Strong Oil Production Growth May Come to a Halt this Year

News
Stunning growth in U.S. oil production may come to a halt by mid-2015 as low oil prices begin to constrain U.S. tight oil production, which has been the dominant engine of world oil supply gains in recent years, according to a new report by the energy consultancy IHS. Growth is still expected in the yearly months of this year, but that momentum will level off in the latter half of the year amid prices at lows not seen since the 2008-2009 Great Reces­sion.

The new report, based on an IHS study of 39,000 wells, points to the possibility of month-to-month oil production growth coming to a halt in the latter half of 2015, assuming that West Texas Intermediate (WTI) prices remain below $60/bbl. The study identified a wide spec­trum of break-even prices for U.S. crude oil production. About a quarter of new wells in 2014 had a breakeven WTI price of $40 or less. Just less than half of new wells in 2014 had a breakeven price of $60/bbl or less. At the opposite end of the spectrum, nearly 30% of new wells had breakeven prices of $81/bbl or higher. The breakeven level is the WTI price needed to cover capital and operat­ing costs and generate a 10% return.

Hedging programs, finishing work on uncom­pleted wells, contractual obligations, and further drilling of the most economic tight-oil plays mean that many new wells will still be drilled in 2015. But adverse economics and lower spending will lead to fewer wells drilled than in 2014, the report says. Monthly average U.S. produc­tion at the close of 2015 is projected to be about 500,000 bbld above the January 2015 average, but nearly all of that growth will come in the first half of the year. By December 2015, U.S. oil production growth will have been flat for several months, according to the IHS report.

“U.S. oil production has been the main engine of global supply growth in recent years,” said Jim Burkhard, vice president of IHS Energy. “And momentum from strong growth in the second half of 2014 means the impact of lower prices will not immediately drive production lower. But the reality of lower oil prices and less spending on new wells will affect production as 2015 progresses.”

The fate of U.S. oil production growth past 2015 and into 2016 will be shaped by global economic condi­tions, geopolitics, and changes in industry costs, all of which are in a state of flux, according to Raoul LeBlanc, IHS Energy senior director, financial markets, and co-author of the report. “So much can happen over the course of a year,” he said. “If oil prices remain weak and confi­dence in future prices remains shaken, U.S. production in 2016 could possibly flatten or even decline. But there is plenty that could happen—a recovery in oil prices, lower upstream costs, and improved well productivity—that would quickly change the calculus of drilling new wells and reinvigorate U.S. production growth.”

OUR DIGITAL PARTNERS