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Estimating The Possible Decline Of U.S. Shale Oil Production With Lower Prices

Sadly, right now the U.S. shale industry is drowning in blood and tears, not so much sweat, as low prices cause spending to plummet. We have been here before, except not really. In 2015, the oil price dropped from $105/barrel to $56/barrel, causing a wave of bankruptcies in producers and the service industry. The active oil rig count dropped from nearly 1600 in December to less than 700 by early May, prompting one famous shale pessimist to say “The Party’s Over for U.S. Tight Oil.” Official forecasts called for a decline in shale oil production and the lower drilling levels certainly appeared to support that.

What happened? Shale production, which had been growing by nearly 1.25 mb/d/yr dropped by about 0.5 mb/d, a reversal of 1.5 mb/d from expectations (EIA) which contributed to the rebalancing of the market, albeit at a new, lower and (probably) more sustainable level. However, as the figure shows, growth shortly thereafter resumed at nearly the previous rate. Again, what happened and could it happen again? (Spoiler alert: probably not.)

The industry generally points to an enormous increase in productivity, and that is reflected in the data. (The EIA estimates of productivity per rig, in terms of added capacity, should be considered illustrative rather than precise.) Clearly, the price drop was the stimulus for the massive increase in productivity, as companies shifted from rushing wells into production to take advantage of high prices to maximizing the efficiency of their operations.

Additionally, there was an increase in the emphasis on horizontal drilling, as the next figure shows, as well as a move towards the more-productive Permian shales. It seems highly unlikely that such could be reproduced again if prices stay at $30/barrel or even ‘only’ as low as $40. Instead, there is a much greater chance that production will drop, and sharply. 

One of the basics of the shale industry is the fact that wells decline sharply, which means that significant drilling must be undertaken simply to maintain production levels. The figure below shows the relative portions of total capacity additions versus DOE’s estimates of lost capacity in each month. (The fluctuations represent short-term production fluctuations that skew the data.)

The implication, and it is a rough one, is that if drilling declines by more than 40-60% in most basins, production will level off and below that drop. How much? The next graph shows, by basin, the ‘legacy’ shale oil production as defined by EIA, or the amount of decline lost in each month from older wells.

Naturally, drilling will not completely cease, but it could drop by 75% or more if prices remain at $30-35/barrel. Given this admittedly simplistic calculation, production could drop by 200-300 tb/d/month. Given current (apparent) over-supply in the market of 6 mb/d or more, the reduction in shale would roughly offset the surplus after 18 months or more (although the hundreds of millions of barrels of surplus inventories would need to be worked off). Obviously, economic recovery and restored demand levels would almost certainly be more important in that time frame.

Still, a loss of 1 mb/d of U.S. shale oil might be enough to encourage a new OPEC+ agreement, especially if it coincides with demand at near normal levels.

Postscript: Eduardo Petazze has pointed out to me that there are many DUCs and completing them, instead of drilling new wells, could offset lower drilling levels.

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