IEA: Continued low oil prices slam brakes on US light, tight oil growth

Sept. 28, 2015
A recent spiral in US light, sweet crude oil prices on the New York Mercantile Exchange to 6-year lows accompanied by a drilling slowdown across most unconventional plays was reflected in the International Energy Agency's Monthly Oil Market Report, which forecast light, tight oil (LTO) production will contract.

A recent spiral in US light, sweet crude oil prices on the New York Mercantile Exchange to 6-year lows accompanied by a drilling slowdown across most unconventional plays was reflected in the International Energy Agency's Monthly Oil Market Report, which forecast light, tight oil (LTO) production will contract.

"Unless oil prices bounce back in coming months, supply is forecast to fall by 385,000 b/d next year to 3.9 million b/d versus 4.3 million b/d forecast for this year," IEA said. "A sharp decline has already started, with annual gains dropping from nearly 1.2 million b/d at the start of the year to around half by July."

LTO operators can respond much more quickly to price movements than can conventional oil producers, the report noted.

Meanwhile, a new US Energy Information Administration methodology for assessing oil production indicated an accelerated decline in light sweet crude production.

IEA of Paris suggested LTO production might already have peaked based on its analysis for the main US shale plays. Analysis of natural decline rates showed output per well fell an average 72% from initial production rates within 12 months of startup, and 82% in the first 2 years of operation.

"As such, operators have to keep on drilling new wells or increasingly focus on higher yielding wells in core acreage (high-grading) just to offset natural declines," IEA said. "Given oil companies' cuts in capital spending, an expected rebound in drilling activity and output levels for next year looks elusive," said IEA's Oil market Report on Sept. 11.

Baker Hughes Inc. statistics showed onshore oil rig count partially recovered starting around early July but the rig count recovery appeared to have ended, at least for now, in September.

EIA: Brent vs. Bakken prices

Since early June, the average Brent futures price for 2016 slumped by nearly $20/bbl before recovering some losses in early September to around $55/bbl.

"Taking into consideration the discount of Bakken to Brent crude-which has dropped to an average of $7.50/bbl so far this year, futures prices are currently below the average cost of production for all the main shale plays," IEA said in its monthly report.

Separately, oil consultant Rystad Energy estimated average breakeven prices for most LTO plays. Rystad Energy estimated $54/bbl in the Bakken formation and Eagle Ford, $61-68/bbl in the Permian basin, and $64/bbl for the Niobrara.

Break-even prices typically vary widely from section to section within any given unconventional play.

"Although operators in the best acreage see much lower break-even costs for new wells, in the current price environment, further reductions to new LTO producing wells look inevitable," IEA said. "We expect drilling and completion rates to drop by a further 20%-70% next year, depending on the play's differential between cost and realized crude prices."

The number of new producing US unconventional wells has dropped nearly in half since the same time last year, yet increased productivity largely offset the dropping well numbers.

"Current well start and output data suggest initial production rates have surged by more than 50% this year as a result of operators only leaving rigs in the most profitable acreage," IEA said. "Real productivity gains are most certainly also taking place, though this is yet difficult to quantify."

Because operators already completed wells in the best acreage, IEA said the potential for improved production rates per well during 2016 "looks doubtful in the absence of further breakthroughs in technology.

"We assume initial production rates will remain largely unchanged from this year's impressive levels, on the assumption producers have enough high-quality stock not having to go into more marginal areas."