Drill rigs are moving into America’s shale basins once again.

This comes at the same time that America’s pipelines are at capacity.

The reason lies at the heart of shale oil formations. Shale plays are not long-term projects like deepwater drilling.

Deepwater drills descend through thousands of feet of water to tap into oil deposits.

The projects take years to develop. Five to 10 years is a reasonable timeline to start production.

They are also long-lived. Oil can flow from these deposits for a decade or more with little loss of production.

Shale has a much shorter timeline. Drills tap into shale beds and use hydraulic fracturing, or fracking, to release oil and gas.

Drilling only takes a few months. Production is also much shorter than deepwater. Production will drop off by as much as 70% within the first year.

That means if producers want to maintain flow rates, they need to keep drilling new wells.

This is an exhaustive process. Drill, pump, drill, pump.

The Fix for U.S. Shale is Coming

To make the situation harder on producers, most of the good wells are already tapped out.

Following the bear market of 2014 that saw the price of West Texas Intermediate oil fall 66% in two years, energy companies only tapped into their best assets to stay alive.

Now that we are over a year into the bull market in oil, shale producers are out of great assets. We are seeing the second- and third-tier deposits getting drilled.

That means we will see more rigs entering shale basins just to keep up with production.

An index of oil service providers fell by 17% since recent highs in May. Fears over transportation bottlenecks and OPEC flooding the market with cheap oil scared off investors.

Transportation bottlenecks will be resolved by 2019, according to the CEO of Schlumberger, a major oil driller.

Oil services offer a contrarian angle. OPEC seems happy to hold back supplies to keep prices higher. The fix for U.S. shale basins is coming, and in the meantime there is plenty of work just to keep up production.

Consider the VanEck Vectors Oil Services ETF (NYSE: OIH). This exchange-traded fund holds a basket of American oil service providers.

Good investing,

Now that we are over a year into the bull market in oil, we are seeing the second- and third-tier shale deposits getting drilled.

Anthony Planas

Internal Analyst, Banyan Hill Publishing