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Analysts predict no significant reduction in shale volumes at current prices

Oilfield Technology,

As oil prices are plummeting, the oil market is looking for clues about how low prices can go before we see a response on the supply side. The market’s attention is naturally turning towards OPEC and North American shale production, but Rystad Energy’s latest analysis shows that a significant reduction in shale volumes at current prices should not be expected. North American shale oil output will respond very slowly to a drop in oil prices. Recent history, such as outages in Libya, shows that supply shocks of up to 500 000 bpd could be needed to move global oil prices US$ 10/bbl. Rystad Energy’s well-by-well database shows that even if the Brent price drops to US$ 50/bbl, it could take up to 12 months before North American shale output would drop as much as 500 000 bpd. In order to maintain production levels in 2015 at expected exit-2014 levels of 6.4 million bpd, Brent-equivalent oil prices can fall to as low as US$ 60-65 per barrel (Figure 1).

Figure 1: North American shale production split by Brent equivalent break even oil prices through 2015
(thousand bpd including NGLs)

Robust plays and weaker regions

The most robust plays are Eagle Ford and Bakken with no significant volumes at risk with current levels of realised prices. In the Permian however, where supply growth has been the strongest this year, we see that merely about 100 000 bpd could be at risk over the next 12 months at current WTI Midland prices (Figure 2).

Figure 2: Light oil wellhead break even cost curve for Permian and current WTI Midland price

The Permian oil-price-spread to Cushing and Brent/LLS has narrowed to minus US$ 7/bbl with the recent opening of the BridgeTex pipeline. The BridgeTex moves 300 000 bpd from Mitchell County to Houston and additional take-away capacity is expected to come online next year. Our analysis shows that North American shale liquids output has passed 6 million bpd (including 1.5 million bpd of NGLs) during the third quarter of this year and it grows with a staggering rate of 1.5 million bpd year-on-year in 2014 and 2015. This growth rate is surprisingly insensitive to oil price fluctuations at current price levels.

Reduced global demand

In today’s IEA Oil Market Report for October, the call-on-OPEC crude production to theoretically balance the oil market next year was lowered to 29.3 million bpd versus September 2014 OPEC crude production of 30.6 million bpd. Downwards revised world oil demand growth of 1.1 million bpd year-on-year compares with the UCube supply growth of 1.8 million bpd for 2015 (Figure 3).

Figure 3: IEA oil demand growth compared with UCube oil supply growth (million bpd year-on-year)

In other words, markets may be even more oversupplied next year than previously thought. Either oil prices will come down further or a significant cut in supplies to the market has to be made, with the ball now firmly in OPEC’s court.

Written by Bjornar Tonhaugen, VP Oil & Gas Markets, Rystad Energy. Edited for web by Cecilia Rehn.

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