Shale Production Could Contract 1.0 mmbbld Within the Year

As a price-elastic source of supply, U.S. shale production will respond relatively quickly to the steep drop in oil prices, ESAI Energy LLC reported March 16. Already, U.S. exploration and production (E&P) companies are reporting further reductions to their 2020 spending guidance and cutting back on drilling activity. “A new-normal is here, with fiscal discipline and strong balance sheets even more important to weather current and future price volatility,” the firm explained.

ESAI Energy examined three price scenarios and the impact on shale basin production for the rest of 2020 under each situation. A decline of somewhere between 170,000 bbld and 1 mmbbld seems to be in the cards.

A sustained price under $40 will require significant restructuring, with many smaller producers unable to continue operating; bankruptcies will increase. This results in U.S. shale ending 2020 almost 1 mmbbld lower than at the start of the year.

If WTI were to recover fairly quickly to a range of $40 to $50, hedged production and a limited drawdown of drilled but uncompleted wells will initially keep production flat. Yet, spending cuts will prevent enough drilling and completions to fully offset decline, resulting in overall U.S. shale ending 2020 about 330,000 bbld lower than at the start of the year.

A recovery in WTI to over $50 should be sufficient to recover and sustain U.S. shale. Producers will concentrate capital expenditures on maintaining, not growing production, paying down debt, achieving free cash flow, and maintaining a dividend. In this scenario, U.S. shale ends 2020 with only a slight decline of roughly 170,000 bbld.
“So far, we are living in a market of sub-$40 or even sub-$30 oil,” noted Elisabeth Murphy, ESAI Energy shale analyst. “But a year is a long time. We still expect a recovery in prices in the second half. So, we may end up somewhere in between scenario 1 and 2.”

SOURCE: The Weekly Propane Newsletter, March 26, 2020. Subscribe to receive the latest posted and spot prices from all major terminals and refineries around the U.S., featuring a center spread of posted prices that includes hundreds of postings completely updated each week, market analysis, insightful commentary and more.)