Outlook for U.S. LTO ProDUCtion In 2016

Outlook for U.S. LTO ProDUCtion In 2016

18th December 2015

2015 has certainly been a tumultuous year for the oil and gas industry.  The year started with a crash, and is ending even deeper in the hole.  What has that meant for U.S. light tight oil (LTO), and what is the outlook for production?

It takes a while to turn a supertanker around.  U.S. LTO started the year just below 5 million barrels per day; and, despite oil prices hitting the rocks, LTO still continued climbing, not reaching its peak until March, at around 5.3 million barrels per day.  Since then, LTO has been in steady decline.  While everyone agrees on the trend, data take a few months to settle down and so the exact production today may be debated somewhat.  Based on GCA’s modeling, LTO is currently down 600,000 from its peak and is expected to close out the year at around 4.6 million barrels per day.  Note that the U.S. Energy Information Agency (EIA) reports show consistently higher numbers than those reported by State agencies and other online data sources.

This decline is similarly reflected in the rig count.  Onshore oil rigs started the year at 1,456, and this week are reported at 520, down 64%.  While appearing to bottom out in June, oil rigs resumed their decline and, despite an increase this week of 15 (a switch from gas rigs to oil), the trend over the past 3 months has been a steady decline of about 4% per month.

With oil prices even lower than at the start of the year, 2016 looks set to continue this trend, at least at the front end of the year.  What, therefore, does this presage for production in 2016?  On a brighter note, what if the current global supply-demand imbalance is shorter lived than expected by many (though not all); what might happen then?

Based on a recently updated model, GCA has examined, using data from the Bakken, Eagle Ford and Permian basins, how U.S. crude production would react to two sets of assumptions regarding activity level in 2016 and 2017.  The analysis also examined how these scenarios would play out over a three-year period in the (admittedly very unlikely) event that nothing changes thereafter.

The two scenarios are:

2016 recovery: activity continues trending down until second quarter 2016, when market signals become sufficiently encouraging to cause new activity.  The focus of this new activity at first is the drilled but uncompleted (DUC) well inventory, which is completed over an approximate 18-month period through the end of 2017.  Rig count also resumes an upward trend, recovering back to today’s level by the end of 2017. 

2017 recovery: activity continues to slide or idle until the end of 2016.  In 2017, DUC wells start being completed, rig count slowly rises, and DUC well inventory is completed by the end of 2018. In addition, rig count rises such that it returns to current levels.

It is worth noting a couple of observations that might not be intuitive.  At all activity levels there is a production floor.  The steep decline in production in the early part of the period reflects the relative influence of the high decline rate of new wells.  While after just one year production from a typical well is only 15% to 20% of its initial production rate (in other words, an 80% to 85% annual decline), after the second year this annual decline reduces to around 40% to 50%, and in the third year to around 20% to 30%.  Thus, as time progresses, the absolute level of production from a given well declines, but the rate at which production declines falls.  Therefore, fewer and fewer wells (and rigs) are required to maintain the lower level of production.

In both scenarios, total U.S. production bottoms out between 7.6 and 7.8 million barrels per day, with a rig count no different to where it is today: 64% below its peak of only just over a year ago.

The second observation is on DUC wells.  Reports suggest that there are perhaps 2,500 wells that, subject to suitable market signals and the physical capacity to complete them, can be brought online in fairly short order.  GCA has assumed that, on a continuous basis, it could take around 18 months to clear an inventory of this size.  The impact of these wells could be in the order of 250,000 barrels of oil per day; overall, it will really depend on whether capital is diverted to DUC wells (nearly twice as many DUC wells can be bought onstream for the same cost as drilling and completing a new well), or whether new capital is found to add these to base drilling activity.

As noted earlier, this is not a forecast of what will happen in 2016 and beyond; it is an analysis of the likely outcome conditional upon where market signals take activity.  The underlying market factors and signals that are likely to accompany these scenarios, such as the interplay between crude in storage, imports, LTO production and refinery demand, will be examined in articles in January.

In the meantime, all of us at GCA would like to wish all of our clients and readers of the U.S. Oil & Gas Monitor, whatever your religious or secular persuasion, the best of wishes for the holiday season and for 2016.

Although we will publish the usual rig count, price, supply, and demand data for the next two weeks, we plan to be back with commentary and analysis in the Monitor again on January 8.

And now, the usual weekly items …

U.S. Drilling Activity…..

The total number of active onshore rigs now stands at 685, down 1,191 (~64%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 324 (up 7 last week), with Eagle Ford up 2, Williston flat, and Permian up 5.  Horizontal rigs gained 5 and now stand at 559.

Total U.S. rig count (including the Gulf of Mexico) was flat last week, with rigs targeting oil increasing by 17 for a 16-week total decline of 133. The average decline per week stands at 8 rigs. 

Oil Price….

The post-OPEC oil price decline accelerated as the discord between members became more apparent and the lack of a supply response more certain. The meeting confirmed that it is not in OPEC's interest to balance the market in the face of still growing higher-cost production. Since the OPEC meeting earlier in December, when the cartel decided it would not reduce production, oil's slide has continued virtually uninterrupted.

Oil reversed early gains to fall on Friday afternoon after the U.S. oil rig count rose for the first time in 5 weeks.

Brent, the global benchmark for oil, was down 65 cents at US$37.58 a barrel, reflecting a loss of 1.7% on the week; with WTI sliding 44 cents at US$35.39 a barrel, down 1.2%.

U.S. Supply and Demand…..

U.S. crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 91.9% of their operating capacity last week.

On the supply side, U.S. oil production in the Lower 48 increased 13,000 barrels per day last week, with total production at 8.652 million barrels per day.

U.S. crude imports averaged 8.3 million barrels per day last week, an increase of 291,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 6.3% above the same four-week period last year.  

Crude oil inventories were increased by 4.8 million barrels from the previous week. Cushing’s storage (the main price point for WTI) increased by 0.7 million barrels taking the total 6 week increase to 6.5 million barrels and end the week at 60.1 million barrels (70% utilized).  This level is just 2.1 million barrels from the historical peak researched in April 2015.

Source: EIA Weekly Update and GCA Analysis

 

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Authors

Outlook for U.S. LTO ProDUCtion In 2016

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Outlook for U.S. LTO ProDUCtion In 2016

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting - Jeanne-Mey.Sun@gaffney-cline.com
Outlook for U.S. LTO ProDUCtion In 2016

Bob George

Global General Manager - bob.george@gaffney-cline.com

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