USA Oil Production

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Includes: BNO, DBO, DTO, DWT, NRGD, NRGO, NRGU, NRGZ, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU, YGRN
by: Ron Patterson
Summary

The U.S. Energy Information Administration forecast at the beginning of this year was that the U.S. shale oil plays were just getting started and that production would increase by at least 2 million barrels of oil per day each year for several more years.

In my opinion, legacy decline in shale production has reached a point where new production only replaces legacy decline. In fact, legacy decline may have reached a point where it is crippling shale oil production.

Very high legacy decline, now over 6% per month, is shale's Achilles heel.

It appears that the USA has peaked, or peaked until the price of oil rises at least $20 a month.

The Real Reason Why US Oil Production Has Peaked

Raymond James recently estimated that over the last three years the U.S. decline rate for oil has doubled from 1.6 to 3.2 million barrels per day. The drilled but uncompleted well inventory ("DUC") is back to normal, so the number of wells being drilled and the number of wells being completed is now about the same. We need over 12,000 new horizontal oil wells completed each year to hold production flat and the number of completed wells will need to go up each year.

The U.S. Energy Information Administration ("EIA") forecast at the beginning of this year was that the U.S. shale oil plays were just getting started and that production would increase by at least 2 million barrels of oil per day ("MMBOPD") each year for several more years.

Now if you believe that U.S. shale production will increase by 2 million barrels per day each year for several more years, then I have a bridge that I think you might be interested in. But let's just play "what if", or what if it really did increase by 2 million barrels per day for the next five years.

According to the EIA's Drilling Productivity Report, December 2018 shale production, all basins, was 8,232,750 barrels per day and the legacy decline, for all basins, averaged 6.14 percent per month or 505,737 barrels per day.

Legacy decline of over one million barrels per day would be a crippling requirement of shale producers. But not to worry, that is simply not going to happen. Now total US production did increase by two million barrels per day 2018. In fact, according to the EIA's Monthly Energy Review, US production increased by 2,064,000 barrels per day in 2018. But for the first 7 months of 2019, total US production has declined by 54,000 barrels per day.

USA production appears to have hit a snag. July production is now below November 2018 production.

In my opinion, legacy decline in shale production has reached a point where new production only replaces legacy decline. In fact, legacy decline may have reached a point where it is crippling shale oil production.

Those who have followed this blog for years know that Texas oil production is reported by the Texas Railroad Commission. But their data is very slow coming in, sometimes it is more than a year before all the data has come in. However, Dean Fantazzini, Energy economist, Deputy Head of MSU's Chair of Econometrics and Mathematical Methods in Economics, has developed a program that uses the vintage data to make a pretty good estimate of the actual data. His past corrected data has been relatively accurate.

If Dr. Fantazzini's data is correct, then Texas peaked in December 2018 and has declined by 280,000 by June.

All the below charts were created from the EIA's Drilling Productivity Report. The data is through September 2019 and the last few months is, of course, an estimate. Historically, the estimate for those last few months has been overestimated.

Notice the last six months is pretty much a straight line. That is because most of it is just an estimate.

It looks like the Permian is pretty much the story as far as US shale is concerned.

The Permian is now just over 50% of total US shale production.

Permian Legacy Decline has been slowly rising and now sits at about 6%.

Eagle Ford has the highest legacy decline rate, now about 8.5% per month.

It looks like shale production, outside the Permian, has pretty much hit the wall. Pay no attention to those last four months. They are just the EIA's wild ass guess.

In conclusion: Very high legacy decline, now over 6% per month, is shale's Achilles heel. Of course, there are other problems as well. Bankruptcies are rampant, running out of sweet spots and the price of oil is just not high enough. It appears that the USA has peaked, or peaked until the price of oil rises at least $20 a month.

And check this one out:

Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.