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Low prices hit fragile shale sector, 1 million b/d may soon be lost: analysts

Highlights

Output could peak in Q2, with collapse in H2 2020

EIA revises output forecasts lower as operators cut spending

Prices expected to weed out less efficient operators

Washington — US shale operators are cutting capital budgets and slashing rig counts in response to the collapse of oil prices, but how hard will the fall in record-setting US oil output be and how long will it take for producers to get there?

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When trying to determine the timing and severity of US shale oil's looming production decline, it is likely a mistake to look at recent price crashes for guidance, said Jamie Webster, senior director at Boston Consulting Group's Center for Energy Impact.

"The industry is more fragile, costs have already been cut sharply, and unlike 2014 when production was spread across the various basins, it is largely a Permian game," Webster said. "In the 2014 price drop, Permian kept growing strongly for six months before finally succumbing to lower activity. At current prices, it is likely to be faster than that this time."

Artem Abramov, head of shale research at Rystad Energy, said up to 1 million b/d of US oil production may be lost throughout this year, with an oil output peak coming at some point in the second quarter as the current seasonal increase in fracking activity dies down. Abramov said he expects a "significant decline" in production in the second half of 2020.

Bakken struggles

North Dakota's monthly oil production last averaged below 1 million b/d in January 2017 and then spent the next three years on a relatively steady climb, hitting a record of nearly 1.52 million b/d in November 2019.

That record may remain North Dakota's oil output peak for a while, but North Dakota's oil output is almost certainly not heading back below 1 million b/d again, the state's top oil and gas regulator said.

"We've looked at a large number of price scenarios and none of them takes us below 1 million b/d in the next four or five years," Lynn Helms, director of the North Dakota Department of Mineral Resources, told reporters late Tuesday. "Never say never in the oil and gas business, but it's extremely unlikely that this goes on long enough to drag us below 1 million b/d."

But the historic declines in demand and an ongoing and global price war between Russia and Saudi Arabia will hit Bakken, and other shale plays; it's just a matter of how hard and for how long, Helms conceded.

"We are in this for a protracted period of time," Helms said.

On Monday, the US Energy Information Administration forecast that US shale oil production will grow by 18,000 b/d from March to April, including 36,000 b/d in growth in the Permian that will be offset by declining or flat growth in every other shale play.

But the forecast, in its monthly Drilling Productivity Report, included multiple revisions lower from the previous month. For example, EIA forecasts Permian oil output to average 4.754 million b/d in March, down 101,000 b/d from last month's forecast for the month.

In its Short-Term Energy Outlook last week, the EIA forecast total US oil production to peak just above 13.2 million b/d in April then fall by as much as 660,000 b/d into 2021 as US shale operators struggle with low prices. A month earlier, the EIA had forecast US output would exceed 14 million b/d by late next year.

Capex Cuts

But even these latest, substantial revisions do not reflect the latest, dramatic cuts in spending by shale operators.

Multiple shale operators have announced plans to cut their 2020 capital budgets by 25% or more, including Hess, which announced Tuesday it was cutting its Bakken rig count from six to one, and ExxonMobil, the Permian's top producers, which said Tuesday it was preparing to "significantly" decrease its 2020 spending.

"We are now seeing rapid response from the US oil-focused E&Ps," said Rystad's Abramov.

Still, he said shale operators are more efficient than they have ever been and can adapt to a changing market quicker than during previous oil price declines.

"The most efficient players will stay in the game, but they will slow down," he said. "We might see a wave of Chapter 11s if we stay in the current price environment. From a macro perspective, it might be positive for the industry as the most leveraged producers will be out and some of them will return with more efficient capital structure."

Similarly, Boston Consulting Group's Webster said the recent collapse in prices will "accelerate the evolution" of the US shale oil sector.

"The big E&Ps and IOCs will hold the reins and the weaker players will fall by the wayside," Webster said. "Fewer players with relatively stronger balance sheets means slower growth and lower breakevens, with smoother reinvestment profiles."