U.S. Oil Production Forecast To Reach Record High in 2018

The Energy Information Administration’s (EIA) latest Short-Term Energy Outlook forecasts total U.S. crude oil production to average 9.3 MMbbld in 2017, up 500,000 bbld from 2016. In 2018, EIA expects crude oil production to reach an average of 9.9 MMbbld, which would surpass the previous record of 9.6 MMbbld set in 1970. The agency forecasts that most of the growth through the end of this year will come from tight rock formations within the Permian region of Texas and from the Federal Gulf of Mexico.
The Permian region is expected to produce 2.9 MMbbld of crude oil by the end of 2018, about 500,000 bbld more than previously estimated and representing nearly 30% of total U.S. output in 2018. The Permian covers 53 million acres in the Permian Basin of West Texas and southeastern New Mexico.

Within the Permian Basin are smaller sub-basins such as the Midland Basin and the Delaware Basin, which contain historically prolific non-tight formations as well as multiple prolific tight formations such as the Wolfcamp, Spraberry, and Bone Spring. With the large geographic area of the Permian region and stacked plays, operators can continue to drill through several tight-oil layers and increase production even with sustained West Texas Intermediate (WTI) crude oil prices below $50/bbl.

Based on data from Baker Hughes, 366 of the 915 onshore rigs in the Lower 48 states in June last year were in the Permian region. EIA forecasts that the Permian’s rig count will fall slightly to 345 and then grow to 370 by the end of 2018. In addition to responding to changes in the WTI price, increases in rig counts are also related to cash flow. In the Permian, operators have been able to maintain positive cash flow because of lower costs, higher productivity, and increased hedging activity by producers, many of whom have sold future production at prices higher than $50/bbl. Available cash flows could potentially contribute to the growth of rigs in this region despite relatively at crude oil prices since December 2016.

EIA’s Drilling Productivity Report expects that productivity in the Permian, as measured by new-well oil production per rig in barrels per day, decreased throughout 2017. Output per rig likely decreased because operators drilled more wells than they completed. Completing a well involves casing, cementing, perforating, and hydraulically fracturing to make it ready for production. When operators drill a well but do not complete it, the inventory of drilled but uncompleted (DUCs) wells rises, which tends to lower output per drilling rig. Oil only flows when a well is completed.

The trend of operators drilling more wells than they are completing does not have a clear cause, but a widening of the WTI-Midland crude oil price discount to WTI-Cushing since the beginning of 2017 suggests the possibility of some minor transportation constraints. Lags in well completion may also reflect implementation of strategies that drill more wells from a single pad, with completion equipment not deployed until all wells are drilled.

(SOURCE: The Weekly Propane Newsletter, January 8, 2018)