Oil prices have plummeted over 30% since June, but the sky is not falling on US producers just yet. There has been a lot of conjecture about how lower oil prices are making unconventional wells uneconomic to drill and complete. What does this mean for US oil production volumes going forward?
While companies will adjust their capital spending programs to account for commodity price fluctuations – as they always do – US oil production volumes are not expected to fall off a cliff, according to several prominent analysts. In fact, US oil production growth next year could still be in the million barrel per day range despite lower prices due to several factors.
As US oil production climbed in recent years and the number of wells drilled increased, producers gained efficiencies that brought down costs. And that learning curve will continue even with lower oil prices.
“Recently, several US producers, including Apache, Continental, and ConocoPhillips, announced plans to reduce their 2015 capex budgets in response to lower oil prices. Despite this, their growth forecasts remain strong… The industry’s ability to increase efficiency through technological advances and drilling optimization strategies should not be underestimated. Producers continue to push the envelope in areas including optimizing down-spacing, frac stages and lateral lengths. This is evidenced by EIA’s Drilling and Productivity Report, which showed that Bakken drilling productivity per rig grew more than 30% y/y on average in 2014. Assuming rig productivity improves by 20% in 2015, the Bakken could shed 50 rigs and maintain flat production. As evidence, Halcon announced 2015 capex cuts of at least 15%, reducing its planned rig count from 11 to six, but the company still expects production growth of 15-20% (pro forma).” Barclays’ The Blue Drum, No pain, no gain, 1 December 2014
The real question now is how much will US oil production increase next year. The estimates range from 500,000 b/d to 1.5 million b/d.
“The question is at what rate (production will grow). Technology will accelerate this rate even if we have lower oil prices. Usually companies become more creative with lower prices,” said Fadel Gheit, senior energy analyst at Oppenheimer. – CNBC
There are also thousands of wells that have been drilled but not yet completed (hydraulically fractured and brought onstream). “There are a very large number of incomplete wells that have been drilled, and they’re the cheapest ones to bring on. So, if companies are going to be strapped for cash, the best way to get cash is to complete wells … the average for that completion is $5 a barrel to complete a well that’s already been drilled,” Edward Morse, global head of commodities research at Citigroup told CNBC.
Barclays’ analysts agree, writing that “Though the oil industry is entering a new phase of lower prices, cost pressures on unconventional supply are likely to lead to enhanced productivity and capital discipline in the years ahead.”
It takes time for lower oil prices to impact production volumes, and in the US, the impacts are not expected until perhaps 2016 or 2017 when other sources of production – Gulf of Mexico for example – come online. So don’t pound that nail into the US oil production coffin just yet.
