With US shale activity in 2019 plagued by uncertainty, three trends for US light tight oil production will play a crucial role for the evolution of the industry in 2019-2020: New Mexico emerging as a rising star; a faster expansion among private operators and majors compared to public E&P players; and a steepening decline in base production that could impede output growth over the next two years.
New Mexico has cropped up as the new core area of unconventional liquid development in the US. All dedicated operators there treat their Bone Spring, Wolfcamp XY and Wolfcamp A developments as core assets in their respective portfolios. While New Mexico was not even one of the top three states in terms of completion numbers in 2018, it left all other major states behind on average oil productivity per horizontal well. As a result, light tight oil production in New Mexico has increased by about 70% year-on-year, from 419,000 barrels per day (bpd) in November 2017 to 703,000 bpd in November 2018, as shown in figure 1. This is the fastest growth rate among all major states with significant shale activity. In terms of absolute growth, no state can compete with the 1 million bpd annual addition achieved by Texas, which dominates all other states in terms of mere scale of activity and the number of commercial plays.
Private operators and majors expansion
Another production trend that emerged in 2018 was the rapid light oil output expansion demonstrated by majors and private operators. We have recently analyzed the outstanding progress achieved by majors among unconventional US plays, yet a staggering 63% year-on-year average production expansion as of November 2018 was not matched by any pure-shale public E&P player last year, as shown in figure 2. Private operators increased their combined unconventional output by 44% year-on-year as of November 2018, twice that of the average public E&P (excluding majors). This production outperformance by private operators and majors largely explained a significant mismatch between market expectations on the US oil production forecast and the actual 2 million bpd addition over 2018.
It should be noted that mid-sized and small public E&Ps achieved more than 40% production growth in 2017. The 50% lower growth rate in 2018 was the result of increased focus on capital discipline and rising base production for many operators. It is admittedly more difficult to grow output by 40% per year with a base production of 100,000 barrels of oil equivalent per day (boepd) than at 10,000 boepd. Gradually, more and more operators find themselves in the 100,000 boepd group.
When making projections for 2019, it is important to take into account that the typical private operator or major is unlikely to behave in the same manner as a public pure-shale E&P would. The recent oil price slump is likely to bring about an immediate slowdown in activity among private operators, especially eliminating those who do not have access to core acreage. On the other hand, activity among majors will not be driven by shale-related cash flow balances. We expect strong resiliency of activity for Chevron, ExxonMobil, Oxy and other majors regardless of degradation in shale-related cash flow balances.
Steepening base decline
Finally, a significant surge in the activity level from the second half of 2017 resulted in more pronounced base decline, i.e., the pace at which production falls if no new wells are completed. The wells completed in the two years up to and including November 2018 accounted for 72% of total light tight oil production. Therefore, base production today is significantly less mature than it was in November 2016, when the last two vintages accounted for only 62%. In fact, it is almost as young as it was in November 2014.
If no new wells are completed in 2019-2020, light tight oil production is projected to decline by 62%, or 4.5 million bpd. It is evident that without an increase in activity levels in terms of new completions, or further increases in well productivity, the pace of growth will decelerate in 2019-2020. In fact, if the activity and productivity levels seen in 4Q 2018 prevail, US light oil production will increase by less than 1.5 million bpd between 4Q 2018 and 4Q 2020. This corresponds to a 50% lower growth rate than what was achieved over 2018.
Nevertheless, this scenario is viewed as conservative given that many operators still indicate production growth as their main priority. While the shale industry (public E&Ps) will also try to achieve favorable cash flow balance and show capital discipline, it is likely that we will see another year of considerable well productivity improvements.