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U.S. Oil Production Is Competing Against Decline

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

U.S. oil output continued to increase in October 2019. Production reached a new high of 12,655 kb/d.

The output of all tight oil basins was 8,165 kb/d in November and increased by 95 kb/d from 8,070 kb/d in October.

95% of the projected January output is required to offset the decline from all of the earlier wells.

World C + C production fell by 1,585 kb/d to 80,736 kb/d in September 2019.

By OVI

All of the oil production data for the US states comes from the EIAʼs Petroleum Supply Monthly. In addition, information from other EIA offices is provided to project future US output. At the end, an estimate is made for the decline rate in the L48 conventional oil fields and an analysis of a few different EIA reports is undertaken.

The charts below are updated to October 2019 for the 10 largest US oil-producing states (>100 kb/d).

U.S. oil output continued to increase in October 2019. Production reached a new high of 12,655 kb/d, an increase 171 kb/d over September and 55 kb/d higher than estimated by the December Monthly Energy Review (MER). However, it is 93 kb/d lower than the 12,748 kb/d estimated in the December STEO report. This could be an indication that the January STEO report will again lower US production estimates for 2020.

Listed above are the 10 states with production greater than 100 kb/d. These 10 account for 10,294 kb/d (81.3%) of total US production of 12,655 kb/d in October.

Texas production continued to rise in October and rose by 53 kb/d to 5,273 kb/d. Comparing the initial growth estimate for Texas from January 2019 to October 2019 vs. 2018 indicates a slower growth rate for 2019, i.e. 377 kb/d vs. 762 kb/d respectively, 49.5% of the 2018 growth. It is worth noting here that the 53 kb/d October increment is close to half of the total 100 kb/d increment shown in the December LTO report and is discussed further down.

Oil production was up by 70 kb/d in October over September. However, September was lower than August due to heavy rains. Regardless, October set a new record.

New Mexico output was essentially flat for October at 982 kb/d. However, the September output was revised up from 956 kb/d to 979 kb/d in the October report.

October production was down by 12 kb/d to 592 kb/d. The chart shows indications of peaking or plateauing in Louisiana. There is a loss of drilling interest in Oklahoma due to the complex geology that stymied hopes for a "Permian Jr," according to this source.

While production is lower than the April high, we will need to wait to see if the down trend continues.

Colorado production was up by 39 kb/d in October to 554 kb/d, an increase of 7%. This is a bit surprising because of all of the concerns with the new drilling regulations and a drop in the rig count. In January, there were 35 rigs operating in Colorado. By October, the number dropped to 24 and a further drop of 2 in December. However, according to CPR News, it's "All Systems Go For Colorado Oil And Gas, Despite Crackdown Efforts."

Six months after shouting that new legislative drilling regulations were an existential threat to their industry in Colorado, the state's oil and gas producers are now whispering a different message to Wall Street:

We do not foresee significant changes to our development plans, as we have all necessary approvals of more than 550 permits to drill wells over the next several years," Noble Energy representatives wrote to investors."

Alaska production was up again in October by 26 kb/d to 475 kb/d after completion of scheduled maintenance. Going forward, two new projects are scheduled for 2020 and 2021 which will add 20 kb/d and 40 kb/d, respectively, according to the Frontiersman. Note how the October over October decline is similar to the annual decline.

According to the Frontiersman, in October, with production facilities back online, Prudhoe was up to 270,658 barrels per day but still below October 2018, when Prudhoe averaged 283,754 barrels per day, according to the state revenue data." Note that the Alaska October over October decline is 12 kb/d compared with with the 13 kb/d from Prudhoe.

In other related Alaska news, Hilcorp Alaska is buying BP's Alaska oil and pipeline assets according to the Frontiersman.

California continues its slow but steady decline and shows no sign of recovery.

Wyoming continues to increase its output and reached a new high of 291 kb/d in October with a minimal increase of 1 kb/d. It continues to benefit from the northern portion of the Niobrara LTO basin being situated in Wyoming. In October, the Niobrara only added 3.7 kb/d. Last week drillers added two rigs for a total of 29 but the number is still down from 33 in January.

After Louisiana's output recovery in August 2019, it began another slow decline phase with no indications of a long-term recovery. The rig count is down from 63 in January to 55 in October.

Oil production in Utah reached its peak of 109 kb/d in September 2018 after the discovery of a new conventional oil field. However, Utah's production now appears to be entering a declining phase.

GOM output was essentially flat for October and is 64 kb/d lower than provided in the December STEO report.

According to Rigzone, annual oil production in the GOM is expected to jump to 1.9 million bpd in 2019 and reach 2 million bpd the following year, the agency reported.

Eight new deepwater projects are expected to come online this year while four should come online in 2020. Majority operators for the 2019 starts include LLOG, Shell, Oxy, Murphy Oil and W&T Offshore. Talos Energy, BP, Murphy Oil and Fieldwood Energy are majority operators for the 2020 starts.

The agency expects these projects in total to add around 44,000 bpd this year and approximately 190,000 bpd in 2020 as their production ramps up."

Above are the top 10 US oil-producing states along with GOM plotted on the same scale to show the relevance of the GOM. Note the chart starts at 2500 kb/d and Texas output is 5,273 kb/d.

DUCs

This chart shows the number of DUCs in the five major oil-producing LTO basins. Much discussion surrounds how production of LTO continues to increase while the number of rigs operating in the LTO basins continues to decrease. Essentially, the higher output rate tier 1 DUCs (Sweet spots) are being used to offset production from lower quality wells. The number of DUCs dropped by 110 from 6,995 in October to 6,885 in November.

This chart shows the net difference between drilled wells and completions and whether the number of DUCs is increasing or decreasing. A positive number indicates that the DUCs are increasing. From April 2018 to May 2019, more wells were being drilled than completed and the number of DUCs increased, with the peak occurring in January 2019. Commencing in June 2019, completions exceeded drilled wells and the number of uncompleted wells began to decrease. The rate at which DUCs were being completed started to slow after August 2019.

This chart shows the number of wells completed each month. Note that the number of completions from March 2019 to August 2019 slowed relative to the previous few months. However, starting in September 2019, completions began to drop and accelerated in October. The last data point is November. This chart lines up with the recent drop in frac spreads?

EIA's Differing Oil Growth Perspectives

The EIA has different offices that collect and publish extensive data on the U.S. oil-producing industry and uses it to provide forecasts for future production. Three of these perspectives are reviewed and compared below.

1) Drilling Productivity Report (DPR)

The Drilling Productivity Report uses recent data on the total number of drilling rigs in operation along with estimates of drilling productivity and estimated changes in production from existing oil and natural gas wells to provide estimated changes in oil and natural gas production for seven key tight oil regions.

The DPR report looks ahead by one month to provide an estimate for next month's output for each of the US tight oil basins. However, it should be noted that the DPR includes both conventional and light tight oil in their projections. It also estimates the month-over-month decline in the same oil fields to provide a net monthly increase in output. The gap between the green and red lines in the above chart reflects the net monthly production increase.

In the above chart, the projected increase for January 2020 is 29.5 kb/d. Also it can be seen that the EIA's projected monthly net increase has been getting smaller and less volatile since August 2019. This may be an indication that the DPR has been collecting/obtaining better information for the more recent months.

This chart shows the difference between the monthly production growth and the monthly decline in the previous chart. In other words, it is the DPR's projected net monthly production increase for the seven LTO basins starting in January 2018. Last month, this chart was shown with data up to December and a straight line fit using the September to December data was added to the chart. Putting a straight line through four data points is a bit risky. Sometimes it is all in the eyes of the beholder. However, when the December DPR was released, their January estimate fell almost on the line. Let's call it luck for now.

If the decrease were to continue at the rate of 23.76 kb/d/mth, there would be no net increase in production from the LTO basins by mid-March 2020. The projected net output for the end of February is 9.45 kb/d.

2) Light Tight Oil (LTO) Report

The LTO database provides information only on tight oil production from the seven main tight oil basins and a few smaller basins. The LTO data differs from the DPR, where both conventional and tight oil are reported. The data is also back corrected each month as updated information is provided to the EIA.

The output of all tight oil basins was 8,165 kb/d in November and increased by 95 kb/d from 8,070 kb/d in October. The average monthly increase from January to November is 90.83 kb/d/mth. The primary contributor to the November increase was the Permian, which provided an additional 100 kb/d and is detailed further down.

Similarly to the DPR report, one can look at the monthly additions to LTO output. By comparing this chart with the similar DPR chart above, the similarity from January 2018 to November 2019 is very close. So while the DPR is projecting a significant slowing in LTO production out to January, the November LTO report can only confirm this trend up to November 2019. A few more months of LTO data will be required to see if the monthly production growth continues to decline and confirms the trend in the DPR data. One indicator that has a trend that is similar to the declining production growth trend shown above is the recent drop in the number of frac spreads.

The Permian is the largest contributor to US tight oil growth. The average growth rate in 2018 was 97.61 kb/d, fairly consistent month over month, while the average rate in 2019, up to November, is lower at 67.49 kb/d. However, in this case, averages are deceptive because starting in September, the Permian output growth was 100 kb/d/mth for September, October and November. It is difficult to explain this continuing linear increase in output in light of the falling rig counts and plummeting frac spreads.

This chart shows the conventional oil component of the Permian output. It was obtained by removing the LTO output from the DPR production. The sharp drop in conventional oil starting in August 2019, may account for the similar drop in the net monthly production shown in the DPR section above. Since this chart represents the difference between total and LTO production, it is not clear if the sharp drop is the result of too high LTO output shown in the previous chart or too low total output. A few more months of data may clarify the situation.

3) Short Term Energy Outlook (STEO) Report

The STEO provides projections for the next 13-24 months for a number of sectors, oil, coal electricity, etc. and is updated monthly. For this post, only their oil production projection is of interest. The upcoming January release will project production out to December 2021

This chart provides the STEO estimate for US oil production out to December 2020. The green graph is the latest December 2019 prediction and is approximately 100 k/d lower than the November 2020 prediction, deep blue, taken from last month's November 2019 publication. Recently the trend shown in the latest 2019 monthly publications has been successively lower estimates for 2020 output.

The purple graph represents oil output from the onshore L48 states, i.e. it excludes the GOM. Both the green and purple graphs are showing signs of decelerating US production in 2020. Some of the slowing is associated with the reduced number of operating rigs. From January 2019 to December the rig count has fallen by 261 from 1,065 rigs to 804 rigs. Note that while the rig count has been coming down, output has been increasing because the older rigs have been replaced with more efficient and powerful ones.

While the chart is showing signs of US oil production peaking in 2020, we should expect continuing slow growth into 2021 if the price for WTI stays above $60/bbl and heads toward $70/bbl.

Estimating Decline in US Conventional Oil Fields

US output has increased yearly from gains in the LTO basins and the GOM. In order to estimate the average decline rate in US conventional oil fields, two approaches are taken. In one case, the decline rate in states with declining production was estimated. In the other, the decline rate for the onshore L48 conventional fields was estimated by removing the LTO component from the L48 onshore oil output.

In the above chart, which looks at the L48 states with declining production, we can see a rapid decline in conventional oil output from January 2015 to December 2016 at approximately 150 kb/yr. However, from January 2017 to the present, it slowed to 2.01 kb/d/mth.

In this chart, the tight oil component was removed from the L48 state's production using the LTO data. As can be seen, there is a rapid decline in output from January 2015 to June 2016 at an average decline rate of 29.48 kb/d/mth or close to 355 kb/d/yr or approximately 15% using 2,525 kb/d as a midpoint reference. The decline rate after June 2016 then falls to 1.66 kb/d/mth and is not that inconsistent with the decline rate estimated using output from declining states above. It is not clear why there is such a sharp change in the decline rate in conventional oil output starting in 2016 to the present.

The above-noted decline rate of 15% seems extremely high. However, it may give credence to the following statement: "Historically, Permian conventional wells have shown an annual decline of 13%.", taken from here.

Taking the average decline rate from these two estimates, gives an average rate of 1.84 kb/d/mth. Adding in the decline rate from Alaska of 1.425 kb/d/mth gives an overall average of 3.27 kb/d/mth or 39.2 kb/d/yr which is less than 2% of current conventional output.

In the text portion of the Alaska report above, the following statement is made : "In October, with production facilities back online Prudhoe was up to 270,658 barrels per day but still below October 2018, when Prudhoe averaged 283,754 barrels per day, according to the state revenue data." If this decline was strictly due to natural decline, then it equates to a decline rate of 1.091 kb/d/mth, which is a significant portion of the overall yearly Alaska decline rate noted above.

On the other hand, a review of the tight oil production data gives a totally different picture for decline in LTO basins. Looking at the production and growth chart in the DPR section above, the expected production increase in January is 609 kb/d while the decline rate is 579 kb/d. In other words, 95% of the projected January output is required to offset the decline from all of the earlier wells. It will take a few more months of data to determine whether the monthly decline and production growth will equalize in March, as suggested by the chart in the DPR section above.

World Oil Production

World C + C production fell by 1,585 kb/d to 80,736 kb/d in September 2019. Of the 1,585 kb/d, 1,350 kb/d was due to the attacks on the Saudi Arabia Abqaiq processing plant, one of the world's most important oil production facilities. The Khurais processing facilities were also attacked.

Original post

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