The U.S. oil industry seemed to be defying gravity in 2015, keeping oil production elevated even as oil prices crashed to lows not seen in more than a decade. But now, over 1.5 years into the price collapse, production declines in shale oil are finally starting to appear as low oil prices have slashed company investments in new supply, and production begins to decline from existing wells.
The latest data from the EIA shows that U.S. output is steadily declining, although perhaps at a slower rate than shale’s competitors might prefer. In December, the latest month for which final data is available, total U.S. production declined to 9.26 million barrels per day (mbd), a loss of 43,000 barrels per day from the month before and down from a peak of 9.69 mbd in April 2015. But December’s small decline hides the decrease in shale production, as losses were offset by output increases from the Gulf of Mexico.
Shale drillers at their limits
Most shale companies began trimming their spending levels last year to adjust to a new period of lower oil prices. But many managed to either maintain current production levels or even boost production in the face of falling prices by improving drilling operations. Still, the ability to stave off decline in an era of sub-$40 oil is becoming increasingly hard to achieve.
Continental Resources, a prolific shale producer in North Dakota and Oklahoma, announced in its latest quarterly report that it would stop drilling in the Bakken this year. Continental said it would maintain its four existing rigs in the Bakken, but would not deploy “stimulation crews” to frack any wells. With most well completions in the Bakken deferred, new sources of production will not come online. As a result, Continental Resource’s production in the Bakken will fall. The shale company’s output was already down about 1.5 percent in the fourth quarter compared to the third, but production will likely slip to between 180,000 and 190,000 of oil equivalent per day (boe/d) by the end of the year, or a decline of roughly 15 to 20 percent from the end of 2015.
Whiting Petroleum is another shale oil and gas producer that is battening down the hatches, hoping to ride out the storm. In its latest earnings report, the Colorado-based driller said that it would cease well completions beginning in the second quarter. Capital spending at the company for 2016 was cut by 80 percent to just $500 million, the bulk of which will be dedicated to tying up loose ends and completing existing projects in the Bakken and Niobrara. By the second half of the year, the company only plans on spending $80 million per quarter as it basically sits on the sidelines. Whiting expects to close out the year with 73 drilled but uncompleted wells in the Bakken, and 95 in the Niobrara. If those well completions are deferred as planned, Whiting’s production will fall by almost 20 percent in 2016.
Devon Energy, a driller with a special focus on the Texas shale basins of Eagle Ford and the Permian, also delivered some grim news to their shareholders in mid-February. Devon slashed its dividend payout by 75 percent in an effort to husband resources, a move that is expected to save the company $320 million annually. The company also cut spending by 75 percent to a range of $900 million to $1.1 billion and it expects production to fall by 6 percent in its core areas, with anticipated declines from 560,000 boe/d to 516,000-540,000 boe/d.
Hess Corporation, a larger multinational with assets in West Africa, the Gulf of Mexico, and the North Sea, is another active driller in the Bakken. Hess cut capex for 2016 by 40 percent to $2.4 billion. The company sees production falling to between 330,000 and 350,000 boe/d in 2016, or a decline of 5 to 10 percent. At the IHS CERAWeek conference in Houston last week, CEO John Hess talked about the damage done to shale drilling from low oil prices. “We’ve been disproportionately hurt in the U.S.,” Hess said. “Our activity level is at a bare minimum.”
Unless oil prices rebound, Hess won’t be making huge outlays on new drilling. “Very few things make sense at $30. They barely made sense at $50,” Hess said in Houston. “It’s better to leave the oil in the ground.”
These are just a few examples of prominent shale producers announcing declines that are either pending or already underway. Reuters surveyed the forecasts from 18 shale companies over the past several weeks, and found that nearly all of them expect to see output fall this year. A few examples include: Apache Corp.’s production down by 43,775 boe/d (9 percent); EOG Resources down by 43,450 boe/d (7.6 percent); Marathon Oil down by 30,660 boe/d (7 percent); and Murphy Oil down by 25,403 boe/d (12 percent).
Major U.S. shale regions in decline
The array of spending cuts and production declines announced by dozens of separate companies may be difficult to wrap one’s head around. Put simply, the major shale basins in the United States are nearly all in decline.
Oil production in the Bakken is down to about 1.1 mbd, off 163,000 barrels per day from its peak in December 2014. The EIA projects that the Bakken will lose 25,000 barrels per day in March and from the EIA chart below it is clearly visible that the Bakken, once home to frenzied drilling, will continue to see output fall.
The Eagle Ford has been hit the hardest of the major American shale basins, losing nearly 0.5 mbd since peaking at 1.7 mbd a year ago. Production in the Eagle Ford is expected to drop to just 1.2 mbd in March.
The Permian Basin has held out longer than most, continuing to post production increases even while oil prices tested new lows. Production in the West Texas shale region hit a new peak in the fourth quarter, rising above 2 mbd, but production has come to a standstill over the last few months.
Oil production from the Gulf of Mexico is expected to continue to rise through 2017, an outlier due to the fact that offshore projects are much more capital-intensive with longer lead times—the pipeline of projects set to come online in 2016 and 2017 were given the greenlight years ago before oil prices crashed. The EIA sees production in the Gulf of Mexico rising from 1.54 mbd in 2015 to 1.63 mbd in 2016, and then jump again to 1.79 mbd in 2017. However, due to the large spending cuts issued in 2015 and 2016, there will be very few new major offshore projects to follow the ones currently under development.
U.S. oil supply falling
On balance, the EIA sees total U.S. oil production falling by 700,000 barrels per day in 2016, followed by another drop of 200,000 barrels per day next year.
With all of the recent announcements from various oil companies predicting production declines this year, the markets have regained a bit of confidence. By early March, WTI was up more than 30 percent in less than a month to $34 per barrel. Forecasts from barrel counters at the EIA, IEA and OPEC about pending shale productions declines have raised speculation of an oil price rally.
However, things may not be that simple. Oil storage levels are still at record highs and need to be worked through. There are also hundreds and maybe even thousands of drilled but uncompleted wells that could be finished off when oil prices rise. That will bring a new spurt of supply online when and if oil prices rise. “As soon as oil rises to $40-50 per barrel, it will give a signal to light tight oil producers (to ramp up),” said Neil Atkinson, the head of the Oil Industry Markets Division at the IEA, according to Reuters. As a result, a sustained rebound in oil prices may still be a ways off.