Many are talking about US light, tight oil (LTO) as
possibly becoming a new source of swing supply for
the world oil market.
“The swing producer role held by Saudi Ara-
bia since the mid-1970s appears to be in flux,”
said Rice University’s James A. Baker Institute
researchers in a paper earlier this year. “At times
when the Saudis decline to adjust production in
line with market signals, such as at present, that
role may revert to higher-cost areas of production,
including some in the US.”
The paper, “Effects of Low Oil Prices on US
Shale Production: OPEC Calls Tune and Shale
Swings,” was written by Jim Krane, a Wallace S.
Wilson fellow at the Baker Institute, and Mark
Agerton, a graduate student fellow at the Baker
They based their findings on statistics from
Drillinginfo, a monthly index, and from Baker
Hughes Inc., provider of the closely watched US
weekly rig count.
LTO investments typically are smaller and
faster to execute than big conventional projects
that can be accompanied by large shutdown costs,
Krane and Agerton said.
“Low barriers to entry allowed small, indepen-
dent producers to rapidly move into the market
and start drilling,” Krane and Agerton said of un-
conventional plays. “The same low barriers allow
them to exit quickly if investing becomes unprof-
On the other hand, Krane and Agerton note
economic reasons why LTO production might
respond more slowly than some have suggested.
Operators stand to benefit from service compa-
nies’ discounts during oil-price slumps, and some
operators also have locked in certain commodity
prices through hedging contracts.
“The nimble characteristics of US shale produc-
ers may provide global markets with alternate and
useful source of spare capacity,” Krane and Ager-
David Havens, oil services analyst with CLSA
Americas LLC in New York, agreed US unconventional oil can be seen as a form of spare capacity.
“It does have a probability of success of over
90%,” Havens said of unconventional operations.
“Yes, Saudi Aramco can switch theirs on faster, but
the elasticity of supply in the US is among the best
in the world.”
Havens calls industry’s budget cuts and subsequent production declines “good first steps,” but
he also notes, “The evolution of US unconventional oil supplies is not going to be managed this
quickly and absolutely.”
Separately, J. Marshall Adkins of Raymond
James & Associates Inc. of St. Petersburg, Fla.,
noted on Apr. 13 that the total US rig count has
fallen more precipitously than he had imagined.
“However, we think the first-half downward
correction was too much, too fast relative to what
was needed to rebalance the system. That means
we expect the rig count to gradually rebound in
the second half of 2015 and continue to grow
For 2016, RJA forecast a rig count average of
1,176 rigs, Adkins expects the recovery will be
disproportionately slanted to horizontal rigs in the
Permian, Eagle Ford, and Bakken plays.
Horizontal rigs represented 78% of the active
rigs drilling in the US according to Baker Hughes
statistics for the week ended Apr. 10. RJA estimates horizontal rigs will represent 83% of active
US rigs by Dec. 31, 2016.
*Paula Dittrick is editor of OGJ’s Unconventional Oil
& Gas Report.
Special Projects Editor*
US shale as swing producer