North American shale
PRODUCTION STOPS GROWING
PER MAGNUS NYSVEEN AND LESLIE WEI, RYSTAD ENERGY
NORTH AMERICAN SHALE production has stopped growing as a result of lower activity. Preliminary capital budgets for the year indicated total shale expenditure of approximately US$100 billion, down from approximately US$155 billion in 2014. As of the second quarter, several major oil and gas companies have further reduced capital budgets, including the top three producers: Chesapeake Energy, Devon Energy, and EOG Resources. Considering the budget revisions as well as short-term cost reductions, the current estimate of 2015 expenditure is now approximately US$95 billion.
The decline in the expected capital expenditure for the year also impacts the 2015 production outlook. Figure 1 shows the updated month-by-month US light oil production and forecast first shown in the Rystad Energy column in the May issue of OGFJ (North American shale - Production continues to grow albeit at a slower pace). The forecast is split by the lifecycle of the well. "Drilled, not yet producing" represents the production from wells drilled but not completed. "Not yet drilled" consists of the production coming from wells expected to be drilled based on company reported activity. Compared to Q1 2015, the main difference is the timing of the slowdown in production. The backlog of completed wells has grown faster than predicted, especially for the Permian plays; therefore, the slowdown took place in June/July, rather than late summer.
Figure 2 shows the light oil production for the top five plays. The Eagle Ford and the Bakken are the two largest plays in terms of light oil production. Eagle Ford 2015 production is expected to remain flat for the year, while production from the Bakken is expected to start increasing again in August. The uncertainty in the forecast is when the companies will start to increase completions. The increase in Q4 production in the Bakken requires approximately 150 wells to be completed on average each month, compared to the current level of approximately 100 wells per month. The only play expected to grow during the year is the Permian Delaware as companies are targeting very profitable wells in the Wolfcamp formation. Based on the latest well results, the Wolfcamp Delaware play in Texas appears to be the most promising in terms of North American shale.
Table 1 shows the 2015 production and spending forecast broken down to the main shale plays. Total expenditure is expected to drop 40% for the year, with less prospective plays dropping over 60% (Barnett combo, Anadarko tight oil). Cost compression also has an important role for the overall expenditure. On average, operators report a reduction of approximately 25% for the year, which results in lower breakeven prices and more profitable wells (Unconventional resources - Cost deflation and the effect on 2015 breakeven prices, July, OGFJ). The reduction in well cost also allows operators to drill more wells with less spending. In 2015, the total shale supply is expected to increase to 14.8 million boe/d, with 5.2 million bbl/d of light oil.
Predicting the 2015 production and spending level is difficult, as we still need to see how companies will react to the lower unit prices. Will operators continue to cut total spending, such as EOG, Devon and Chesapeake have done, or will they increase spending as Bill Barrett and Pioneer Natural Resources have reported?
ABOUT THE AUTHORS
Per Magnus Nysveen is senior partner and head of analysis for Rystad Energy. He joined the company in 2004. He is responsible for valuation analysis of unconventional activities and is in charge of North American shale analysis. Nysveen has developed comprehensive models for production profile estimations and financial modeling for oil and gas fields. He has 20 years of experience within risk management and financial analysis, primarily from DNV. He holds an MSc degree from the Norwegian University of Science and Technology and an MBA from INSEAD in France.
Leslie Wei is an analyst at Rystad Energy. Her main responsibility is analysis of unconventional activities in North America. She holds an MA in economics from the UC Santa Barbara and a BA in economics from the Pennsylvania State University.