U.S. Shale Growth Is Decelerating

|
Includes: BNO, DBO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: HFIR
Summary

There are two conclusions we arrived in this report: 1) US shale growth will still be strong in 2019 but weaker than 2018. 2) 2020 US shale growth will decelerate.

Well productivity increase has materially decelerated year over year. The same could be said of the gross monthly US shale production increase.

Well productivity in all the oil shale basins is flat-lining, while Anadarko and Niobrara are declining.

Going forward, the growth will be almost entirely dependent on the Permian, and we see much lower growth in 2020. If well productivity declines, then the growth will disappoint more.

Welcome to the decelerating edition of Oil Markets Daily!

EIA released its latest drilling productivity report today. We purposely waited a few months before updating our model, as we wanted the DPR to get more revised data from the EIA 914. Indeed, we saw massive revision downward in Eagle Ford and Permian production in the DPR.

There are two overwhelming conclusions one can reach looking at the latest data:

  1. US shale growth will still be strong in 2019 but weaker than the growth we saw in 2018.
  2. 2020 US shale growth will decelerate materially, assuming the same well completion count and same productivity.

Strong US shale growth should still be expected in 2019

We are seeing well productivity stall in the Permian, Eagle Ford, and Bakken, while Niobrara and Anadarko are showing well productivity in decline. This has dragged total shale oil well productivity lower:

(Source: EIA, HFI Research)

Unlike what we saw in 2018, when shale oil well productivity steadily increased for most of the year until Q4, we are seeing the declining productivity trend continue. As of May, well productivity has only increased by ~5% year over year.

What this has resulted in is that in order for US shale to keep the same growth pace year over year, it would need to complete more wells.

(Source: EIA, HFI Research)

But as we've seen with well completions so far this year, it's been only marginally higher.

So, combining both productivity and well completions, we can see the current gross production capacity increase from US shale oil basins:

(Source: EIA, HFI Research)

At the current capacity, gross shale oil production increase is ~1.4 mb/d. But as you will see in the chart below, the growth is decelerating:

(Source: EIA, HFI Research)

Furthermore, if you break down the US shale growth by basin productivity, you can see a clear productivity stall.

Permian

Bakken

Eagle Ford

Anadarko

Niobrara

2019 is all about the Permian... again

The future outlook of US shale oil production will be entirely in the hands of the Permian Basin. For 2019, 71% of the growth yoy will come from the Permian. The Gulf of Mexico already is maxed out between 1.9 mb/d to 2 mb/d and will be declining going forward. Bakken and Eagle Ford will provide ~150k to ~200k b/d of growth at most yoy going forward. So, if the Permian production growth decelerates, the entire US oil production growth will decelerate:

(Source: EIA, HFI Research Estimate)

(Source: EIA, HFI Research Estimate)

For example, the assumption from 2019 onward assumes 6,000 wells completed each year with the same well productivity. Obviously, if well productivity continues to improve, then we would see higher absolute growth, but the growth deceleration story would still be the same.

But based on anecdotal evidence like dwindling tier 1 acreage and the issue of parent-child well relationships, it's far more likely to see a 2-3% decline in well productivity going forward. This is what growth would look like assuming a 2% decline in productivity each year:

(Source: EIA, HFI Research Estimate)

Conclusion

We expect to see strong US shale oil production growth this year. We have forecasted US oil production to exit year-end at ~13.1 mb/d. Most of the production growth in H2 2019 will come from the Permian with the increase in takeaway capacity. DUCs are starting to fall in every shale basin outside of the Permian. Well productivity also is stalling in all the basins.

From our view, it's clear that US shale oil growth will decelerate going forward. Depending on how many wells are completed this year, that growth figure will fluctuate.

Energy investors should take note!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.