US shale oil poised to disappoint… OR IS IT?
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Unless you have been living under a rock, you will know that crude oil prices have soaring on geopolitical concerns, speculation that quite a few OPEC suppliers simply can’t open up the taps further and questions about how quickly US shale oil production can ramp up.
Questions have been raised on the last topic with Doomberg reporting that the recent boost in US production is due to producers draining their stores of drilled but uncompleted wells (DUCs) – the store of quick shale oil production that has been locked away for a rainy day.
DUCs are shale oil wells that have been drilled but not fracture stimulated for production using a frac spread.
According to the US Energy Information Administration (EIA), the December DUC reading of 4,616 wells is the lowest since early 2014 and represents a 48% drop from pre-COVID highs.
The actual number of DUCs may actually be lower with Bison Interests noting that historically, 95% of wells drilled have been completed within two years and that DUCs older than two years are considered “dead” and the probability of their completion falls drastically.
Bison added that the quick fall in DUCs is due to completions outracing the pace of drilling, which is a far cry from levels seen in 2019, much less the levels seen prior to the 2014 oil crash.
US shale oil producers have also been cautious about their spending, preferring to focus on well completion over drilling.
This could mean a very real cap on how much the US can offset production declines from existing wells and grow production in 2022 as the existing rig count is still below peak levels with new rigs likely to be less productive due to having inexperienced crew.
However, there is some chance that US drillers might be able to rise to the challenge with energy services company Baker Hughes noting that the rig count – the number of drill rigs operating in the US – had increased by 56% over the same period last year to 613 in the week ending February 4.
Standard Chartered added that the surge in US shale oil output during the fourth quarter of 2021 has gone largely unnoticed with supermajors such as ExxonMobil and Chevron flagging Permian output increases of 25% and 10% respectively this year.
This increase appears contrary to popular opinion that US shale oil producers would limit growth due to shareholder pressure for dividends with the bank noting that high oil prices meant that companies can significantly increase both Capex and dividends.
Further support comes from ConocoPhillips chief executive Ryan Lance who despite warning investors during a conference call that high prices might lead US shale oil producers to add production too quickly, leading to oversupply, he expected the US to add as much as 900,000 barrels of oil per day over the course of 2022.
Primary Vision adds that growth of frac spreads in the Permian is already outpacing 2020 and will reach the levels last reached in 2018-19 levels by the beginning of March.
While these include easier completions, it also reflects the growing focus on Permian activity driven by the majors increasing activity in the region.
“We are expecting to see an increase in crude production by about 500k barrels a day with another 500k barrels of liquids production coming to market,” Primary Vision noted.
“The blend between the two may vary, but we are well positioned to see steady growth in 2022.”
Taken together, this could translate to greater than expected US shale oil production that could ease oil prices from its current levels.