Miller/Howard Investments
Miller/Howard Podcast Series
2018 Energy Outlook
Upstream, Exploration & Production Series—
Part 2: The Industry Has Matured
Technology continues to impact the shale revolution and change economics.
Adam Fackler, CFA, Senior Research Analyst  |  Full Bio (PDF)
Upstream, Exploration & Production Series—Part 1: The Shale Revolution
Upstream, Exploration & Production Series—Part 2: The Industry Has Matured
Upstream, Exploration & Production Series—Part 3: The Oil Majors Move In
Upstream, Exploration & Production Series—Part 4: Investing Upstream


Over the last decade, crude oil production has nearly doubled, and natural gas production has increased by over 40%—all of this driven by shale and tight resource development. Tight oil and gas production right now accounts for over 50% of US production. As a result, the US has become the world’s top producer of oil and natural gas for the last five years. Horizontal drilling and hydraulic fracturing have also changed the industry’s cost structure. Cost structures went through another mutation in 2014 as commodity prices declined.

Throughout the downturn, US onshore companies reexamined their operations really with a focus on increasing efficiencies and reducing costs. As a result, many basins in the US are now economic at levels not previously seen, and are displacing production volumes around the world. Within the US, the Permian Basin and STACK are generally considered the most economic, with the lowest break-even costs. For gas-focused basins, the Marcellus is generally considered the most economic. I think it’s important to note that as much as we want to think about shale basins being composed of perfectly consistent layers of rock, acreage quality can vary within each of these basins. The best operators have been able to identify and develop these sweet spots.

From a high level, cost structure is extremely important within the industry, and really drives development activity. US production growth has been driven by a combination of increased drilling activity and increased productivity. The oil rig count peaked in the second half of 2014 before plummeting roughly 80%. The count has since rebounded by 150%. Oil-focused drilling activity is concentrated in the Permian Basin, which accounts for roughly 55% of the oil rig count. The gas rig count peaked in the second half of 2011 before plummeting 90%. The count has since rebounded by roughly 125%. Gas-focused drilling has been concentrated in the Marcellus and Haynesville.

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