January 2020

Five light tight oil trends to consider amidst talk of a "shale slowdown" in the US

NAPE Summit 2020

February 6 -7, 2019

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As we enter a new decade, the US shale industry is facing rising concerns about a possible slowdown in production growth – or even production declines. Last year we identified three light tight oil (LTO) production trends to sway 2019 growthIn this commentary, we revisit how these trends developed throughout 2019 and evaluate what kind of trajectory LTO is positioned for in the US in 2020.

One interesting metric is found when looking solely at US light tight oil output from horizontal wells – and there is no doubt that the pace of production growth slowed in 2019. Nevertheless, the magnitude of recent growth still qualifies as fairly dramatic. Between March 2018 and January 2019, year-on-year LTO growth in the US was observed at between 1.5 million and 1.9 million barrels per day (bpd). While the industry failed to generate a similar level of LTO growth in 2019, it did manage to climb by about 1.3 million bpd year-on-year as of November 2019. After a relatively weak performance throughout the first half of 2019, production exploded upwards between June and November, adding approximately 900,000 bpd of LTO. So, what were the key trends behind this recent evolution of US shale oil output?

Permian contribution to growth keeps rising, but some LTO additions persist elsewhere

Between November 2018 and November 2019, Permian LTO output from horizontal wells increased by more than 900,000 bpd. While impressive, this tally represents a considerable slowdown – to the tune of 240,000 bpd – compared to the year-on-year growth seen in November 2018. Yet the November 2019 numbers from the Permian account for as much as 71% of nationwide LTO additions, which is a small increase from the 70% share of growth stemming from the Permian a year earlier. In other words, other basins – Eagle Ford, Bakken, Niobrara and minor regions – still delivered a collective 370,000 bpd of additional LTO to the market between November 2018 and November 2019.

A material slowdown in the pace of growth has been observed in Niobrara, Bakken and minor basins. We expect this trend to continue in 2020, with the Permian’s contribution to nationwide light tight oil production increasing further. There will still be modest additions from the other major regions, the only exception being SCOOP & STACK, where a drop is anticipated.

Is New Mexico destined to become the second largest oil producing state?

While New Mexico LTO growth cannot compete with Texas in absolute terms, the state clearly cemented its top place in terms of largest growth rate in 2019. As of November 2019, New Mexico boasted 263,000 bpd of year-on-year LTO additions, representing an annual growth rate of 38%, and without any material slowdown in the pace of additions compared to 2018. While final production numbers for 2019 are yet to be reported, it is very likely that statewide oil output in New Mexico surpassed 1 million bpd by the end of the year. Given that growth prospects look significantly more favorable in the Permian Delaware than they do in the Bakken, we would not be surprised to see New Mexico eventually surpass North Dakota and take over as the nation’s second largest oil producing state – although this could take another three or four years.

Among major producing states, Wyoming is the only one to show record LTO year-on-year growth rates as of November 2019. Driven by the Powder River Basin, statewide light tight oil output increased by an impressive 59,000 bpd (39%).

Private operators and supermajors – more important for the US LTO story than ever

We have repeatedly argued that the stories about a US shale slowdown are exaggerated due to the market bias towards communication of public shale E&Ps. The latest data indeed confirms that year-on-year LTO growth for public shale E&Ps decreased by 45%, from 1.09 million bpd in November 2018 to 604,000 bpd in November 2019. Many public shale E&Ps will be managing a plateau throughout 2020, so the pace of growth will decelerate further.

Meanwhile, both supermajors (ExxonMobil, Chevron, BP and Shell combined) and private operators saw record production growth in absolute terms in 2019. These two operator groups collectively added 680,000 bpd between November 2018 and November 2019. So far we have not seen any indication of a significant slowdown in growth for these groups in 2020. That is, while the pace of additions is set to decelerate in absolute terms, we do not expect a complete elimination of growth.

Long laterals account for 55% of US LTO output; share set to climb higher in 2020

The shale industry has been systematically transitioning from early exploration to full-scale development mode. This shift was accompanied by enhanced frac designs, a switch from one-mile to two-mile laterals (or even longer in some cases), and the optimization of spacing unit development patterns. The share of LTO production coming from laterals longer than 9,000 feet increased from 25% in 2014 to 55% by the end of 2019. Some operators have yet to make the full transition to longer wells, suggesting the trend is bound to continue in 2020-2021 and drive well performance to record levels.

Base decline flat, well performance up – fewer wells needed to maintain output

Many observations have been made about the steep acceleration in base decline due to the substantial production growth in the shale sector and, consequently, the large number of new wells with steep initial decline rates contributing to the base output. While this was indeed a big story in 2017-2018, our recent research indicates that a stabilization of activity levels in 2019 led to an associated stabilization of base decline.

As of the second half of 2019, first month base decline for LTO activity was generally observed around 600,000 bpd, less than 10% more than the level seen in late 2018 despite continuous production expansion. Meanwhile, new horizontal well productivity – defined as total oil production from wells on their second month of production divided by the number of new horizontal wells – kept increasing throughout 2019. In fact, a step change in average new well productivity was observed in September 2019, from 580 bpd to between 620 and 650 bpd. New well productivity is increasing continuously due to the rise in average lateral length, high-grading of drilling locations in an environment of capital discipline, and a growing share of basins with more productive wells.

The stabilization of base decline, along with continuous improvements in well performance, shaped interesting new trends for the balancing well count over the past six months. Balancing well count is the number of new horizontal wells needed to maintain flat LTO output. It increased from 600 wells in late 2016 to 1,050 wells in mid-2019. Since that time, however, it has declined by about 10%, and the industry now needs to deliver 950 new horizontal wells per month in order to maintain flat output.

Actual new well activity has been observed recently at about 1,200 wells per month, explaining the continuation of robust LTO production growth. With the recent slowdown in nationwide fracking, we expect a seasonal dip in the actual new well count in 1Q20. Yet the gap between actual and new well activity remains substantial and activity needs to fall by another 20% or so to eliminate LTO production growth in the US. While there is no doubt that the pace of growth will moderate in 1H20, the seasonal recovery in fracking that can be expected in 2Q20 will surely result in new robust LTO additions in the second half of the year.