The U.S. Production Decline Has Begun

Posted in The Petroleum Truth Report on April 29, 2015

The U.S. oil production decline has begun. 

It is not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled.

The implications are profound. Production will decline by several hundred thousand of barrels per day before the effect of reduced rig count is fully seen. Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells than are being completed today.

Tight oil production in the Eagle Ford, Bakken and Permian basin plays declined approximately 111,000 barrels of oil per day in January. These declines are part of a systematic decrease in the number of new producing wells added since oil prices fell below $90 per barrel in October 2014 (Figure 1). 

Chart_ALL New Prod Wells
Figure 1. Eagle Ford, Bakken and Permian basin new producing wells by month and WTI oil price. Source: Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Deferred completions (drilled uncompleted wells) are not discretionary for most companies. Producers entered into long-term rig contracts assuming at least $90 oil prices. Lower prices result in substantially reduced cash flows. Capital is only available to fulfill contractual drilling commitments, basic costs of doing business, and to complete the best wells that come closest to breaking even at present oil prices.

Much of the new capital from junk bonds and share offerings is being used to pay overhead and interest expense, and to pay down debt to avoid triggering loan covenant thresholds. Hedges help soften the blow of low oil prices for some companies but not enough to carry on business as usual when it comes to well completions.

The decrease in well completions provides additional evidence that the true break-even price for tight oil plays is between $75 and $85 per barrel. The Eagle Ford Shale is the most attractive play with a break-even price of about $75 per barrel. Well completions averaged 312 per month from January through September 2014 when WTI averaged $100 per barrel (Figure 2). When oil prices dropped below $90 per barrel in October, November well completions fell to 214. As prices fell further, 169 new producing wells were added in December and only 118 in January.

Chart_Eagle Ford Break-Even

Figure 2. Eagle Ford new producing wells (2 month moving average) and WTI oil prices. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Bakken break-even prices are higher at about $85 per barrel. Well completions averaged 189 per month from January through September 2014. In November, only 80 new producing wells were added. In December and January, 123 and 114 new wells were added, respectively. Orders for rail cars used to transport oil decreased by 70% in the first quarter of 2015 compared with the fourth quarter of 2014.

Chart_Break-Even
Figure 3. Bakken new producing wells (2 month moving average) and WTI oil prices. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Permian “shale” play break-even prices are also about $85 per barrel based on declining well completion data. Well completions averaged 175 per month from January through September 2014. In January 2015, only 35 new producing wells were added.

Chart_Permian Break Even
Figure 4. Permian “shale” new producing wells (2 month moving average) and WTI oil prices. Permian “shale” includes horizontal wells in the Bone Springs, Consolidated, Delaware, Spraberry, Wolfcamp,Trend Area and related combinations of those reservoirs. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Much of the commentary about the backlog of deferred completions is exaggerated and irrelevant unless oil prices increase to $75 or $85 per barrel. The assumption underlying most industry chatter these days is that oil prices will return to normal.

The world oil market is undergoing a fundamental structural change in response to expensive oil. Producers are trying to survive by limiting expenditures. While analysts have been focused on rig counts, deferred completions have emerged as the initial path to lower U.S. oil production. This unanticipated outcome suggests that others may follow. While everyone is waiting for higher oil prices and for things to return to normal, what we may be witnessing is the end of normal*.

*James Kenneth Galbraith, The End of Normal–The Great Crisis and the Future of Growth (2014).


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14 comments on this entry


  1. […] And a word from James Kenneth Galbraith courtesy of Art Berman […]


  2. Art,

    I think you are spot on with the cut in production due to the fall in energy prices and drilling rigs. However, it looks as if the EIA has revised their figures over the past several months (in thousand barrels per day):

    Nov 2014= 9.029
    Dec 2014 = 9,228
    Jan 2014= 9,214
    Feb 2014= 9,238

    So, according to the EIA, they now show an increase in Feb 2015 at a new record high. Unless I am looking at the data incorrectly, or the EIA is overstating production… something doesn’t seem right.

    steve


  3. Steve,

    Thanks for the data. It is clear that the response relationship between rig count, number of new wells added and production is not linear or even especially rational. As with commodity prices, oil production will move up and down as it adjusts to a new dynamic and it may be awhile before the trend is clear.

    Also, the EIA uses a model based on limited sampling of large producers to determine near-month production. The same is especially true for EIA and IEA world supply and demand data.

    U.S. production has a lot of moving parts and I am mostly focused on the tight oil component because that is the source of much of global over-supply. I will continue to follow that and report what I see.

    All the best,

    Art


  4. Actually there are plenty of capex being spent on well completions, taking advantage of the price suppression in the oilfield services sector. Many of them are just immediately shut-in waiting for a more favorable price environment.


  5. Alex,

    Do you have data to support your statement or is this your opinion?

    Thanks for your comment,

    Art


  6. […] Cost Obsessions By Country (RT) • The Day After Damascus Falls (Robert Parry) • The U.S. Oil Production Decline Has Begun (Art Berman) • The Traumatic Restructuring Of Austria’s Cooperative Banking System (Coppola) • […]


  7. We are looking at distress energy properties every day throughout Texas and Oklahoma. A recent phenomenon is the offering of defaulted working interest payments from investors declining follow on cash calls, completion costs in particular. The phenomenon of drilled but not completed properties is totally commodity price based, and while there are some completions occurring daily, activity in our core areas of the Eagle Ford, Permian basin and Gulf Coast are dramatically lower, and my friends at the mid tier E&P companies tell me that they do not anticipate substantial capex increase until oil reaches a sustained level of $65/bbl or more…and by the way, virtually no one is getting posted WTI prices for their oil. Our last sales were at WTI-$11 per bbl.


  8. Tim,

    Many thanks for your comments and insight. The issue of defaulted WI payments from investors is a fascinating piece of the decreased completion story.
    We factor in a discount of at least -$10 per barrel to WTI in our economics but most people don’t think about that. The gas discount as a percentage of price is even more extreme in the Marcellus.

    All the best,

    Art


  9. I might add that the additional production is largely due to two issues–the initial production numbers of completions that were in process before year end 2014 on committed capex budgets, and the large flush of production that comes from new shale production. However, shale has a notoriously steep decline curve in the first year of production, as much as 80%. Those decline curves will start being seen very shortly in lower production , perhaps by end of June at the latest.


  10. About backlog,leave in the ground is cheaper then Cushing,and where “held by production” applies,
    acreage prices are down (Ohio)


  11. William,

    The logic and arithmetic of “storing” oil in the ground eludes me.

    Storage at Cushing averages about $0.40/barrel per month.

    If all you do is drill but not complete a Utica Shale well, that’s about $4 million. The average Utica well will produce approximately 200,000 barrels of oil equivalent. Most of it is gas but, to follow the argument to its illogical conclusion, let’s assume it is all oil. That works out to $20/barrel.

    None of this includes any discounting to account for the time value of the $4 million in up-front capex.

    Of course, this is all irrelevant because to hold a lease by production means you must produce in commercial volumes which also means full drilling and completion costs and you are not “storing” the oil at all.

    If an operator “stores” the oil in the ground and doesn’t produce in commercial volumes, he loses the lease and his $4 million in capex plus lease and other costs so the mineral owner can store the oil for free.

    All the best,

    Art


  12. Indeed Arhur,there is no logic in this business,it’s a dead end street.

    Take care.


  13. […] http://www.artberman.com/the-u-s-production-decline-has-begun/ […]


  14. Indeed,best source for information.