REEXAMINING SHALE AS A SWING PRODUCER

PER MAGNUS NYSVEEN AND LESLIE WEI, RYSTAD ENERGY

The notion that shale could be a swing producer was especially interesting at the end of last year when oil price started to fall. The industry believed that shale producers would stop completion activity, resulting in fast production decline, and the backlog of uncompleted wells would be able to quickly add production once prices increased.

The three big plays, Eagle Ford, Bakken and Permian (Midland & Delaware), make up roughly 70% of the unconventional light oil production in the US. The inventory of Drilled but Uncompleted wells (DUC) in these plays has steadily been increasing since 2010, reaching a historical peak at the end of 2014. Several major operators (EOG Resources, Anadarko, and Exxon) have delayed completion activity for the year, but as a whole the total number of uncompleted wells has dropped significantly for these main plays. Figure 1 shows the uncompleted wells for the top three shale plays from 2010 to 2015, where the inventory is derived using the spud and completion date for each well. The Eagle Ford, the largest shale play, experienced a decrease of nearly 30% in DUCs since the end of last year. Of the top operators, Chesapeake, BHP Billiton, and Marathon decreased backlog, while ConocoPhillips and EOG continued to increase inventory.

The Bakken experienced the largest drop in DUCs of the three plays, effectively returning to the 2010 level. All the top operators in the Bakken reduced the backlog of uncompleted wells during this period, with Continental Resources decreasing the most from 149 wells at the end of 2014 to 49 wells in July 2015.

The Permian Midland also experienced an overall decline. The initial decline was driven by Pioneer, but the operator began to build inventory in April as it added more rigs. The current decline is driven by Occidental Petroleum and Apache. The Permian Delaware experienced the lowest decline in DUCs, where the top operators-Concho Resources, EOG, and Oxy-retained relatively flat inventory levels through the first half of the year. On average, there was an approximate 35% reduction in DUCs across the three top plays from the peak in 2014 to July 2015.

The timing of the completion directly affects the play level production. Figure 2 shows the light tight oil production for the same plays forecasted to the end of the year. Instead of cutting production in reaction to low oil prices, operators continued to grow production through the first half of 2015 by reducing the backlog of DUCs. Light tight oil production stopped growing in June 2015 for the first time since shale started producing and is expected to continue declining for the rest of the year.

In order to maintain current levels of production, operators need to increase rig counts. The number of rigs required per play to maintain a balanced production is calculated by combining the rig rates, well performance and legacy production decline. Figure 3 shows the balancing and actual horizontal rig counts for the three main shale plays. The balancing rig rates evolve through time due to improvements in performance, completion technology and focus on 'sweet spots.' In 2014, the three plays delivered strong monthly additions as the balancing rig count was below the actual drilling fleet. Through efficiency gains, the balancing rig counts decreased 30%-40% in 2015. However, the actual drop in the number of rigs of 50%-60% resulted in Eagle Ford and Bakken below the balancing point and Permian around par. Production output in the Bakken for the first five months of the year was supported by the completions of DUCs as seen in Figure 1. A continued reduction of DUCs is not sustainable in the long-run as the inventory becomes depleted. Production in the Permian is likely to continue growing but at a much slower pace as the gap between the actual and balancing rig rate closed.

Earlier this year, there was speculation that the large backlog of uncompleted wells would allow operators to quickly react to an increase in oil price, making shale a possible short-term swing producer. Empirical data shows that in reality, operators continued to increase production for a year after oil prices first started to decline. The large number of operators acting independently makes it difficult for shale to respond like a swing producer.

ABOUT THE AUTHORS

Per Magnus Nysveen is senior partner and head of analysis for Rystad Energy. He joined the company in 2004. He is responsible for valuation analysis of unconventional activities and is in charge of North American shale analysis. Nysveen has developed comprehensive models for production profile estimations and financial modeling for oil and gas fields. He has 20 years of experience within risk management and financial analysis, primarily from DNV. He holds an MSc degree from the Norwegian University of Science and Technology and an MBA from INSEAD in France.

Leslie Wei is an analyst at Rystad Energy. Her main responsibility is analysis of unconventional activities in North America. She holds an MA in economics from the UC Santa Barbara and a BA in economics from the Pennsylvania State University.

Date: 2015-12-11; view: 760