Shale drilling activity in North America has decreased considerably in 2015, to the lowest level since 2011. This downturn has affected all plays, mostly those producing oil. During 2016, with an expected Brent oil price of 61 $/bbl average for the year, shale drilling will stay at slightly lower levels than in 2015, as shown in Figure 1. However, light oil production from shale can possibly increase in 2016 by ~200 kbbl/d mainly due to overperforming wells and a significant backlog of drilled uncompleted (DUC) wells possibly coming online during 2016.
With the oil price drop during 2015, shale companies have been forced to run leaner and more efficient operations. In fact, efficiency has increased considerably during 2015 due to a combination of factors such as deferred old rigs, increased pad drilling, longer-lateral wells, lower oilfield service costs and high-grading. The latter, in particular, has led to better performing wells with higher initial production rates and EURs (Estimated Ultimate Recovery) on average, as shown in Figure 2. By drilling only their best acreage in key shale plays, companies ensure the best performance in each well drilled during 2015.
If well performance continues to increase (i.e. more proppant per well leading to higher initial production rates) for the wells currently under development, shale production will not decrease at the same pace as activity. Wells under development currently correspond to ~80% of the total spudded 2015 well count, as shown in Figure 3. The wells “under development” include drilled, not yet producing wells and not yet drilled wells. In fact, according to in-house research and analysis, ~43% of under development wells of 2015 are wells already drilled but pending completion (DUC). If the DUC wells are completed during 2016, shale production will increase during this year; if the DUC wells continues or increases during 2016, shale production can remain constant year-over-year. Hence, the DUC wells play a significant role when forecasting the 2016 North American shale production.
The future of the DUC wells and the shale drilling activity in general are highly sensitive to key factors such as the oil price and the cost deflation, as shown in Figure 4. This figure shows the estimated number of yearly spudded shale wells for different Brent oil prices and cost deflation scenarios. The key assumption is that the companies will balance investments with operational free cash flow. With a Brent oil price of 50 $/bbl and a cost deflation of around 30%, the number of spudded wells will be around 13,000, which is close to the well count depicted in Figure 1 and 2 for 2015. Towards 2016, Figure 1 suggests that ~10,000 shale wells are needed to keep a flat light oil production on a yearly basis, at an oil price of 61 $/bbl and no cost deflation (Figure 4).