Tight Oil Production Trends in a Low Price Environment · 2015-06-16 · Global oil production...

www.eia.gov U.S. Energy Information Administration Independent Statistics & Analysis

Tight Oil Production Trends in a Low Price Environment

For EIA Conference June 15, 2015 | Washington, DC

by Grant Nülle, Upstream Oil & Gas Economist Office of Petroleum, Natural Gas and Biofuels

Outline •  Effects low prices are having on U.S. oil production

•  EIA’s short-term outlook for production

•  Reasons why U.S. output may be more resilient than otherwise thought

Nülle | U.S. Tight Oil Trends, June 15, 2015 2

U.S. oil supply: reasons for reduced output in the short term

•  Oil price decline

•  Reduced operating cash and capital expenditures

•  Falling rig counts

•  Corresponding decline in well completions

•  Global competition, rising world output


Year-over-year change

Source: Evaluate Energy

4 Nülle | U.S. Tight Oil Trends, June 15, 2015

Operating cash, capital expenditure, drops among onshore producers

-60%

-40%

-20%

0%

20%

40%

60%

80%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014 2015

WTI price Capital expenditure Cash from operations

-

500

1,000

1,500

2,000

2,500

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 $0

$20

$40

$60

$80

$100

$120

$140

$160

WTI Price US Onshore Rig Count

Rig count Nominal dollars per barrel

Source: Baker Hughes, Federal Reserve Bank of St. Louis


Rig count mirrors price drop, lagged by two to four months

414

218

660

287 255

124

1,180

766

0

250

500

750

1,000

1,250

Jan Apr Jul Oct Jan Apr

Eagle Ford Permian Bakken All Others

2014 2015

Well completions

Source: EIA estimates


Reported well completions are falling as rig count dwindles

-3%

-2%

-1%

0%

1%

2%

3%

Month1-05 Month1-07 Month1-09 Month1-11 Month1-13 Month1-15

Percent change from previous month

Source: US Bureau of Labor Statistics, Current Employment Survey (June 2015)


U.S. oil and natural gas production jobs showing month-over-month declines

Global oil production million barrels per day

Stock change million barrels per day

Source: EIA, Short-Term Energy Outlook, June 2015


Gap between global oil production and consumption signals increasing competitive landscape

Forecast

-3 -2 -1 0 1 2 3 4 5 6

82 84 86 88 90 92 94 96 98

100

2010-Q4 2011-Q4 2012-Q4 2013-Q4 2014-Q4 2015-Q4 2016-Q4

Implied stock change and balance (right axis) Forecast World production (left axis)

Production Trends & Outlook


Delays of several months between drilling, well completion, production, and administrative reporting

Marked differences in reporting lag and frequency of reports among the states

Recurring revisions months or years ago


Data lags complicate understanding of turning points

Drill a well Complete well

& install infrastructure

Report first production to

the state

Production added to state data

Up to 1 month

2 months or more 2 – 4 months 1- 2 months or more

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0 1 2 3 4 5 6 7 8 9

10

2000 2002 2004 2006 2008 2010 2012 2014

Rest of U.S. Oil Production Eagle Ford (TX) Bakken (MT & ND) Spraberry (TX & NM Permian) Bonespring (TX & NM Permian) Wolfcamp (TX & NM Permian) Delaware (TX & NM Permian) Yeso-Glorieta (TX & NM Permian) Niobrara-Codell (CO, WY) Haynesville Utica (OH, PA & WV) Marcellus Woodford (OK) Granite Wash (OK & TX) Austin Chalk (LA & TX) Monterey (CA) Tight oil % of total

U.S. oil production million barrels of oil per day

Tight oil production as a percent of total oil production

Sources: EIA derived from state administrative data collected by DrillingInfo Inc. Data are through April 2015 and represent EIA’s official tight oil estimates, but are not survey data. State abbreviations indicate primary state(s).


Estimated U.S. tight oil production was 4.6 million barrels/day in May 2015 48% of total U.S. oil production

(350)

(150)

50

250

450

Month1-14 Month4-14 Month7-14 Month10-14 Month1-15 Month4-15 Month7-15

Production from new wells Decline from existing wells Net change

Total month-to-month change thousand barrels per day

Source: EIA Drilling Productivity Report, June 2015


Sum of seven DPR regions show production from new completions beginning to trail legacy declines starting in May 2015

0

2

4

6

8

10

12

2012 2013 2014 2015 2016

2014 2015 2016

Q1 Q2 Q3 Q4

Federal GOM Alaska

Lower 48 production from wells drilled in 2013 or before

U.S. monthly crude oil production million barrels per day

Source: EIA, Today in Energy 1/26/2015 http://www.eia.gov/todayinenergy/detail.cfm?id=19711


January 2015 STEO had Lower 48 y/y growth in 2015 of 502,000 bbl/d and in 2016 210,000 bbl/d.

0

2

4

6

8

10

12

2012 2013 2014 2015 2016

2014 2015 2016

Q1 Q2 Q3 Q4

Federal GOM Alaska

Lower 48 production from wells drilled in 2013 or before

U.S. monthly crude oil production million barrels per day

Source: EIA, Short-Term Energy Outlook (STEO) June2015


June 2015 STEO shows U.S. Lower 48 y/y growth in 2015 of 720,000 b/d and a decrease in 2016 of 160,000 bbl/d.

Resiliency of U.S. production


U.S. oil supply: reasons for rebound in US output

•  Quality of rig fleet

•  Growth in initial production rates

•  Increase in well completions

•  Falling costs

•  Continued capital availability

•  Ability to compete in global oil market


Source: Baker Hughes


Horizontal rig share rapidly increasing as vertical/directional rigs laid down at a faster rate

Rig Type Running Rigs October 2014

Running Rigs May 2015

% Chg

Horizontal 1,351 687 - 49%

Vertical / Directional 574 202 - 65%

Total 1,925 889 - 54%

Increasing well productivity will help shore up production numbers

•  Analysis of 85,000 wells drilled from 2012 to 2014 –  By vintage

–  Horizontal, Vertical, Directional wells

–  All U.S. onshore regions

•  Average initial production (IP) rates increasing as the number of horizontally-drilled wells increases


0

100

200

300

400

500

600

700

800

2012 2013 2014 Vertical Average Horizontal

Initial production (first full month) Barrels per day per well

Source: EIA analysis of DrillingInfo data


Permian shows rapid 30-day IP rate increases as share of horizontal wells grows from 13% to 33% of wells drilled in 2014

Barrels per day

Source: EIA analysis of DrillingInfo data for 2014 wells


High IP rates driven by “core” Bakken counties

Well Count

Inventory of “drilled but uncompleted” wells may add to production

•  Estimated 2,000 - 4,000 DUC wells in the Lower 48 –  Equivalent to 6-10% of the 40,000 wells in 2014

–  Predominantly located in the Eagle Ford, Bakken, and Permian

•  Depending on actual DUC number and average well productivity thereof, hundreds of thousands of barrels per day could come online if all wells completed over the next 20 months

•  Stabilization of oil price makes added completions likely –  As prices have stabilized, there is a much greater incentive for operators to get wells

completed to generate cash flow

–  1-year drilling permits may help facilitate Bakken well completions


149 167

660

880

0

200

400

600

800

Jan Apr Jul Oct Jan 2015 2014

Well completions

Uncompleted wells

Well count

Source: North Dakota Department of Mineral Resources, EIA Estimates


Bakken uncompleted well count growing as well completions decline

- 50 100 150 200 250 300 350 400

-

500

1,000

1,500

2,000

2,500

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

Added Production

Well Completions

Completed wells Added production

thousand barrels per day


Potential scenario of well completions and added production

80

90

100

110

120

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr

Drilling Oil & Gas Wells Support Activities Frac Sand

2013 2014 2015

Index Jan. 2013 = 100

Source: U.S. Bureau of Labor Statistics, June 2015


Oil industry supplier cost reductions beginning to manifest in producer price indices Cost Index Oct. 2014 May 2015 % Chg

Frac Sand 102.2 87.6 - 14.3%

Drilling 113.9 93.1 - 18.3%

Support 100.8 99.5 - 1.3%

-0.90

-0.60

-0.30

0.00

0.30

0.60

0.90

-15

-10

-5

0

5

10

15

Free cash flow (left axis)

Net share issuance plus net

change in debt (left axis)

Net hedging assets (left axis)

Long-term debt to equity (right

axis)

Cash-on-hand to short-term

liabilities (right axis)

Select financial measures for 38 U.S. onshore producers 2013 Q1 2014 Q1 2015 Q1

Billion dollars Ratio

Source: Evaluate Energy


Onshore producers have not had problems raising cash, but still have a high stock of debt

Dollars per barrel of oil equivalent

Source: Evaluate Energy, EIA Analysis


U.S. onshore companies are competitive on costs

$0

$5

$10

$15

$20

$25

$30

5-yr avg Finding & Development cost

5-yr avg Production cost

U.S. onshore

Global majors

Summary •  Low oil prices are adversely affecting the U.S. onshore oil sector

•  EIA’s short-term production outlook anticipates decline in tight oil production

•  Rig quality, well productivity improvements, and falling costs will help U.S. oil sector be more resilient amid period of low prices than otherwise thought


For more information •  U.S. Energy Information Administration home page | www.eia.gov

•  Annual Energy Outlook | www.eia.gov/forecasts/aeo

•  Short-Term Energy Outlook | www.eia.gov/forecasts/steo

•  International Energy Outlook | www.eia.gov/forecasts/ieo

•  Today In Energy | www.eia.gov/todayinenergy

•  Monthly Energy Review | www.eia.gov/totalenergy/data/monthly

•  State Energy Portal | www.eia.gov/state


Supplemental slides


0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

1995 2000 2005 2010 2015

Vertical

Horizontal/Directional

Percent of total running rigs

Source: Baker Hughes


Horizontal/Directional rig share rapidly increasing as vertical rigs laid down

- 100 200 300 400 500 600 700 800 900


Barrels/day

Source: EIA Estimates, DrillingInfo Data


Eagle Ford shows slower 30-day IP growth as share of horizontal wells annually comprise 9 of every 10 wells drilled

-

100

200

300

400

500

600

700


Barrels/day



All other regions shows steady IP increases as share of horizontal wells grows from 34% in 2012 to 42% of wells drilled in 2014

-

200

400

600

800

1,000


Barrels/day



Virtually all wells in Bakken are horizontally drilled, with average 30-day IP rate more than doubling since 2012

Barrels per day



Eagle Ford IP rates indicate greater heterogeneity across counties

Barrels/day Well Count

2014 4,248 Total Wells

1) SPUD Only

2) COMP Only

3) PRODUCING

26% 1,122

21% 887

53% 2,239

2013 3,706 Total Wells

1) SPUD Only

2) COMP Only

3) PRODUCING

62% 2,305

24% 875

14% 526

35

Analysis of Eagle Ford well activity shows increasing proportion of wells drilled or completed but yet to produce

Source: DrillingInfo April 2014 and 2015

Nülle | U.S. Tight Oil Trends, June 15, 2015

0

200

400

600

800

1,000

1,200 Bloomberg High Yield Corporate Bond Index Energy Materials Industrials

Option adjusted spread (bps)

Source: Bloomberg


Risk premiums have declined since crude prices stabilized, but remain higher than other sectors

Contributing Factors to U.S. Tight Oil Production

•  Technical expertise and experience

•  Extensive transportation capacity

•  Price responsiveness of producers

•  Availability of capital

•  Regulatory stability

•  Learning-by-doing efficiencies gained by drilling thousands of tight oil wells


Tight Oil Production Trends in a Low Price Environment · 2015-06-16 · Global oil production...

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