In it’s World Energy Outlook 2018 issued on November 13, the IEA stated US Shale will need to add another “Russia” before 2025, or roughly 11 million barrels per day if forecast energy demand is to be met.
Given the recent crash in world oil prices due to a number of competing geo-political factors (as is usually the case), and the angst in the patch, I thought it interesting to test this thesis. As an aside, the OECD storage levels were at the five-year average in October at 2.848 billion barrels. According the October OPEC marketing report, 14 million barrels were added in October. Assuming that the market was balanced at the time, the increase by the Saudi’s and Russia tipped the balance by 1 million bpd. Once the Iran waivers were announced the market crashed, and boy did the Saudi’s take action quickly unlike in 2014. This should bring things back into balance. The recent storage builds in the US I believe were as a result of refinery turnaround. I can’t verify it, but perhaps the China situation resulted in barrels having to remain stateside.
Before I begin my thesis, I want to ensure that everyone knows that I believe the economic viability and strength of the US shale industry in general and all of the fine companies no matter how the world supply and demand issues play out over time. The US industry is formidable, resilient, competent and profitable at reasonable prices.
The EIA has estimated that US production will grow by 1.925 million barrels per day this year. This would break down as follows (bpd):
Permian – 1,300,000
Bakken – 250,000
Eagleford – 150,000
Niobrara – 225,000
Quite impressive growth.
Now based on straightlineology, at 1.9 million per day growth annually, US shale should grow by 14 million barrels per by 2025, so the incremental 11 million barrels per day should be a breeze. OK I’ll admit to being wrong before. I said that reaching 7 million barrels per day was unlikely yet here we are today at 6.9 million.
I’ll start my thesis by reviewing Permian performance in 2018 using EIA drilling productivity reports. According to the January 2018 report, Permian production was estimated at 2.78 million bpd. In January, the basin added 76,000 bpd per month, and had a decline of 175,000 bpd per month. In March, the basin added 80,000 bpd per month, and had a decline of 195,000 bpd per month. Adding a few rigs in December, production was estimated at 3.695 million bpd, adding 63,000 bbl per day per month with declines of 236,000 bpd per month. At this rate, assuming average well performance, we need about 388 rigs to hold this decline. Anyone in the oil patch knows that its easier to grow when you are small. Directionally, the seems to indicate that growth is slowing. It is significant to note absolute growth slowed while decline from legacy production grew as you would expect in a growth situation.
It’s instructive to look at the timing of development and rates of growth of the big three. The Bakken took off in 2011 and grew until 2015 at the height of the first boom. It grew from 40,000 to 1,200,000 bpd 300% percent growth (about 27% per year)). Thanks to high prices, it has been revitalized and grown to 1.35 million per day, a 12.5% increase from its first peak in 2015. I should add that the Bakken has added 250,000 bbl per day in 2018. On a cautionary note the Bakken is adding 15,000 bpd of new production but is suffering declines of 68,000 bpd which require 45 rigs to offset the decline. Will the Bakken grow? Yes. Will it climb to 2 million barrels a day? Not likely, as the Bakken is mature with a thinnish one zone pay.
The Eagleford was developed contemporaneously as the Bakken. Its growth dwarfed the Bakken growing from 200,000 bpd in 2011 to over 1,600,000 bpd in 2015. An eight-fold increase! The Eagleford has grown by about 200,00 bpd in 2018 to about 1.475 million bpd. The Eagleford is adding about 15,000 bpd per month but has quite severe declines of 115,000 bpd per month. I see the Eagleford perhaps reaching its former peak, but not much else. Using the November report as a data source, all four basins lost a total of 471,000 bpd to legacy decline. This equates to 528 rigs to arrest declines alone.
Now what about the Permian? Taking 2012 as a starting point, it has grown from about 1 to 3.5 million bpd in 2018 (as shown in the report). It has grown by 820,000 bbls per day (don’t ask me why it’s different than 1.3 million). In any event, the growth rate is either 26% or 46%. I looked at the year on year growth of the top ten producers who grew production by 50% so let’s go with the higher number.
US shale growth has shown consistent year over year growth primarily (notwithstanding intense activity) because it has added new plays, which as shown by history have very high growth rates. Development first occurred in the Bakken and Eagleford and has now pivoted to the Permian.
So where does the Permian go from here? If the Permian follows production patterns of the Eagleford and Bakken, the slope of growth will gradually roll over and peak. The peak will be higher and take longer simply due to its huge area. It’s widely acknowledged that US production will grow by 1.7 million barrels per day 2019, the same as the EIA 2018 estimate. Here’s the fly in the ointment: The November drilling productivity report has the Permian growing by only 63,000 bbl per day per month or about 750,000 barrels per day annually. This is only about half of 2018 growth, and it is in line with my model for Permian growth. In order to raise this to 1.3 million barrels per day, we’d need to add another 225 rigs which is definitely within the realm of possibility.
As a refresher, my model assumed a 500-rig program that ran for ten years, drilling about 46,000 wells. As the EIA data shows, it gets harder and harder to maintain production with legacy decline. Production peaked at 5.8 million barrels per day in eight years. For reference, it took only 4 years to reach 5 million barrels per day. Of course, you could add more rigs, but it would only bring the peak forward and not necessarily increase the peak rate all that much. Of course, it is possible that there is another sub-basin out there. If that’s the case then who knows.
My point is that we as an industry do ourselves a great disservice by going hell bent for leather to drill it all at once and at all costs. Once the market demand is filled and we put that marginal barrel on, it crushes the price. Rather than doing this, our leaders must strive to create rather than destroy value. I’m not sure how we can do this and it is a fine line between serving the public and our shareholders.
And in closing to all in the industry, lets keep our chins up and keep up the good work.
Randy Evanchuk, P. Eng., has 35 years of experience in the patch. From 2007 until he retired in 2015, Mr. Evanchuk was involved in all phases of of unconventional resource development including evaluation, economics, production and facilities. As as senior consultant with Murphy’s Holdings, he evaluated their Montney holding and was a member of evaluation team. Mr. Evanchuk was the Vice President of new ventures at Daylight Energy where his team was successful in acquiring a substantial Duvernay position. At Seven Generations Energy he was Executive Vice President looking after facilities, marketing, production operations and long range facility and marketing planning