US Shale Oil Continues to Decline, But Could Increase Under $50 Oil With DUCs

Oct 18, 2016


Yesterday, the EIA released its Drilling Productivity Report “DPR” [LINK], which is its look ahead one month to estimate Nov 2016 production levels for the major shale/tight oil and gas basins – Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica.

The EIA forecasts slightly declining production in the major basins in Nov vs Oct.  Oil production down to 4.429 million b/d (vs 4.459 in Oct), and natural gas production down to 45.958 bcf/d (vs 46.136 bcf/d in Oct).   The afternoon headlines on the DPR were that US shale production continues to decline.  The EIA’s forecasted Nov 2016 major basin oil production is down 13% YoY from 5.027 million b/d in Nov 2015, but natural gas production is up 3% YoY from 44.682 bcf/d in Nov 2015.

We thought the more significant data in the DPR to near term oil prices was the updated estimates of Drilled but Uncompleted Wells (DUCs) for the major basins of 5,069 at the end of Sept, down marginally from 5,069 DUCs at the end of Aug.  This DUC inventory provides significant productive capacity, in particular for oil, when industry moves to complete these DUCs.  This inventory of DUCs should continue to be a factor to limit near term oil price gains.

The EIA doesn’t divide DUCs between oil and natural gas wells, but a reasonable allocation would be 925 natural gas DUCs (Haynesville, Marcellus, Utica), and 4,144 oil DUCs (Bakken, Eagle Ford, Niobrara, Permian).   There is no precise calculation for the absolute total initial productive 30-day (“IP30”) capacity of this inventory ie. there are some DUCs that will never be completed as the wells are marginal at best.  For the balance there will be a range of type curves, the inventory of legitimate DUC locations will never be zero, and the associated gas ratio will vary for the oil plays.  For a rough cut on the absolute IP30 capacity, we will use 75% of the DUCs.  Assuming 800 b/d of oil initial productive 30 day capacity (IP30) on average, the absolute total DUC inventory IP30 capacity is 2.5 million b/d.  Assuming 10 mmcf/d of natural gas initial productive 30-day capacity (IP30) on average, the absolute total DUC inventory IP30 capacity would be 6.9 bcf/d.  We didn’t specifically add in associated natural gas IP30 rates from oil wells in the natural gas absolute IP30 productive capacity.  We recognize that play leaders are having much higher IP30 rates, but the accumulated DUC inventory is not going to be all top tier acreage.

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However, we still believe these DUCs will be needed to help offset declines in areas outside these major basins (the “Other Areas”).

The EIA forecasts Nov 2016 production from the major shale/tight natural gas plays to represent 63% of total US natural gas production of 72.5 bcf/d.  Total US natural gas production is down ~2.5 bcf/d YoY.   The EIA is forecasting the major basins are up ~1 bcf/d YoY, which means the Other Areas are down ~3.5 bcf/d YoY.  Plus the EIA introduced a wildcard last week for natural gas in its Short Term Energy Outlook Oct 2016 [LINK].  Our Oct 16, 2016 Energy Tidbits memo noted the EIA lowered its forecast for 2016 US natural gas production by 1.7 bcf/d.  The EIA stated that ““these changes reflect forecast adjustments based on lower-than-expected drilling activity that has contributed to actual data coming in below previously forecast levels.”  This is a significant reduction to “actuals”.

The EIA forecasts Nov 2016 production from the major shale/tight oil plays to represent 52% of total US oil production of 8.45 million b/d.  Total US oil production is down ~1 million b/d YoY.  The EIA is forecasting the major basins are down ~0.75 million b/d, which means the Other Areas are down ~0.25 million b/d.  We also believe the major basin oil DUCs will be needed to offset oil production declines from oil production outside of these major basins (the “Other Areas”).  We reviewed the Baker Hughes rig counts as at Oct 14, 2016 [LINK], and note that oil rig counts for Other Areas is 36% of total US oil rigs, yet these Other Areas represent 48% of total US oil production.  Arguably these Other Areas should have lower decline rates as there has been less drilling of new wells and decline rates are highest in the early years.  However, it is fair to assume that the Other Areas tend to have lower oil production rate wells as opposed to the Permian and Bakken.

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Overall, we don’t see the DUCs changing the near term outlook for oil and natural gas prices.  In the short term, the oil DUCs will continue to be a factor to limit near term oil price, but do not change the challenge for the US to have any sustainable reasonable oil growth at $50 oil.  For natural gas, we don’t see the DUCs being a big negative to near term natural gas prices, especially with last week’s EIA cut of its 2016 natural gas production forecast by 1.7 bcf/d.  Rather, the key near term variable for natural gas prices will be how cold it is in Nov/Dec and for the winter overall.  We still the potential for oil and natural gas to be stronger than expected to 2020.