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Page added on July 19, 2015
Has U.S. oil production started to turn down?
The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn’t be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise–until early June when it stalled and then dropped slightly.
Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015–even as the number of rigs operating plummeted. Shale drillers who are in debt–and most of the independents are heavily in debt–simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies–who don’t have huge debt loads related to their tight oil wells–have the luxury of waiting for higher prices before completing those wells.
The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA). Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.
What this first sighting of a decline suggests is that glowing analyses of how much costs have come down for tight oil drillers and how much more efficient the drillers have become with their rigs are off the mark. It was inevitable that oil service companies would be forced to discount their services to tight oil drillers in the wake of the price and drilling bust or simply go without work. And, it makes sense that the most inefficient uses of drilling rigs would be halted.
But the idea that these changes would somehow allow tight oil drillers to continue without missing a beat were always bunkham promoted by an industry sinking into a mire of overindebedness in the face of lower prices. In order to maintain the flow of capital to the industry–which has consistently spent more cash than it generates–the illusion of profitability had desperately to be maintained. A recent renewed slump in the oil price may finally pierce that illusion among investors.
As Iranian oil exports start to ramp up in the wake of an agreement on nuclear weapons–the Iranians aren’t allowed to have any–and the resulting end of economic sanctions, the oil price is likely to fall further, putting even more pressure on U.S. domestic drillers.
OPEC, which has refused to reduce output in the face of slackening world oil demand growth, continues to say that others–such as U.S. tight oil drillers–will have to “balance the market,” a euphemism for cutting production in order to push up prices.
It looks as if U.S. drillers may finally be doing just that. Who knew that 45 years after abandoning the role of the world’s swing producers*–that is, producers who adjust production up or down to maintain stable world oil prices–U.S. oil companies would be forced into that role again entirely against their will?
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*The state of Texas was the world’s swing producer up until 1970 through a mechanism called proration. The state regulated the percentage of maximum flow from oil wells in order to adjust production and thus keep prices within a band that made drilling profitable without jeopardizing demand for oil. In fact, the proration program administered by the Railroad Commission of Texas became a model for OPEC.
6 Comments on "Has U.S. oil production started to turn down?"
Jimmy on Sun, 19th Jul 2015 6:37 pm
The new swing producers will be the expensive producers when the price goes up and down. But the expensive oil brought online won’t lower the price and if it does it’ll take the ‘new swing production’ off the market. Price volatility will be the new normal. We’ve seen more volatility in the last 10 years than we had in the previous 50. It’ll be sometime until consumers and producers adjust to the price whiplash. Consumers will learn to save money and reduce discretionary spending, and that will undermine the debt fueled consumer orgy that has defined our economy for so long.
joe on Sun, 19th Jul 2015 7:17 pm
Seems silly to think of anyone being a swing producer. The energy industry rigged the high prices seen in recent years, the result was new entrants to the market, now the biggest players want these new entrants out because at 100$ it was as easy to get oil locally as from far away.
Peak oil will arrive when the quality of Saudi oil is too poor to be of any use, at that point a search will arrive for quality, that search will reveal more expensive oil, and the price will creep up, until costs in the general economy rise such that living standards begin to fall. Iranian oil is full of sulphur and needs more refined steps making the spread less profitable, so the preference will stay with Saudi oil for now.
Makati1 on Sun, 19th Jul 2015 10:42 pm
joe, living standards are already falling all over the Western countries, or haven’t you noticed? Oil prices cannot go much higher or the Western economies will crash, taking down the system that allows oil to be recovered. That and the coming ME war will end BAU for most of us.
I cannot see Sunni and Shiites ever becoming one unit, and especially not with Israel and the US beating the hornet’s nest and providing money and weapons to fuel the dispute. All of the dictators that had controlled the ME countries for decades, were killed off by the US psychopaths running Washington and Saudi Arabia.
rockman on Mon, 20th Jul 2015 7:23 am
“Overall U.S. production, however, confounded the conventional logic and continued to rise…” Confounded only those who lacked the basic understand of the oil patch dynamics. For those who do the rise in production during 1Q and 2Q 2015 was very predictable.
“And, it makes sense that the most inefficient uses of drilling rigs would be halted.” The rigs drilling today are no more efficient then the rigs drilling during the height of the boom. First, all shale prospects are not created equal: some have a higher potential then others and those are the ones still being drilled. Second, nearly all pubco shale players drill with borrowed money to a significant extent. Those pubcos might not have had to write down their reserves values yet but the banks they borrow from did it constantly as oil prices fell. There are a number of valid shale prospects not being drilled today for lack of credit by the companies holding those leases. The Rockman has been offered a number of farmouts from such companies. Unfortunately for them the Rockman’s company didn’t drill the shales when oil was $90+/bbl so we’re not going to drill them for $60/bbl. The Rockman’s biz plan is to put reserves in the ground to sell at a later date. Given the high decline rate of those fractured reservoirs there would be very little to sell after 3 or 4 years.
Nony on Mon, 20th Jul 2015 10:37 am
EIA understood the concepts (and most good analysts do too).
http://www.eia.gov/todayinenergy/detail.cfm?id=19171
Here is what they had to say…pretty decent explanation of the factors involved.
The numeric prediction looks like it will be close to true, maybe slightly low (9.3 for the year…we will do 9.5). Also, you could still label it as conservative because they made it with an assumption of $60/bbl average WTI price for 2015 and it looks like we will instead be in the low 50s.
marmico on Mon, 20th Jul 2015 11:17 am
Confounded only those who lacked the basic understand of the oil patch dynamics.
What a crock of shit. You are on record as subscribing to the Berman theory of rig counts wherein tight oil production would decline by ~600,000 barrels per day between January and June 2015.