American Oil and Gas Reporter - January 2017 - 42

Outlook 2017
unsustainably low levels for nearly two years now. At the same
time, however, operational efficiency will continue to improve.
The dramatic break-even cost reductions seen in 2015 and 2016
as prices collapsed were partially the result of lower service costs
and partially the result of better operational efficiencies.
Cyclically, we are going to see a surge in service costs in 201718 that may temporarily offset continued structural cost improvements resulting from better operations and technology applications. In fact, we expect a fairly large increase in 2017 completion-related costs as the industry struggles with bottlenecks in pressure pumping services and equipment.
However, it is important to understand that the higher service costs are not going to destroy shale play economics in any form
or fashion. We simply have gotten too good at drilling and completing horizontal wells. U.S. production economics should be
rock solid at $60-$65 oil, and break-even costs will continue to
edge downward over the longer term.
Getting decline curve projections right is all about doing the
math right. Shale plays do decline very steeply within the first
few years, but the shape of most of the curves is very flat once
one gets past the first few years. After the initial production hit

following the price crash in late 2014, the average U.S. decline
rate actually has shrunk with fewer new wells being completed.
We are now more than two years into the downturn, and the average U.S. oil well decline rate today is lower than it was three
years ago.
That means we can grow production today at a lower rig count
not only because new well productivities are better, but also because so many shale wells are farther out on the decline curve,
where production rates are lower but stable. If activity does what
we expect over the next few years, those decline rates will start
to move back up as new wells are added to the mix.
I see a very bullish two-three years ahead for the U.S. energy business. The recovery has begun, and at the right price, the
United States can achieve a net growth of 1.5 MMbbl/d over the
next decade to satisfy world demand.
With the new, more price-driven cyclical oil market, the seesaw of supply and demand makes another "overbuild" inevitable. Hopefully, the next one will result in nowhere near the
oversupply we saw in 2014. In the meantime, U.S. producers
should see much better times. They certainly have earned it after the past two years.

ALL ABOUT DEMAND
Rusty Braziel is president and principal energy markets consultant at RBN Energy, a leading market analysis and advisory firm, and is the author of "The Domino Effect," a bestselling book about understanding energy markets. With an extensive background in energy marketing, trading and data services, Braziel began
his career with Texaco, and has held executive-level positions with a major producRusty Braziel
President and Principal
Energy Markets Consultant

RBN Energy

er, a major pipeline, a leading software company, and a top energy analytics and
information company. He holds a B.B.A. and M.B.A. in finance and business from
Stephen F. Austin University, which in 2014 named Braziel a distinguished alumni.

EIA estimated 20 years ago that the nation had 167 trillion

Q: cubic feet of proved natural gas reserves and 1.156

quadrillion cubic feet in technically recoverable resources. Two
decades' worth of consumption later, EIA puts those numbers at
324 Tcf of proved reserves and nearly 2.300 quadrillion of technically recoverable resources, thanks largely to shales. The rise
of U.S. shale gas has been nothing short of remarkable, but what
does the future hold for gas shale plays?
BRAZIEL: The future of the shale revolution is about demand,
both in the United States and exports in the form of liquefied natural gas to overseas markets and pipeline deliveries to Mexico.
U.S. producers have proven they can meet almost any rational level of gas demand, if the price is right. So much of shale's future
will turn on whether demand will support a price high enough
42 THE AMERICAN OIL & GAS REPORTER

to drive continued increases in drilling activity.
Three factors will be the primary determinants of this demand.
The first is the U.S. regulatory environment, running the gamut
from production rules to pipeline transportation and constraints
on natural gas end-use markets. The other two factors-the health
of the global economy, and the price of crude oil-will influence
demand for U.S. LNG export volumes in overseas markets, and
therefore, the likelihood of a second wave of LNG export facilities. If the demand is there, the recoverable resources are available for U.S. producers to meet that demand.
For the first time since 2005, year-to-year U.S. natural gas

Q: production was down in 2016, averaging about 1.5 billion

cubic feet a day less than in 2015. The Marcellus/Utica has been
the primary contributor to increased domestic production, but Ap-

American Oil and Gas Reporter - January 2017

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