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Rystad Energy: US oil production has gained significant momentum – limited downside risk in the short-term

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Oilfield Technology,

Looking at the recent evolution of oil production in the Lower 48 states (excl. Gulf of Mexico), Rystad Energy observes a continuous expansion, with a 430 000 bpd growth from December 2016 to May 2017.

Even though late-2016 production levels were adversely exposed to winter storms in several states, the growth from the average level in 4Q 2016 to May 2017 is still significant, around 340 000 bpd. The majority of shale-dedicated operators were able to achieve oil production levels around the high-end of guidance in Q1 2017 or beat it on several occasions. Despite growing concerns about service cost inflation in the most active basins, completion activity is set for a steep expansion throughout the remainder of 2017. US Lower 48 oil production is set to expand by an additional 390 000 bpd from May 2017 to December 2017 assuming a WTI price of US$50/bbl.

The recovery in rig counts has been outpacing the growth in completion activity since 2H 2016, resulting in a strong build-up of new high-quality inventory of drilled uncompleted wells (DUCs). Should the prices collapse to 40 or even US$30/bbl level, a major part of these DUCs can still be completed commercially given that drilling costs are sunk. Therefore, a drastic downward shift in the market conditions will not lead to a rapid collapse of the US oil production. No more than 500 000 bpd of December 2017 volumes are at risk in the US$30/bbl scenario.

“If the prices go down to US$30/bbl and we assume that operators behave rationally, we should observe relatively quick adjustment of activity, which will result in a temporary contraction of output with stabilisation in 4Q at the level 100 000 bpd lower than the current output as base production gets more mature,” says Artem Abramov, Vice President Analysis at Rystad Energy. “In reality, history tells us that many operators will rely on hedging gains or simply outspend more, so short-term evolution of supply in the US$30/bbl world might end up much closer to the rational US$40 or even US$50/bbl scenarios.”

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