Shale Technology: Moore’s Law or Turgot’s?

In the last decade, we have witnessed seismic changes in the oil and gas industry, particularly regarding the economics of North American unconventional production. A significant portion of these advances have been attributed to technology, which many observers expect to be a continued source of deflation into the future. In this paper, we attempt to disaggregate structural improvements in well economics from cyclical ones in order to better understand whether we are in a period of accelerating productivity gains, à la Moore’s Law, or if we have reached the point of diminishing returns.

Introduction

The impact of technology on the global oil and gas industry is indisputable. Oil prices have fallen almost 50% in the last decade, in no small part due to the emergence of U.S. unconventional supply growth. Domestic natural gas prices have fallen even more, and a country which once banned the construction of gas-fired power plants out of fears of resource scarcity is now on the verge of becoming one of the commodity’s largest exporters. Ten years into the “shale revolution”, the industry has accomplished far more than anyone could have expected back in the early days of the Barnett Shale. That success has fostered a belief in some circles that the E&P business will be transformed into a technology play, with “AI” and “big data” increasingly a part of the oil patch lexicon. In fact, many industry observers now incorporate annual “productivity gains” into their forecasts of future well results and commodity price assumptions. While we have no doubt that technology will continue to play a vital role in the evolution of the industry, we question how much of the recent results are due to structural factors, versus cyclical ones, and wonder whether future improvements will be as linear and homogeneous as conventional wisdom suggests. These issues bear consideration, as the answers will shape forward-looking assessments of both individual well economics and, perhaps more importantly, inventory depth. These factors, in turn, are the basis for estimating asset values as well as the magnitude and cost structure of potential sources of supply. In other words, understanding the impact of technology is critical to understanding the future of the E&P industry...”