US oil and shale output – Jan 2017

Published at 20:34 31 Mar 2017 by . Last edited 11:17 22 Aug 2019.

US liquids production rose to 13.31 mb/d in January, with y/y declines reducing to 0.24 mb/d. Crude production ticked higher by 60 thousand b/d m/m to 8.84 mb/d, although it was still lower y/y by 0.36 mb/d. This trend was driven by Texas (+41 thousand b/d m/m although it remained lower y/y by 0.17 mb/d), and in particular output from the Permian basin and the Gulf of Mexico (at 1.75 mb/d, up m/m by 19 thousand b/d and y/y by 0.14 mb/d) where the Thunder Horse South Extension project came on alongside ramp-ups at Julia and Stones. Output also recovered m/m in the Midwest, rising by 20 thousand b/d as North Dakotan output rebounded following freeze-offs in December 2016. We expect US output to have continued rising through February and March, with weekly DoE statistics indicating a 70 thousand b/d m/m uptick in February, and an increase of 0.11 mb/d in March-to-date. We expect production to start registering y/y growth from April (for the first time in 18 months), with output likely to be higher by 0.1 mb/d. By December 2017, crude production may be higher y/y by 1 mb/d, with average y/y growth across the year at 0.41 mb/d. The growth is being driven by the Permian basin, where our forecasts indicate average production growth of almost 0.44 mb/d across 2017, with December 2017 exit rate growth of 0.58 mb/d. US NGLs output rose by 62 thousand b/d y/y to 3.37 mb/d in January, as a 71 thousand b/d y/y increase in ethane output offset a 24 thousand b/d y/y decline in production of butanes and isobutanes. Gas plant production of propane rose by 2 thousand b/d y/y as output declined in most parts of the country other than New Mexico, where some gas from the Permian basin is processed, and the Marcellus shale regions in the Northeast. 

Meanwhile, investors continue to focus on how breakeven costs have trended lower; that service cost deflation continues to filter through; and how efficiency gains will make US crude production competitive even below current prices. In our opinion, the availability of capital is of greater importance than breakeven costs. Tight oil production remains a cashflow negative business, and growth is being driven by producers with access to capital. Thus, the production trend being reflected in the Permian reflects the surge in M&A activity and willingness of private equity to put up capital last year. The Bakken and Eagle Ford, where capital has been less forthcoming, declined by 12% and 21%, respectively last year, and production is unlikely to turn higher materially (NDIC does not expect North Dakota production to hit 1 mb/d again until Q4 18, although we believe this is overly pessimistic). In the service sector, while operators such as Haliburton may be guiding towards a market share model, which would the impact of runaway cost inflation for producers, others, such as Schlumberger, have warned of an ‘impending cost inflation avalanche’, as the sector continues to operate at unsustainable pricing levels. This cost inflation is reflected mostly in frac sand, where spot prices are double contracted price rates.

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