September 2018

    US oil production seeks new heights

Upcoming event

Rystad Energy's Annual Summit and Client User Meeting

Houston: September 18-19
London: October 3-4
Singapore: October 16-17
 

Learn more and register

Article: Diamondback eyes synergies in the Permian Basin with Energen acquisition

Article: Eagle Ford Shale: horizontal completion activity by distance to the closest well and year


RYSTAD ENERGY PRODUCT HIGHLIGHTS

Shale Upstream Analytics: Monthly reports with insights into key trends and developments in the North American tight oil and shale gas plays, including an overview of M&A activity, productivity metrics, short- and medium-term projections on production, spending, and valuation.

ShaleWellCube: Database with daily updates of official US & CA well data, covering over 1,000,000 wells and permitsIt contains a detailed analysis of well curves, pad drilling, re-frack trends and well economics. A powerful tool that gives an in-depth insight into North American shale and conventional well activities.

Shale IntelReport with unique insights into supply and demand of key service segments of the US shale industry. Provides an industry overview of drivers behind drilling and completions activity, detailed analysis and forecast of the global frac services market, the US frac sand market overview, analysis of the US oilfield water management market as well as an overview of the US stimulation chemicals market.

CONTACT
NAS@rystadenergy.com 


Newsletter Subscription: If you are not yet a subscriber to this email or you would like to receive one of our other industry newsletters, please fill out the Newsletter Subscription Form.

The latest EIA-914 survey and Petroleum Supply Monthly (PSM) were released at the end of August, confirming our expectation of strong oil production additions from Texas in June 2018. According to the EIA, Texas oil production jumped by 165,000 bpd for the month and along with strong post-outage recovery from the Gulf of Mexico, this addition pushed total US oil production to a new record level of 10.68 million bpd.

While we see room for up to 50,000 bpd of upward revisions in subsequent EIA publications, the important milestone has already been reached. As shown on Figure 1, US oil production exhibits an all-time high year-on-year addition of 1.6 million bpd. This confirms the ability of new shale industry to grow even faster than it did during the first wave of growth prior to 2015, when yearly additions peaked at 1.57 million bpd in December 2014. In a global context, such annual growth corresponds to the total oil production of some prominent oil exporters, such as Norway.

Looking back at our predictions from March 2017 and 2018, we see that the shale industry managed to outperform expectations – in spite of all the midstream bottlenecks this year and the service-side constraints last year. In March 2017, we predicted oil production to reach 10.33 million bpd by June 2018, while in March 2018 we had June at 10.53 million bpd.

It is important to bear in mind that the oil price environment remains the significant driver of shale activity and resulting production. Without diminishing the significance of efficiency gains, we emphasize that a higher price environment always triggers additional activity in less commercial acreage positions. In the same way, an oil price collapse leads to unsustainable activity in acreage of low quality.

A majority of E&P companies use conservative $55-$60 bbl WTI Cushing assumptions when they build their activity and production guidance. Positive price swings result in upward revisions as excessive cash from operations is used to deploy new rigs and frac spreads.

We run sensitivity analyses for US oil production, evaluating the portfolios of each shale operator individually. The key assumption is that each operator will adjust its activity by giving up on the least commercial parts of the portfolio in a low oil price environment until the reduction in spend balances the reduction in cash from operations relative to Rystad Energy’s base case. We focus on the segment of US oil production that tends to respond quickly to oil price fluctuations, namely the Lower 48 states excluding the Gulf of Mexico.

Figure 2 summarizes the results for different price scenarios. In a $30 per barrel price environment neither the Permian Basin nor other plays survive. Apart from exceptional sweet spots, US Land E&P would struggle to maintain sustainable activity levels in such an environment. The Permian Basin would likely enter into a gradual decline phase under such circumstances, with production falling toward 2.8 million bpd by the end of decade. The rest of L48 excluding the GoM would lose more than 1.3 million bpd by the end of 2020, according to our analysis.

In a $40 per barrel scenario, meanwhile, we observe significant differences between the Permian and other US plays. While some decline in the short-term is inevitable in such a price scenario, with the elimination of the least prospective activity in the Permian, we believe that a migration of activity toward core areas of the Permian would be sufficient to restore growth from mid-2019, with production returning to 3.7 million bpd by the end of 2020. We do not see a sufficient number of commercial acreage positions in other plays in a $40 per barrel world to offset the base decline from uncommercial assets.

When we move towards $70 per barrel, Permian oil production explodes upwards, surpassing 5 million bpd in mid 2020. Bakken, Eagle Ford, DJ, PRB and SCOOP & STACK are also able to achieve material additions in such a price scenario. In this scenario, gains in these basins collectively ensure that the rest of the L48 excluding the GoM would grow towards 6 million bpd by the end of 2020.

The conceptual difference between the Permian and other plays in different price scenarios is visualized by Figure 3, which shows the contribution of Permian Basin oil production to total L48 output excluding the GoM. Over the last two years, the Permian’s share increased from 30% to 40% and it is poised to continue to increase toward 47% in a high price environment. In turn, a low oil price environment is set to result in the same relative decline in the Permian as in the rest of the US onshore.