In Oil & Companies News 29/02/2016
Like Wile E. Coyote briefly floating midair after running off a cliff, U.S. shale output has been amazingly resilient as oil prices plunged.
But just as the hapless cartoon character eventually succumbed to gravity, analysts now expect U.S. production to fall in a meaningful way.
The number of U.S. oil rigs fell by another 13 this week to a total of 400, oil-services firm Baker Hughes reported Friday. That’s down from 986 a year ago and the lowest since December 2009.
Rig counts have been falling for quite some time as oil futures CLJ6, -0.70% plunged by around 80% from their mid-2014 highs. Output, however, has been stubborn, with shale output falling more slowly than expected. Overall crude-oil production in the lower 48 states, excluding the Gulf of Mexico, grew to 7.4 million barrels a day in 2015 from 6.81 million in 2014, according to the U.S. Energy Information Administration.
That’s beginning to change. Total U.S. crude output has fallen in recent weeks, and the EIA forecasts oil production from the top U.S. shale regions to fall by 92,000 barrels a day in March to 4.924 million barrels a day.
The resilience in output has been attributed to a host of factors, including the fact that only the most experienced crews are manning the wells now and ever-improving fracking technology. In addition, and most important, firms also continued to complete previously drilled but unfinished wells, often referred to as the “fracklog.”
But that seems to finally be changing, analysts note. Major players, including Continental Resources CLR, +10.17% and Whiting Petroleum Corp. WLL, +9.92% this week announced plans to sharply curtail well completions and to largely cut in half fracking activity, according to analysts at JBC Energy, in a Friday note.
With no new wells coming online, that should lead to “strong declines” in output since shale wells typically have a very steep rate of decline—often as much as 50%—within the first half year, the analysts said.
But there’s a rub.
The JBC analysts found that since the third quarter of last year, production in the Bakken region—based on state data from North Dakota—hasn’t fallen as fast as the firm’s model would suggest based on the number of new wells and the declines of legacy wells. While the model matches up with historical production data through the third quarter of 2015, subsequent declines have been smaller than predicted. The Bakken, spread from western North Dakota to eastern Montana and encompassing parts of Saskatchewan and Manitoba, is one of North America’s largest shale regions.
“This would indicate that decline curves are at least for now much flatter due to production optimization,” the analysts wrote. JBC’s base case calls for 2016 production to fall by 120,000 barrels a day in North Dakota (see chart above), while the worst case would see a fall of 375,000 barrels a day. For the entire U.S., JBC sees shale oil output dropping 600,000 barrels a day in its base case—a figure in line with the International Energy Agency’s projection earlier this week—and by 120,000 barrels a day in the worst case.
While JBC analysts worry that production may not fall as fast as forecast, Helima Croft, head of commodity strategy at RBC Capital Markets, and other analysts suspect the EIA might, in fact, be overcounting production. That would be in contrast to last year when the agency’s algorithm appeared to undercount the barrels of oil coming out of the ground. She explains, in a note to clients:
We have argued that these numbers should be taken with a grain of salt given the difficult time the EIA’s algorithm had capturing technology shifts and drilling activity changes last year—consistently underestimating production. Missing barrels, the difference between the EIA’s storage numbers and the figures implied by the balance [see chart below], have flipped from largely positive last year to negative in five of the first seven weeks this year. This implies that either production and/or imports are being overestimated or that refinery runs and/or exports are being underestimated. Forecasting production in real time is difficult, but taking the weekly numbers at face value suggests that true production is actually lower than the EIA now estimates.
While analysts might be poised to debate how fast production is falling, they’re in agreement that the direction is ultimately down. Of course, the next question is whether oil prices can rebound and, if so, how quickly that output bounces back.
In other words, when it comes to production, is there a trampoline at the bottom of that cliff?
Source: MarketWatch
