The unconventional natural gas and oil revolution in North America has been less a random series of fortuitous events and more a cascading set of circumstances that has created a new world order for energy markets and upended the global economic outlook, according to industry guru Rusty Braziel.
Braziel lays out his theory in a new book, "The Domino Effect: How the Shale Revolution Is Transforming Energy Markets, Industries, and Economics," published by NTA Press and available on Amazon.com. Originally designed for an energy-centric audience, the book takes the reader on a fascinating and winding journeywith Braziel, who has spent his life working in all the relevant segments of the oil and gas industry. It describes the revolution that appeared to spring out of nowhere to transform the energy world with the fortunate marriage of two separate developments, horizontal drilling and hydraulic fracturing. Weather also had a part to play, withthe hurricanes in 2005 that sent prices soaring and producers pouring their talents and money into unconventional drilling.
Braziel brings together the factors that first transformed the natural gas markets, then moved into natural gas liquids (NGL) and finally the crude oil markets, an enjoyable ride that thoroughly explains how the United States has led the way and what may happen in the years ahead. The end result for each commodity is a cyclical market basically following the pattern set by the natural gas market over the past six years.
"My experience is that a lot of times, the folks that are getting involved in one segment of the business don't really know what's going on in the other segment of the business," Braziel said in an interview with NGI. "My main goal was to spread the information around so that people who understand one segment can understand how the rest of the segments tie it all together."
The book is attracting an audience beyond the energy sector, drawn to by people who want to know why prices are low and when they will rise. It dawned on Braziel that the little boxes he was using in PowerPoint presentations for energy conferences to explain the history of the shale transformation looked like dominoes. That lightbulb moment brought into context how the massive changes have occurred -- and will continue to occur.
The first domino to fall was put in place by the man many considered the "Father of Shale," George Mitchell, whose team honed drilling techniques in a North Texas field known as the Barnett Shale in the 1980s, combining old school hydraulic fracturing with horizontal drilling.
Gas prices still were low back in 2002 when Devon Energy Corp. paid what is now seen as a bargain -- $3.1 billion -- to buy Mitchell Energy & Development Corp. (see Daily GPI, Nov. 19, 2002). It took three more years for the next domino in place to tumble, when the terrible twins Katrina and Rita tore through the Gulf of Mexico in 2005, with Rita's wrath alone damaging or destroying more than 20 offshore installations (see Daily GPI, Jan. 6, 2006). The natural gas industry, then preparing to head into the winter withdrawal season, saw prices soar -- and remain high for several years.
"A lot of folks didn't realize how important that price run-up after the hurricanes was to the development of shale," Braziel said. "My sense is, it probably would have happened eventually, but it wouldn't have happened nearly at the speed it did had it not been for a price run-up to $12 and $13.00/Mcf."
All in, Braziel sets up 30 dominoes that he said have fallen, including price shocks, production economics, more efficient drilling -- and the applications from gas to NGLs to crude oil -- a trio of "drillbit hydrocarbons," or DBH, that now can be produced from one well. Each segment has played and will continue to play a "distinctive role as the domino effect ricochets through the markets and topples one domino after another," he writes in the book.
Braziel said the most frequent question he is asked is when will the energy sector, i.e. prices, recover. There's no book that can clarify that completely.
"My response is, you need to get the 'R' word out of your vocabulary because it’s not going to happen that way," he said. Six principles he outlines in the book offer a direction on which dominoes will fall next, which are tied to a now proven fact: "We can produce more NGLs, natural gas and crude oil than anyone expected. And all of that is coming from that single hole in the ground."
So what's next?
"Well, prices are low, so demand's probably going to increase. Supply is probably going to decrease because we're going to be drilling a lot less at $2.15 gas and $30 crude oil. And we're going to be drilling a lot less and then supply/demand is going to tighten up. And when the supply/demand tightens up, then prices are going to go back up. But only temporarily and only for a short period of time."
As soon as prices perk up, "what do you think all of those producers are going to do? They are going to jump right back in it. So we're in a trading range. I've said it a number of times, and I don't get the sense that people are believing it. I say it, and people say, 'oh, yeah, Braziel, that sounds OK. But when are prices going to recover?' It's not going to be that way."
A crude oil trader only needs to look at what happened in the gas markets to get a sense of where prices are headed -- and it's not up.
"That's the whole point of the book," Braziel said. "Crude oil is now living in the natural gas world that natural gas has lived in for the last six years...It came to gas and then it came to natural gas liquids. Finally it came to crude oil and here we are."
Asked how long the "surplus" may last, Braziel said it depends on the definition of "surplus." For example, the Haynesville Shale, neglected since the Appalachian Basin boom, "could be producing an additional 4 Bcf/d or so if prices were high enough. But they're not. What’s that 4 Bcf/d? Is that a surplus? It's not getting produced right now. So is that a surplus? What is that exactly? It’s an overhang.
"And I submit that the natural gas overhang that the gas business has been living with for these same six years, is the overhang that the NGL business has been dealing with for the last three years or so, and the crude oil business has been dealing with since the latter part of 2014. It never went away in gas. It hasn't gone away in natural gas liquids. And I don't think it's going away anytime soon in crude oil."
That doesn't necessarily mean North America would have a continual surplus, producing more than it’s using.
"Production will not infinitely be at a level of consumption because storage fills up. It just can't happen that way," Braziel explained. "What can happen is that I know that I can drill a well there in the Bakken Shale and it will produce X, and it will produce a Y rate of return if prices are $60. But they're not. So I’m not going to drill it. But by golly, just as soon as prices do get to be $60, I am going to drill that well.
"So is that production behind that well a surplus? No, not really because it hasn't been produced yet. It hasn't even been drilled yet. But It can be."
The first domino was technology, which has become a "good news, bad news story," he said. Producers have learned to do much more with less." But that means fewer drilling rigs are needed along with fewer people.
"I don't see that changing very much," he said. "We're not in the situation we were in 1986 when people were leaving this industry in droves," as the oil markets crashed, sending thousands of people to the unemployment lines and pushing energy-centric Houston into a severe slump.
"The entire shale revolution is a technology-driven set of events," he noted. Horizontal drilling and hydraulic fracturing had been around for decades. "But it was the application of those technologies to shale and figuring out how to break the code in each one of the individual shale formations that made this all possible in the first place. But the improvements have been coming from lots of other sources around those technologies. In other words, we've cut drilling times substantially."
In the Eagle Ford Shale, for example, it took EOG Resources Inc. 22 days to drill a well in 2011. "Now they can drill that well in eight days. That means in 2011, a given rig could drill 16 wells in a year. Now that same rig, or probably one that’s a lot more technologically advanced, can drill 47 wells in a year. There are a lot more wells per rig. And the initial production rates of those wells have essentially doubled, up from 533 b/d of oil to 855 b/d, an 88% improvement in that time period. So I'm getting a lot more bang for my buck for each well that I drill, and I can drill a lot more wells.
"If you put that together, a given rig that could generate 9,000 b/d of incremental production in 2011 now can generate 50,000 b/d. It's unbelievable. I don't believe that most producers thought that was possible." It's the same thing on the gas side, with gas production added per rig in the Marcellus and Utica shales at 1.4 MMcf/d in 2011 and now at around 7.8 MMcf/d, a 453% improvement.
"So, can that keep going? No, I don't think so," and "not in the Marcellus and Utica at least, not in the areas that are being drilled right now. But what we know is that each of the shale basins is different. Each of the shale basins has to have its own code cracked the way that basin works. So will technologies will go to other parts of existing basins and then be able to improve productivity out of those geological formations more than they are able to do right now? Absolutely right."
Most of all shale production now is coming from some "relatively small geographic areas versus the size of the overall basin. There's only 20 or so counties that are responsible for most of the production from both the Marcellus and Utica formations. Are people going to figure out how to produce in all of the counties? That's unlikely. But it's a lot more than 20, I bet," he said.
Braziel wrote his book initially for the 20,000-plus readers of RBN's daily blog, people who work for producers, midstreamers, downstream companies, oilfield services and the financial industry.
With the falling stock market and declining crude oil prices, "all of the sudden my book appeals to an audience that I never expected to be talking to, and those are folks who are trying to figure out what's going on in the energy markets as it’s having such a huge impact on the overall stock market."
He's already thinking about the next book.
"Obviously, another set of dominoes are falling," he said. In a blog published in early January detailing his prognostications, Braziel said to some extent, "what we're just passing through right now is the end of Act One. The reason is, when gas prices fell, producers could go drill for wet gas. And they did. When NGL prices fell, producers could drill for crude oil. And they did. Now crude oil prices have crashed and there's no other place to go.
"I can't go across the street and find what I call an attractively priced drillbit hydrocarbon anymore. They are all gone. So now the market has to either true-up on demand or buy less supply. Those are the only two things that can balance the market anymore. That's the reason why crude oil has now joined natural gas in that exact same environment that gas has been living within for the last six years. Producers, since they don't have any other choice, now deal with the problem rather than going down the road to the next energy commodity and leaving the other commodity behind…”
Braziel said “we’re in a different world. We've never been in this world before. It's uncharted territory. In two years, we're going to look back on this and say, 'there's exactly what’s happened and here’s what's likely to happen next...That will be Act Two."