U.S.

shale oil's crash diet likely to

bring forward output dip
BY ANNA DRIVER AND TERRY WADE
HOUSTON Mon Feb 23, 2015 6:01am EST

(Reuters) - Shale oil producers are throttling back so quickly on drilling

that U.S. crudeoutput could fall sooner than expected, within months, executives
say as they slash costs to cope with tumbling crude prices and compete with
Persian Gulf rivals.
About a dozen chief executives who talked to Reuters or who spoke publicly,
acknowledged they were taken aback by the scale and speed of the cutbacks,
noting how this oil price downturn was different from several previous episodes
in their careers.
For one, companies

are cutting costs deeper and faster than before as Wall

Street investors increasingly place a premium on capital discipline rather than

just production growth. Some also say the nature of shale makes it easier for
companies to defer work and wait for prices to recover. The wells that drove the
U.S. energy boom of the last decade rapidly deplete, so overall output will fall
unless new holes are constantly bored and oil extracted via hydraulic fracturing,
or fracking.
"The thing that has surprised me ... is that companies large and small, financially
strong, financially weak have really cut capital spending much quicker than I have
seen before," said Bruce Vincent, who retired as CEO of Swift Energy Co this
month after 40 years in the industry.
Just few weeks ago, the prevailing view among industry insiders and analysts was
that U.S. oil production would keep rising for several months despite falling rig
numbers because of rising productivity of active wells and drilling inertia.
In the past, if a producer had a rig contract, they would continue drilling. Now,
producers are paying fees to break those contracts, a fact that has hastened the
steep drop in the rig count, said Vincent.

LOCKED IN ROCK
In the old days, producers felt compelled to pump in a downturn, fearing
competitors with wells in the same reservoir would take the oil. That is no longer
a risk as shale is locked in rock.
"(Now) you can leave it in the ground. In the old days you had to produce because
everybody was sucking on the same straw,"
Harold Hamm, CEO of Continental Resources, said at a conference in January.
Already, many companies have announced 25-70 percent reductions in drilling
and a total of at least $25 billion in spending cuts.
Some went even further. Magnum Hunter Resources Corp has halted all drilling
and told services firms it will not resume work unless its costs fall 40 percent, the
company's Chief Executive Gary Evans told a conference in Houston.
Such pullback, combined with shale well decline rates of some 60 percent or more
a year, has Evans predicting U.S. production will begin falling "in the next two
months."
His view is largely echoed by several other executives, though they say their own
output will hold up or rise and expect much of the decline come from the
shuttering of older, low-yielding wells known as strippers.
Assuming that many drilling contracts will be carried out, the U.S. Energy
Information Administration (EIA) still sees output climbing early this year to
peak at 9.42 million barrels per day in May, with a decline starting in June.
After nearly doubling since 2008, U.S. crude production should stabilize, though
not necessarily decline, in the second half of this year, analysts at IHS said.
Lower output, along with rising gasoline consumption, would help reduce 1.5
million bpd in estimated global oversupply and might allow crude prices to
recover from a 50 percent slide since mid-2014.
While some analysts expect the slide to continue for some time, with Citibank
predicting U.S. benchmark prices to bottom out at $20 per barrel, industry
insiders count on a faster price recovery because of two factors pulling U.S
production down.

One is the much faster than expected decline in the number of active rigs. Oilfield
services company Baker Hughes said on Friday, nearly 50 rigs were shed last
week, bringing the U.S. land rig count to 1250, about the level EIA had forecast
would be reached in October.
"There's been a real rapid response, probably faster than I've ever seen," Jack
Stark, president of Continental Resources told an IHS conference in Houston this
month.
LEANER AND TOUGHER
The rig fleet alone is not the best predictor of output because well lengths and the
frequency of fracks along a well have been rising rapidly to boost output.
However, in the past few weeks companies have also started to refrain from
fracking wells to bring them online, so-called completion, which normally
accounts for 60 percent of a well's total cost.
On its fourth-quarter earnings call, Devon Energy Corp. said it had cut its
completion crews working in the Eagle Ford oil basin to four from nine, while
Anadarko Petroleum said it reduced its completion crews by a third.
After years of breakneck growth, top shale companies Apache Corp and EOG
Resources have said their oil and gas output this year will be flat.
Producers who had grown accustomed to oil at $100 a barrel say they aim to cut
costs to profitably drill shale wells at $40 a barrel or less. That is well below the
$70 now needed to work in some basins and less than current U.S. benchmark
crude prices of about $51 a barrel.
The path to slash costs is to pressure service companies - already cutting
thousands of jobs - to lower prices as well as rely on technology to speed up
drilling and improve well productivity.
"The services companies have always found a way through time to do business,"
said Stark. "The shale business will continue to exist and this renaissance will
continue."
U.S. executives, some of whom proudly call themselves wildcatting "rednecks"
from "cowboyistan," say they will come out leaner and meaner from the downturn
and be able to better compete with top OPEC producer Saudi Arabia. Many
believe the top OPEC oil producer has let oil prices fall and refused to cut output
to squeeze shale rivals out of the market.

"The most ironic thing about what we are in today is the fact that when we emerge
from this the Saudis will have toughened up the American oil industry," said one
prominent shale oil executive who spoke on condition of anonymity.

Africa's oil "sweet spots" still

viable after price rout
* "Sweet spot" exploration to go ahead despite price drop
* Frontier projects, such as pre-salt suffer most
* Ebola, investment uncertainty deter elsewhere
By Emma Farge
DAKAR, March 10 (Reuters) - African oil explorers will keep drilling in select
locations such as onshore east Africa and less complex projects off the West
African coast even with oil at $60 a barrel, executives and analysts told Reuters.
But they warned that African governments with reserves in less attractive
locations should revise terms now or forfeit the investment, leaving the oil and
gas underground.
"There are still some exciting areas in Africa like east Africa and in particular the
onshore areas," said Aidan Heavey, CEO of one of Africa's biggest explorers
Tullow Oil, referring to drilling projects in Kenya and Uganda. "This is certainly
not the end of African oil - far from it."
Oil prices have collapsed from $115 a barrel in June, prompting oil firms to slash
hundreds of millions of dollars from exploration budgets, hitting relatively
expensive African projects hard. Tullow has cut its budget from a peak target of
$1 billion to around $200 million this year, mostly focused on Kenya, although it
may double from next year.
Stuart Lake, CEO of African Petroleum, which has licences offshore Senegal
and Ivory Coastin the West Africa Transform Margin, says the firm has no plans
to cancel projects in an area he called one of Africa's "sweet spots".

"It's an area that is oil-rich with little gas and it's cheap to drill," said Lake,
pointing to two Cairn finds in Senegal. He said the mothballing of projects further
south had dragged down rig rates, saying costs were now around $35-$50 million
per well versus $200 million in Angola.
Low operating costs of around $10 a barrel for Ghana's Jubilee field will mean
cuts have a limited impact there, said Jacques Verreynne, an economist at NKC
Independent Economists.
"You need to be close to or at production and have visibility on cash flow. That's
critical right now," said Chris Bake, an executive at top energy trader, Vitol which
has a stake in a $7 billion Ghana project.
Paul Eardley-Taylor of Standard Bank Oil and Gas said he expected
liquefied natural gasprojects in Mozambique - home to an estimated 180 trillion
cubic feet of gas, or enough to supply Germany, Britain, France and Italy for 18
years - to go ahead.
"Mozambique achieved a lot over the last two months with the passing of
enabling legislation. Standard Bank is hopeful that a final investment decision
can be reached this year," Eardley-Taylor said. The CEO of South African
petrochemicals group Sasol David Constable also said Mozambique remained a
priority. "We want to stay warm other there," he said.
REVISED TERMS
Frontier projects are seen as most vulnerable to cuts such as offshore Namibia
and South Africa as well as Angola and Gabon where vast oil reserves resembling
Brazil's are thought to be trapped deep underwater beneath a salt layer.
Oil-dependent countries with reserves that are costly to develop such as Gabon
and Angola should revise terms.
"If you want to get companies to start looking at licences again then they have to
be made more attractive. It's very simple supply and demand," said Heavey.
Mozambique has extended a bidding round by more than three months.
Other factors such as the Ebola epidemic in Liberia and Guinea and uncertainty
over an oil bill in Nigeria are deterring investment in projects that might
otherwise be attractive, even in the current environment, executives and analysts
said. (Writing by Emma Farge; additional reporting by Ed Cropley, Ed Stoddard
and Karolin Schaps, editing by David Evans)