ESAI: US shale could contract by 1.0 million b/d within the year

March 17, 2020
As a price-elastic source of supply, US shale production will respond relatively quickly to the steep drop in oil prices, ESAI Energy said, noting an expected decline of 170,000 b/d to 1 million b/d in 2020.

As a price-elastic source of supply, US shale production will respond relatively quickly to the steep drop in oil prices, ESAI Energy said, noting an expected decline of 170,000 b/d to 1 million b/d in 2020. ESAI examined three price scenarios and the impact on shale basin production for the rest of 2020 under each scenario.

“Already US E&Ps are reporting further reductions to their 2020 spending guidance and cutting back on planned drilling activity. A new-normal is here, with fiscal discipline and strong balance sheets even more important to weather current and future price volatility.”

A sustained price under $40/bbl will require significant restructuring, ESAI said. Many smaller producers will be unable to continue operating and bankruptcies will increase, resulting in US shale ending the year almost 1 million b/d lower than the start.

If WTI were to recover fairly quickly to $40-50/bbl, hedged production and a limited drawdown of drilled but uncompleted wells would initially keep production flat. However, spending cuts would prevent enough drilling and completions to fully offset decline, resulting in overall US shale ending 2020 about 330,000 b/d lower than at the start of the year.

A recovery in WTI to over $50/bbl should be sufficient to recover and sustain US shale, ESAI said. Producers would be expected to concentrate capex on maintaining, not growing production, paying down debt, achieving free cash flow, and maintaining a dividend. In this scenario, US shale ends 2020 with only a slight decline of roughly 170,000 b/d.

“So far, we are living in a market of sub-$40 or even sub-$30 oil. But a year is a long time. We still expect a recovery in prices in the second half,” said ESAI Energy shale analyst Elisabeth Murphy. “We may end up somewhere in between scenario 1 and 2,” she said.