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Lower 48 Oil Production Outlook Stable Despite Expected Near-Term Reduction in Rig Count

Lower 48 Oil Production Outlook Stable Despite Expected Near-Term Reduction in Rig Count thumbnail

graph of monthly oil production and rig count in the lower 48 states, as explained in the article text

Source: U.S. Energy Information Administration, January Short-Term Energy Outlook. Note: Graph does not include production from Alaska and the Federal Gulf of Mexico.

The sharp decline in oil prices over the last quarter of 2014, which has continued in January, is already having a significant effect on drilling activity in the United States, as shown by the 16% decline in the number of active onshore drilling rigs in the Lower 48 states between the weeks ending on October 31, 2014 and January 23, 2015, according to data from Baker-Hughes.

Moving from what has happened to forecasting the future is challenging, in part because market expectations of uncertainty in the price outlook have increased as reflected in the current values of futures and options contracts. When the latest edition of EIA’s monthly Short-Term Energy Outlook (STEO) was issued on January 13, the 95% confidence interval for market expectations for prices in December 2015 was extremely wide, with upper and lower limits of $28/barrel (bbl) and $112/bbl, respectively. The growing uncertainty surrounding oil prices presents a major challenge to all price forecasts. EIA’s January STEO forecasts Brent crude oil prices averaging $58/bbl in 2015 and $75/bbl in 2016, with annual average West Texas Intermediate (WTI) prices expected to be $3/bbl to $4/bbl lower.

Should its price forecast be realized, EIA projects that the number of operating rigs will decrease by approximately 24% from January to October 2015 before beginning to rebound in November 2015. However, the outlook for Lower 48 production reflects more than just the rig count. Other key factors include the efficiency of drilling, which EIA tracks in its Drilling Productivity Report, the rate of decline in production from existing wells, and changes in the amount of time between the start of drilling (called spudding) and the completion of the well.

As discussed in a previous Today in Energy article on the effect of declining crude oil prices on U.S. production, permits and drilling in North Dakota declined during the financial downturn of 2008-09, but production rates did not decline as substantially. At the time of the July 2008 oil price peak, drilling activity in the Bakken-Three Forks formations outpaced well completion activity as increasing numbers of wells were drilled. Averaging about 70 days before the oil price peak, spud-to-completion times almost doubled within two months, reaching more than 130 days. This increase created a backlog of wells that had been drilled but not yet completed. As fewer wells were drilled during the subsequent drop in oil prices, the spud-to-completion times decreased. Increased drilling activity in the Bakken since 2011 has once again increased spud-to-completion times, which have stabilized at more than 120 days per well, almost twice previous minimum levels.

graph of spud-to-completion time for wells drilled in  the Bakken-Three Forks formation, as explained in the article text

Source: U.S. Energy Information Administration

This backlog of wells acts as a cushion for production rates, offsetting the more immediate decreases in drilling and permitting activity. At most major plays in the United States, the backlog currently ranges from three to seven months. When drilling activity remains at reduced levels long enough to outlast the cushioning effect of the well-completion backlog, the number of new wells brought online will begin to decrease, which can eventually reduce production rates.

While the cushion provided by the well-completion backlog changes from formation to formation, EIA’s forecast of rising crude oil prices in the second half of 2015, if realized, is expected to be accompanied by a stabilization of drilling activity that would be sufficient to prevent a substantial production decline in the Lower 48 region. Different outcomes are entirely possible under other price scenarios.

EIA



15 Comments on "Lower 48 Oil Production Outlook Stable Despite Expected Near-Term Reduction in Rig Count"

  1. Makati1 on Sun, 1st Feb 2015 7:41 am 

    Hahahaha…yes because they are pumping as much as possible from their existing wells to pay the bills. As their output declines, so will the totals for the US. It may take year or so, but it will happen. The government propaganda mouthpiece called the EIA is about as factual or reliable as a used car salesman … or a politician.

  2. Mike999 on Sun, 1st Feb 2015 7:42 am 

    This is bad news for the oil industry. IF there’s no cutback in production, then that’s guaranteed low prices going forward.

  3. Davy on Sun, 1st Feb 2015 8:16 am 

    The EIA, academics of all colors, and global NGO’s are all caught in the growth meme. If you are in the growth meme you are not acknowledging the paradigm shift of both the bumpy plateau and the current beginning of the bumpy descent. This denial started at least 10 years ago with continued growth polices despite facing limits and diminishing returns of efforts. This has led to a condition of an investment in maintaining growth at all cost with little if any discussion of degrowth.

    There is talk of the normal business cycle with recessions and recovery but there is little being said about a paradigm shift to descent. Descent has completely different economic and social rules. These are harsh rules that are unpalatable. If this new reality would be optimistically palatable for example a return to a simpler 1950’s and early 1960’s life in a shiny new green AltE world a full embrace may take place. The problem is the necessary policies are mitigation and adaptation to a harsh and painful world.

    Our global society wants to feel exceptional and believe in progress towards a better world. We want to be optimistic and eliminate all those bad conditions we hate to see on the news like war, poverty, social injustice. These are precisely those troubled conditions we will be facing. Instead of facing these harsh results of years of poor policies we chose to embrace those same policies and messages that got us to where we are.

    This EIA report is just more of that false optimism message in a condition of worsening news. They are saying it looks bad now but improvements are ahead. If you acknowledge the POD and ETP factors effecting oil now then you acknowledge a train wreck with a brick wall ahead. The financial brick wall is likewise being discounted in MSM but less so with investors who are nervous now with the financial repression and excessive debt based policies. All governments are broke and saddled with huge unfunded liabilities of all kinds. It will be curious to see how this MSM message adapts to ever worsening news

  4. JuanP on Sun, 1st Feb 2015 8:44 am 

    The EIA’s forecast for an average $58 per barrel for 2015 is very close to the Russian government’s estimate of $60. I think the EIA’s shale production forecasts are too optimistic. US Shale production may never recover fully. The longer this lasts, the worse it will be for shale producers to get the necessary investments lately. If the boom busts, will investors come back again after it’s over? I don’t know, but there are a couple of suckers born every second in this world.

  5. shortonoil on Sun, 1st Feb 2015 9:27 am 

    EIA’s forecast of rising crude oil prices in the second half of 2015, if realized, is expected to be accompanied by a stabilization of drilling activity that would be sufficient to prevent a substantial production decline in the Lower 48 region.

    As we stated here a few weeks ago there is a backlog of wells to be completed. Because completion cost can be almost as much as drilling cost it is likely that some of those wells may not be completed. A $45/barrel price would not return the investment. We expect the present backlog to be used by April of this year, at which point production will begin to decline. That is likely to begin to show in the EIA reports by June of this year.

    We are anticipating a small price increase later this year. That price increase will be constrained by the maximum price the economy can afford to pay for oil:

    http://www.thehillsgroup.org/depletion2_022.htm

    The maximum price is $77/barrel in 2015, and $66/barrel in 2016. Even through this increase will provide some relief to the beleaguer petroleum industry it will not be sufficient to restart a enough drilling to compensate for the natural decline rate of shale wells. We expect that decline to be reported by June of this year, and by the end of 2016 shale production to be down by 1.5 mb/d.

    http://www.thehillsgroup.org/

  6. Beery on Sun, 1st Feb 2015 10:17 am 

    I would say “Hahahahaha”, but to be honest, I’m tired of laughing at these clowns. I’m guessing they still won’t get it when we’re on the production downslope – they’ll still be predicting new production peaks and rising production after ten, twenty, thirty years of the downslope after the peak, while the committed cornucopians will be either saying that it’s a temporary dip or frothing at the mouth while gleefully proclaiming that peak oil is dead despite all evidence to the contrary.

  7. Bob Owens on Sun, 1st Feb 2015 10:49 am 

    Any EIA estimates should always be considered the upper bounds of what is possible. They are wildly optimistic at the EIA.

  8. rockman on Sun, 1st Feb 2015 10:55 am 

    Just amazing: countless stories about how the US shales have increased production. And a lot of stoies bout their high decline rates and the need for continuous drilling to replace that decline. And with that background there’s the expectation that oil production will remain stable??? Maybe if the rig count only drops 25%.

    But look at the details. In 2013 an avg. of 835 rigs were drilling in Texas, home of the big EFS play. The last time oil was at this level (in 2004) the avg was 500. BUT the vst majority of those rigs were drilling for $7/mcf NG and not oil. And all the tech used to develop the oil shales the last few years, though tweaked some, existed then. What didn’t exist then was $100/bbl oil.

    And the rig count the last time both oil and NG prices (adjusted for inflation) were this low was closer to 250 rigs…70% fewer rigs then in 2013.

    I’m not predicting the count will drop that low. OTOH if someone thinks we’ll be drilling a lot more oil wells of any kind this year then we were just 10 years ago with the same price we had back then I would like to hear the logic behind that expectation.

    And one more factor not present 10 years ago: the oil patch in 2013 was $200 BILLION in debt. I can’t find that stat of 2004 but that number is 30% higher then it was just 3 years ago. I suspect it was under $50 billion in 2004…maybe a good bit under. At this point just servicing debt will likely be a bigger challenge than taking on more.

  9. shortonoil on Sun, 1st Feb 2015 11:21 am 

    All governments are broke and saddled with huge unfunded liabilities of all kinds. It will be curious to see how this MSM message adapts to ever worsening news

    The total amount of energy provided by petroleum has been declining since the beginning of the the millennium. It continues to do so. This is affecting world GDP by about $2 trillion per year. Relative stability has, so far, been maintained by consuming the accumulated assets of prior years. Depreciating assets are not being fully replaced. This is occurring in every sector of the economy, but as time progresses it will become ever more difficult to convert these assets into usable cash flow. We are witnessing this now as Central Banks are finding it ever more difficult to create a pretense of economic growth through their monetization policies. Don’t expect, however, for this situation to be readily acknowledged; many fortunes would be put at risk if it became common knowledge.

    The system has, thus far, been maintained through the confiscation of public wealth, thus the rise of the term: private profit, and public loss. The financial sector, and the governments that serve it has done this through social safety nets, which has allowed them, so far, to steal $1 for every 10 cents they return. With the price of oil in a perpetual state of decline, and $trillions being yearly wiped off of balance sheets this precarious status quo will soon fail. It is hard to image that it can be continued below $20/barrel. The financial sector’s power to manipulate will decline with the price of oil.

    http://www.thehillsgroup.org/depletion2_022.htm

  10. rockman on Sun, 1st Feb 2015 12:03 pm 

    And here are the words from the horse’s mouth compared to the think tank “experts”. So while the “experts” are predicting a 25% drop in rig count a company that actually drills wells is expecting about a 30% drop during just this quarter. And that decrease is from an already reduced number.

    Reuters – Driller Helmerich & Payne Inc said it may cut 2,000 jobs as it begins to idle rigs amid a slide in crude oil price. H&P had about 11,901 employees as of Sept. 30. It has benefited so far from robust shale drilling activity in the United States. H&P said less than 200 rigs would be active by the end of the current quarter, down from over 297 in the first quarter. “The rig count reduction thus far has been more swift than many expected,” Chief Executive John Lindsay said on a post-earnings call. The company said it expected rig revenue in its U.S. land drilling unit to average $27,000-$27,500 per day in the second quarter, below the $29,457 it recorded in the first quarter.

    {Wishful thinking IMHO. I’ve already heard of rates of formerly $22k/day being dropped to $14k/day.}

  11. Davy on Sun, 1st Feb 2015 12:25 pm 

    Short said – Relative stability has, so far, been maintained by consuming the accumulated assets of prior years. Depreciating assets are not being fully replaced. This is occurring in every sector of the economy……maintained through the confiscation of public wealth, thus the rise of the term: private profit, and public loss…….done this through social safety nets, which has allowed them, so far, to steal $1 for every 10 cents they return.

    What Short is saying in a much more effective way is what I say when I speak of as cannibalization of the social fabric and wealth transfer. This is the destruction of social complexity and systematic cohesion of global BAU to maintain a pseudo growth for the plutocrats. This is as bad or worse than a physical destruction. In addition it is the perpetuation of the environmental degradation of a destructive system. I would be sympathetic to destructive actions if they are action that are an effort at transition and not perpetuation of an insane system with no future nor a plan B.

  12. Plantagenet on Sun, 1st Feb 2015 12:56 pm 

    1. The oil glut caused oil prices to plummet and drilling to slow down. Less drilling will lead to less US oil production. Just wait and see.

    2. And when the oil glut is over, oil prices will go back up and there will be more oil drilling and oil production will go back up.

    E-Z-P-Z

  13. shortonoil on Sun, 1st Feb 2015 3:03 pm 

    And when the oil glut is over, oil prices will go back up and there will be more oil drilling and oil production will go back up.

    It is possible that prices could go up as much as $25/barrel by the end of this year. Of course that is not going to be enough to save the shale industry.

    http://www.thehillsgroup.org/depletion2_022.htm

    Shale was built on $100 oil, and that we will never see again. If we did the banks would close , and the selves would be bare in a week. It would take an additional $7.9 trillion for the world to purchase $100 oil (using a 6:1 multiplier). If the CBs printed another $7.9 trillion it would drive world interest rates into the negative territory. As the monetary base expanses interest rates go down. Banks would be paying lenders to borrow money, and they wouldn’t last long doing that. $100 oil would completely destroy what little remains of the credit markets.

  14. GregT on Sun, 1st Feb 2015 3:56 pm 

    The only glut of oil that exists, is a glut of oil that is unaffordable to our economies. The dregs that have allowed oil production to increase since 2008.

    The price can only go as high as what the market, and our economies can afford. Prices may rise as the economy picks up, but the damage has already been done. Rising prices will cause further damage to our economies, which will cause prices to drop again. Wash, rinse, repeat.

    The end of the oil age is already upon us.

  15. Kenz300 on Mon, 2nd Feb 2015 6:43 pm 

    So how fast are the depletion rates……..

    You can keep moving as long as you are not standing still…… Once you stop drilling it will not take long for depletion to impact the oil supply……

    Selling for less than the cost of production is not a business model…..

    Just like musical chairs….. they start to drop one at a time……

    High cost deep water, tar sands and shale producers can not compete with low cost conventional production……. until the over supply is brought down and price rises again……

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