US oil and shale output – May 2019

Published at 19:41 31 Jul 2019 by . Last edited 11:18 22 Aug 2019.

US liquids production averaged 18.1 mb/d in May, higher y/y by 2.2 mb/d but lower than our expected 2.3 mb/d growth. This is because crude production inched lower by 26 thousand b/d m/m to 12.11 mb/d (higher y/y by 1.65 mb/d), while we projected a m/m rise of 48 thousand b/d. At the end of May, US crude production was just 70 thousand b/d higher than the 2018 exit rate, with April’s strong reading also revised down by 27 thousand b/d to 12.13 mb/d. For all the market’s fears that the 0.5 mb/d weekly adjustment factor was entirely due to underreported production and would show up in much higher final output figures, May crude output was in fact 0.14 mb/d lower than the weeklies. In May, Texas (+16 thousand b/d), New Mexico (+33 thousand b/d), and Colorado (+12 thousand b/d m/m) output rose while North Dakota remained relatively flat (+3 thousand b/d m/m) and Oklahoma (-12 thousand b/d m/m) saw declines.

Gulf of Mexico (GoM) production totalled 1.9 mb/d in May despite falling m/m by 78 thousand b/d. Operators continued to add tiebacks to existing facilities, such as the Phoenix complex, and new projects that come online ahead of schedule, such as Shell’s 0.18 mb/d Appomattox, which achieved first oil on 22 May. Across July, Hurricane Barry took out an estimated 0.3 mb/d of production and caused USGC sour differentials to soar, highlighting just how vulnerable sour differentials are to disruptions. The sweet/sour compression lasted for the longest time since January 1999. As a result of the production loss, we have revised our GoM growth forecast for 2019 down by 30 thousand b/d to 0.13 mb/d.

To maintain production growth under greater capital discipline, US producers have turned to M&As and the drawdown of DUCs, which require less capital than a new well given the sunk costs. With regards to the latter, the latest EIA Drilling Productivity Report (DPR) from 15 July revealed another m/m decrease in DUCs across the Bakken, the Eagle Ford, the DJ basin and the Anadarko basin. The Permian may soon follow suit after the ratio of completed wells to new drilled wells increased to 0.92 in June, its highest in the last 12 months. A ratio of more than 1 points to DUCs being run down, and the Permian is fast approaching that level. In the M&A space, following the Occidental-Anadarko transaction, Callon Petroleum announced a $3.2 billion acquisition of Carrizo. The deal allows the combined entity to capitalise on contiguous acreage in the Delaware basin due to higher efficiencies and better combined well performance. Taken together, M&A activity and DUC completions should help producers continue to grow output. Our analysis suggests that average m/m production growth of 0.1 mb/d is needed from US onshore production in H2 19 to meet our 1.3 mb/d y/y growth forecast for 2019, although there is growing downside risk to our figure.

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