Macro Overview of the World Oil Supply and the Impact on North American Shale
June 29, 2015 11:00am-1.00pm Houston, USA For sign up, contact Julia Weiss
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In the first months of 2015, the US shale industry faced a rapid decline in drilling activity, yet oil supply has not been showing any signs of entering into a consistent decline phase. This opposite movement is mainly due to drilled uncompleted wells, namely fracklog. The following examines how drilling and fracking activity in the US shale evolved in 2014-2015 and to what extent accumulated fracklog can affect light tight oil (LTO) supply in 2015-2016.
Figure 1 provides a full insight into the fracklog evolution in the largest LTO plays “The Big Three” Bakken, Eagle Ford and Permian Basin, which together accounted for 80% of LTO production growth in 2014. Last year, driven by expansion of tight formations in the Permian Basin, drillers outperformed completion crews by three horizontal wells per day on average. This has led to a significant accumulation of the fracklog with an annual increase of 1,100 wells as of year-end. When drilling had started falling with almost 35% decline from October 2014 to February 2015, fracking activity showed a delayed response, declining by less than 25% in the same period. However, the decline accelerated in March and April 2015. As a result, the fracklog decreased by 200 wells in the first five months of 2015.
Figure 1 also demonstrates a strong correlation between the number of fracked and started wells, as 80% of the wells come online within three weeks after completion. Thus, massive well completion delays prevented aggressive fracklog reduction, but the number of fracked wells has been sufficient to balance base production decline to date.
In the beginning of June 2015, the scale of the fracklog in “The Big Three” plays remains alarming with 3,850 wells awaiting completion crews. As much as 35% of these wells were drilled more than five months ago. This number corresponds to 7-8 months of drilling at the current pace and indicates that the US shale has sufficient inventory to restore growth when market conditions become favorable.
Figure 1. Horizontal well drilling, completion, connection activity and cumulative fracklog in Bakken, Eagle Ford and Permian Basin
In order to balance oil production decline from horizontal wells in Bakken, Eagle Ford and Permian, 500 wells have to be completed each month. Thus, even if no more wells are drilled, accumulated fracklog is sufficient to maintain flat production profile until the end of 2015. Alternatively, if the fracklog does not change, around 360 horizontal rigs are able to fill the gap. This is slightly above the currently active drilling fleet of 352 rigs.
Figure 2 shows how the production outlook is affected by the number of wells coming online each month. Already producing wells are expected to decline by 50% by the end of 2016, while 250 completions per month will limit the decline to 25%. In turn, 500 completions appear to be a balancing production point. Finally, 750 wells per month deliver 4,150 kbbl/d exit-2016 rate, that is 800 kbbl/d growth from today. Even though such upside potential is fully dependent on the evolution of the market environment, it demonstrates the speed at which current drilling activity of 500 wells per month and 250 wells from the fracklog could restore the growth trend of past years.
Figure 2. LTO production outlook for horizontal wells in Bakken, Eagle Ford and Permian Basin by the number of start-ups per month