from discovery to construction and an additional six years to start producing liquefied natural gas.
Developing Challenges
The ability to add oil and gas production in established fields, even over shorter timelines, is contingent on factors such as the availability of labor and equipment. These factors became increasingly constrained in the wake of supply chain disruptions and tight labor markets resulting from the COVID-19 pandemic. In the Permian Basin, the leading U.S. production reservoir, material delivery delays, including pipes and sand, were hindering production growth in March 2022, according to Occidental Petroleum Corporation (OXY) Chief Executive Vicki Hollub.
A further constraint on oil and gas production is the availability of capital, particularly pronounced in the case of shale production. This is due to the faster decline in production from shale wells compared to conventional ones. To offset these declines, more wells must be constantly drilled. Investor preferences have favored companies that return excess cash flow in dividends or share repurchases rather than substantial capital spending, even when oil and gas prices were soaring in early 2022.
Additionally, the limited inventory of highly profitable drilling locations poses another challenge to the growth of oil and gas production. This constraint was already apparent in the Permian Basin in 2022.
Conclusion
Oil and gas production is a complex, time-consuming, and costly endeavor. As a result, the industry's response to price signals is slow, and U.S. drillers encounter additional challenges due to the rapid decline in production from shale wells. Understanding these production timelines and constraints is crucial for comprehending the dynamics of the oil and gas market, where supply and demand continually seek a delicate balance.