Oil and gas production in the United States has peaked and is already declining.
The latest EIA data Drilling productivity report sees a general decline in production in all the main shale basins of the country. The Permian should lose 76,000 b / d between April and May, with drops also visible in the Eagle Ford (-35,000 b / d), the Bakken (-28,000 b / d), the Anadarko (-21 000 b / d) and Niobrara (-20,000 b / d).
Natural gas production is also declining, a reality occurred before the global pandemic, but is expected to accelerate. The Appalachian basin (Marcellus and Utica shales) is expected to lose 326 million cubic feet per day (m3 / d) in May, a loss of 1% of supply. In percentage terms, the Anadarko basin in Oklahoma is expected to experience an even larger decline – 216 mcf / d in May, a 3% drop in production.
The sudden drop in production illustrates the fatal flaw in the shale business model. Once drilling slows, production can immediately turn negative due to the steep decline rates. The E & Ps shales must continue to operate quickly on the drilling conveyor in order to maintain production at altitude. But the collapse in prices has forced the industry to run 179 devices since mid-March.
As the drilling stopped crushing, production fell as the “legacy” production declines settled. In other words, without new wells going online to compensate for the drop compared to existing wells, overall production falls.
More specifically, the Permian, for example, will lose 356,000 b / d of “inherited” wells in May, far exceeding 280,000 b / d of new production from new wells. On a net basis, the Permian is expected to lose 76,000 bpd in May.
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This inherited decline rate has intensified each year, requiring more aggressive drilling each month to keep production on an upward trend. But the treadmill finally caught up with the industry.
The OPEC + deal will not save many shale businesses. The destruction of demand is simply too great for OPEC + cuts. With the WTI at $ 20 a barrel on Tuesday, the Permian drillers actually receive a little less than that.
“Since humans started using oil, we have never seen anything like it,” said Saad Rahim, chief economist at Trafigura Group Pte. Ltd., said the wall street newspaper. “There is no guide that we follow. It’s unexplored. He estimates that demand has gone from 100 million barrels per day (mb / d) to just 65 to 70 mb / d today.
The WSJ says oil storage at Cushing, OK could be full by the end of the month, which could force production shutdown in Oklahoma and Texas. This suggests that the EIA estimate of a US shale production decline of 183,000 bpd in May may be optimistic.
Meanwhile, analysts are anticipating a gas rebound due to supply cuts already underway. The closures in the Permian also help balance the gas markets as the associated gas will shrink with oil.
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“We believe that the outlook for crude oil closures and a decline in oil drilling activity is likely to shift the image of natural gas supply and demand from bearish to bullish over the next 9 months assuming normal weather, “Goldman Sachs wrote in a note. “We assume the Henry Hub 2021 natural gas price of $ 3.25 / MMBtu on average, above our mid-cycle estimate of $ 2.75 / MMBtu. Henry Hub is currently trading at around $ 1.70 / MMBtu.
The oil driller crisis prompted some of them to call for regulation by the Texas Railroad Commission. But whatever CRR’s decision, cuts are in sight.
A more worrisome prospect for the American shale is that the OPEC + deal, as ineffective as it was at rising prices, may not prove to be sustainable. “The current agreement was made under duress and is much more likely to collapse over time,” said Bjarne Schieldrop, chief raw materials analyst at SEB, in a statement. “The economic need of Saudi Arabia for a production volume of 12 to 13 million bl / day in a world at 50 dollars / bl, and the strong disgust of Russia for production reductions as a means of achieving higher prices, are fundamental elements that the current agreement cannot circumvent. ”
Saudi Arabia has raised prices for shipments to the United States, a nod to President Trump and the OPEC + deal. But it has cut shipping prices to Europe and Asia, proof that Riyadh has not finished its market share strategy.
“The official selling prices for its oil deliveries in May, which were announced after a week’s delay, should be taken as a warning to other oil exporters if they do not follow the line,” wrote the Commerzbank Tuesday. ” [T]The price war continues to simmer at a low level. “
By Nick Cunningham of Oilprice.com
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