2016 Oil And Natural Gas Production And Storage Forecasts

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Includes: OIL, UNG, USO
by: Joseph Wells

Summary

Drilling rig efficiencies have increased considerably since the crash in oil and gas prices, but will it be enough to offset the recent decline in drilling rig counts?

Rig counts can be used, along with well production curves and drilling rig efficiency factors, to estimate future oil and gas production.

This article presents production forecasts for each of the seven most prolific oil and gas basins on the U.S. mainland. The results are then translated into 2016 storage forecasts.

In my previous article, "Drilling Rig Counts Are Still An Excellent Indication Of Future Oil And Natural Gas Production," I explained how drilling rig counts can be used to predict future oil and gas production. That article, which utilized November 2015 data, was successful in predicting the downturn in US oil and gas production we are seeing today. Also, Matthew Clegg presented a similar oil specific forecast in "What Do Models Say About US Crude Oil Production?"

This article presents an updated model of 2016 production forecasts for the top seven U.S. shale basins.

The Top Seven U.S. Shale Basins

The most prolific shale basins are the Permian, Marcellus, Eagle Ford, Bakken, Niobrara, Haynesville, and Utica, which together represent over 90% of the total US mainland oil and natural gas production growth since 2010. Individual and total oil and natural gas production and storage forecasts are included for these areas.

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Well Production Curves

Well production curves are the basis in creating the oil and gas production model results presented here. There are differences in well production characteristics from well to well and from basin to basin but well production curves look similar when shown as a percentage of initial production rate. New shale well production rates typically drop about 75% during the first year of production. An Eagle Ford well production decline curve is shown below, as an example.

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Drilling Rig Productivity

Shale well drillers now have faster and farther drilling capability, better fracking techniques, optimized fracking mixes, and more efficient well pad clusters. It seems likely that U.S. shale well drilling and fracking is nearing the point where the majority has adopted the most important new and innovative technologies. This means drilling rig productivity increases may soon taper off. However, this forecast assumes that recent trends in productivity will continue at all basins. The median increase in drilling rig productivity across all shale regions is in the neighborhood of 500% (38% per year) since 2010.

Well productivity factors were obtained from the EIA Drilling Rig Productivity Report, by dividing "production per rig" by "February 2011 production per rig." These factors are used by the forecast model to capture relative changes in initial well production over time. Eagle Ford Productivity Factors are shown below, as an example.

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Rig Counts

Drilling rigs are used to drill new wells. Fracking setups are used to complete the newly drilled wells. Fracking setups are not included in drilling rig counts.

Drilled and uncompleted wells (DUCs) are ignored by this forecast model. There is no evidence that the number of DUCs has any significance in predicting future production.

Lastly, the number of drilling rigs is assumed to be constant for the remainder of 2016 such that a lower future rig count would have a lowering effect on the forecast. The rig count charts below were made using data from Baker Hughes.

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Historical and Forecast Oil Production

The following charts were created from the forecast model and from data in the EIA Drilling Rig Productivity Report.

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Oil production is currently either flat or falling at all major basins. It appears that only Permian, Niobrara, and Haynesville will experience growth in oil production during 2016.

Historical and Forecast Natural Gas Production

The following charts were created from the forecast model and from data in the EIA Drilling Rig Productivity Report.

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With exception of Utica, natural gas production is forecast to fall during 2016 at all major shale basins.

Total Production at Top Seven U.S. Shale Basins

The following charts were created from the forecast model and from data in the EIA Drilling Rig Productivity Report.

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Based on historical data, total oil and natural gas production at the most prolific shale basins is clearly falling. Also, forecast indicates that both oil and gas production will continue falling for the remainder of 2016.

Total U.S. Oil and Natural Gas Storage

Year over year changes in production, as predicted by the model, were added to the previous year's weekly change in storage in order to estimate future changes in storage. These estimated weekly changes in future storage were then added to previous storage totals in order to obtain the following storage forecasts. Year over year weather effects, and import/export quantities, were assumed to be equal going forward. Oil and gas storage history was obtained from EIAs Weekly Petroleum Status Report and Natural Gas Storage History.

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Results indicate that oil storage is likely to increase into late spring before returning to normal going into 2017. Natural gas storage appears headed to 2050 BCF in April before turning the corner into a weak injection season.

Takeaway

Based on modeled results, oil production will likely stabilize within 12 months. Also, barring both a drop in U.S. oil consumption and a surge in U.S. oil imports, U.S. oil storage will likely return to normal over the same time period. Based on forecast oil storage, oil prices may hit bottom around the June/July 2016 time frame. However, low priced oil imported from overseas could offset the forecast drop in U.S. oil production, thereby keeping U.S. oil storage levels high and oil prices low.

Based on modeled results, the current number of active natural gas directed drilling rigs is insufficient to provide enough natural gas storage going into 2017. Also, many oil and natural gas companies are financially stressed such that a sustained price movement above five dollars per MMBTU may be needed in order to spur more drilling. If drilling rig counts continue declining into summertime, I would expect that natural gas prices will spike well above five dollars per MMBTU.

Disclosure: I am/we are long UNG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is an expression of my own views regarding future oil and gas production, storage, and producer prices. My only advice is to read opposing views and form your own opinion.