Article:US oil production has gained significant momentum - Limited downside risk in the short-term
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Amid persistent recovery in US horizontal onshore rig counts since bottoming out in mid-2016, it is only in Q1 2017 that shale started to exhibit material and persistent monthly output additions. This is evident on the oil side, according to official state data that already provides sufficient fact-based visibility on the most recent trends in Q1 2017. With a strong start to 2017, shale is set for steady growth throughout the remainder of 2017, due to indications of significant recovery in completion activity.
As depicted in Figures 1 and 2, drilling activity exhibited an upward trend since mid-2016 for both oil and gas wells, while completion activity was naturally lagging behind drilling, exhibiting relatively flat development through H2 2016. This resulted in a build-up of inventory of drilled uncompleted wells. However, in Q1 2017 we observe that completion activity finally starts to catch up with growth in drilling, driven primarily by a growing number of completions in the Permian Basin and South Texas. Along with the significant build-up of new inventory of high-quality DUCs observed in H2 2016 - Q1 2017, this positions completion activity for a prolonged expansion throughout the rest of 2017 as more pressure pumping equipment gets reactivated. In contrast, despite further expansion in rig counts, growth in drilling activity is stabilizing due to degrading drilling efficiencies in all major plays.
Q1 2017 was particularly strong for shale in terms of monthly net additions in oil production, as shown in Figure 3. Additions were particularly strong in February 2017, reaching an all-time high of 190 kbbl/d, due to overlapping completion rounds in several major basins and reactivation of inactive wells in Bakken after a winter shock in December 2016. While February oil output growth is unsustainable towards the end of 2017, US horizontal shale oil monthly production is set to grow month-over-month by ~100 kbbl/d on average throughout 2017, implied by the current expansion in completions. The largest growth is expected from the Permian plays. On the other hand, rich gas production from US shale has been exhibiting a flat development since early 2016. However, robust drilling in January-April 2017 shows signs of recovery and is expected to turn into new completions from mid-2017. Therefore, a considerable growth in gas volumes can be restored from H2 2017, driven by expansion in the Appalachian Basin, Haynesville Shale, and recovery in associated volumes from liquid plays, as depicted in Figure 4.
Figure 5 compares the productivity of wells in Q1 2017 versus Q4 2016, in terms of new production per well, which is defined as an average daily rate in the second production month. Eagle Ford, Permian Delaware and Permian Midland exhibit further productivity improvements, despite some offsetting effects such as a stronger contribution from minor players and expansion of activity in non-core areas. Eagle Ford is in the lead among the major liquids plays in terms of new production per well, with an average of 785 boe/d of new volumes per well brought into the market in Q1 2017, followed by Permian Delaware with 696 boe/d of new production per well.
Overall, strong first quarter results suggest that shale is on track to grow further throughout the remainder of 2017. While exceptional oil output additions observed in February are unsustainable through the rest of the year, ~100 kbbl/d average month-over-month oil production growth in 2017 is in line with trends in completion activity.