July 6, 2020
AliExpress WW
Is US Oil Dominance Coming To An End?

Is US Oil Dominance Coming To An End?

AliExpress WW

Posted by Arthur Berman through OilPrice.com,

AliExpress WW
  • The US energy dominance agenda is dead as the country’s shale industry is experiencing a sharp decline in production.

  • In the United States, the number of drilling and shale drilling rigs fell 69% this year from 539 in mid-March to 165 last week.

  • In the next couple of years, dependence on US oil imports will increase.

US energy dominance is over. Next year, production is likely to decline by 50%, and there is nothing to be done about it. This has nothing to do with the lack of profitability of oil shale or other stupid memes referred to by people who do not understand energy.

This is due to the low number of rigs.

In the United States, the number of drilling and shale drilling rigs fell 69% this year from 539 in mid-March to 165 last week. Dense oil production will decline by 50% by this time next year. As a result, by mid-2021, US oil production would decline from less than 8 million barrels per day.

What if the number of rigs increases between now and then? This will not make any difference due to the delay between the drilling contract and the first production.

The party ended for the dominance of slates and the United States.

Energy domination over

Hard oil is the foundation of US energy dominance. The United States has always been a major producer of oil, but it has moved to the top row of oil superpowers since limited-range oil production has increased production from 5 to more than 12 million barrels per day between 2008 and 2019 (Figure 1).

Traditional production has been declining since 1970. It fell from almost 10 million barrels per day in 1970 to 5 million barrels per day in 2008.

Figure 1. Hard oil is the foundation of US energy dominance.

Traditional production has been declining since 1970. Dense oil production increased US production to more than 12 million barrels per day in 2019.

Source: EIA and Labyrinth Consulting Services, Inc.

Tight oil rig counts and oil production

Drilling rig counting is a good way to predict future oil production, provided that proper breaks and delays are taken into account.

A few months elapse between the price increase signal and the signed contract for the rig. Another 9-12 months pass from the launch of the well to the first production for tight oil wells. When drilling on the sites, as a rule, all the wells on the site must be drilled before entering a command to break the wells.

Horizontal dense oil production reached 7.28 million barrels per day in November 2019, when the number of lagging drilling rigs amounted to 613 (Figure 2). This corresponded to 12.9 million barrels per day of oil production in the United States – oil production is about 55% of total production. Approximately 600 rigs are needed to maintain 7 million barrels per day of dense oil and 12.5 million barrels per day of production in the United States.

The number of horizontal drilling rigs is now 165, so a drop in production is inevitable. Significant lags and breaks mean that we can not expect a decline in production decline until 2021, if we assume that it will begin to grow immediately. This will not happen due to limited budgets and low oil prices.

Fig. 2. 600 dense oil rigs to maintain tight production of 7 million barrels per day / 12 million barrels per day of total US production.

In May, the number of rigid drilling rigs was 207, so a decrease in the second quarter of the United States to 8 million barrels per day is inevitable. Production should increase this summer with reactivation, and then fall in the fourth quarter of 2020.

Source: Baker Hughes, IEA DPR, Enverus, and Labyrinth Consulting Services, Inc.

US manufacturers shut down most of their wells in May because oil prices fell and storage reached its limits. Dense oil production decreased by more than 1 million barrels per day to 6.2 million barrels per day, and total US production is about 10.5 million barrels per day.

Given that the storage crisis is now apparently averted, and with slightly higher oil prices, the most inaccessible oil wells are recovering. Production should increase until all closed wells return to work and then resume decline.

Based on an analysis of the number of rigs, U.S. oil production is likely to be approximately 8 million barrels per day by mid-2021, or more than 4 million barrels per day below peak levels in November 2019.

Bid reduction killer Require a lot of rigs

A decrease in US crude and condensate production is inevitable, given the number of installations they currently have. This is because the tough rate of oil decline is really high.

Figure 3 shows the rate of decline in shale gas production in the Perm basin by years of first production. On average for all years 27% per year. Recently, drilled wells have been declining at a faster rate due to better drilling and completion technology. The problem is that the wells do not have large reserves – they simply produce reserves faster. This means higher rates of decline.

Figure 3. The annual decline in the Perm basin for horizontal tight oil wells is 27%

The rate of decline is usually increased for wells drilled in recent years due to higher initial production rates.

Source: Enverus and Labyrinth Consulting Services, Inc.

This is not criticism of plays or companies. This is just a fact.

And that is why it is extremely important to constantly drill 500 or 600 drilling rigs in order to replace 30% of losses lost every year with depletion.

Production can be turned off and on, as it was in May and June. Production cannot be increased without adding drilling rigs and drilling new wells. Assuming there is infinite capital to add rigs and drill wells, it will take several years to increase the number of rigs to the levels necessary to maintain production levels in 2019.

Drilled, incomplete wells (DUCs) may lead to some slowdown in production decline. However, it is important to note that completion requires at least 50% of the total cost of the well. Capital constraints and low oil prices will affect the ability and enthusiasm of companies to complete the DUC.

After the last collapse in oil prices, it took 2.5 years for the number of narrow oil rigs to increase from 193 in May 2016 to 618 in November 2018 (Figure 3). During the last oil price collapse in 2014–2017, there were thousands of DUCs, but they did not have much impact on the decline in production.

The current number of rigs in June 165 will continue to decline for several months due to low oil prices and capital expenditures.

Fig. 4. It took 2.5 years to increase the number of drilling rigs from 193 in May 2016 to 618 in November 2018.

The number of drilling rigs in June, equal to 165, will decline over the course of several months, based on oil prices and investment budgets.

Source: Baker Hughes, IEA DPR, Enverus, and Labyrinth Consulting Services, Inc.

Oil rigs do not produce, and wells produce

I have shown how rig counts, production lags and rates of decline are used to estimate future production levels. This approach is useful, but the truth is that drilling rigs do not produce oil, but wells.

Therefore, another approach is to compare the number of tight oil wells that have been drilled and completed during each of the last 5 years with the corresponding average production rates for each of these years. Then, using the current data of drilling and completion, we can make an annual forecast and predict what the volume of production in 2020 will be.

This approach assumes that by 2020 the production of dense oil will be approximately 30% less than in 2019 (Figure 4). Since in 2019 crude oil production was 56% of total US production, we can estimate that US production will average about 8.7 million barrels per day in 2020.

Figure 5. US production in 2020 will be less than ~ 8.7 million barrels per day, compared to 12.3 million barrels per day in 2019.

The number of completed tight oil wells is expected to be approximately 30% less than in 2019. 8.7 million barrels per day is approximately 25% less than the US EIA forecast for 11.6 million barrels per day in 2020.

Source: EIA and Labyrinth Consulting Services, Inc.

This is similar to the estimate obtained from the rig counting approach. However, this is approximately 25% less than the EIA forecast for 2020 for oil and condensate in the United States.

Energy dominance and green paint

Much lower US oil production has a bad effect on Trump’s anthem of energy dominance and its consequence that the US is energy-independent. Even worse for US oil prices and the balance of payments after recovery in demand. We will have to import even more oil than today, and it will cost more.

The idea of ​​US energy independence is ignorant at best, and at worst deceiving. The United States imported about 7 million barrels per day of crude oil and condensate in 2019 and more than 9 million barrels per day of crude oil and oil products. This is almost as much as China consumes – the second largest economy in the world.

The US is a net exporter, just like shale companies make huge profits by keeping a record of sleight of hand.

The United States imports foreign crude oil, refines it, and then exports it. If a country imports unpainted cars, colors them green and then exports, is it a net exporter of cars? No, this is an exporter of green paint.

The US is screwed when it comes to medium-term oil production. This is not due to Covid-19. The number of drilling rigs in the United States began to decline 15 months before anyone knew about the Covid-19. Even if the path to economic recovery and oil demand is faster than I think, it will take a long time to return to 12 or 13 million barrels per day of production.

There is every reason to expect that much lower US oil production will ultimately lead to higher oil prices. This could lead to the resumption of drilling and another cycle of overproduction and lower oil prices. This is how things evolved in the past.

But a new phase of economic reality and oil pricing is unfolding, and no one knows where this will lead. A decrease in demand may mean that a decrease in US oil production is advisable. The only thing that seems indisputable is that the United States will not be the oil superpower that it was until 2020.

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