US oil production has gained significant momentum and downside risk of US oil production in the short term is limited, even if oil prices collapse to $40/bbl or even $30/bbl, according to Rystad Energy, a Norway-based industry consultant.
Looking at the recent evolution of oil production in the Lower 48 states excluding the Gulf of Mexico, Rystad Energy observes a continuous expansion, with a 430,000-b/d growth from December 2016 to May 2017. Even though late-2016 production levels were adversely exposed to winter storms in several states, the growth from the average level in 2016 fourth quarter to May 2017 is still significant, about 340,000 b/d.
In this year’s first quarter, the majority of shale-dedicated operators were able to achieve oil production levels about the high-end of guidance or beat it on several occasions.
According to Rystad Energy, despite growing concerns about service cost inflation in the most active basins, completion activity is set for a steep expansion throughout the remainder of this year. US Lower 48 oil production is set to expand by an additional 390,000 b/d from May to December assuming a WTI price of $50/bbl, Rystad Energy forecasts.
The recovery in rig counts has been outpacing the growth in completion activity since the second half of 2016, resulting in a strong build-up of new high-quality inventory of drilled uncompleted (DUC) wells. Should the prices collapse to $40/bbl or even $30/bbl level, a major part of these DUCs can still be completed commercially given that drilling costs are sunk. Therefore, a drastic downward shift in the market conditions will not lead to a rapid collapse of the US oil production. No more than 500,000 b/d of December 2017 volumes are at risk in the $30/bbl scenario, according to Rystad Energy.
“If the prices go down to $30/bbl and we assume that operators behave rationally, we should observe relatively quick adjustment of activity, which will result in a temporary contraction of output with stabilization in the fourth quarter at the level 100,000 b/d lower than the current output as base production gets more mature,” says Artem Abramov, vice-president, analysis, at Rystad Energy. “In reality, history tells us that many operators will rely on hedging gains or simply outspend more, so short-term evolution of supply in the $30/bbl world might end up much closer to the rational $40/bbl or even $50/bbl scenarios.”
