By - Jim Vess

U.S. shale oil production to remain strong, shale gas production cools due to weak prices

Energize Weekly, December 18, 2019

U.S. shale oil production will continue to grow over the next few years, despite weak investment and commodity prices, while increases in shale gas production will slow.

That is the picture drawn by an analysis of shale oil by Rystad Energy, an Oslo-based energy consultant, and natural gas forecast by Enverus, an Austin, Texas-based industry analytics firm.

The forecasts come at the same time proven U.S. reserves increased 12 percent for oil and 9 percent for natural gas, according to the federal Energy Information Administration (EIA). Proven oil and condensate reserves reached 47.1 billion barrels and natural gas reserves were put at nearly 505 trillion cubic feet.

Rystad, in its “base case” scenario, puts shale oil production growth rate at 10 percent a year compounded, reaching 11.6 billion barrels a day in 2022.

The base case scenario assumes a price for West Texas Intermediate (WTI) crude of $44 a barrel in 2019 rising to $55 a barrel in 2022.

That increase in production would come in the face of some stiff economic headwinds.

Without deeper cuts by Organization of the Petroleum Exporting Countries (OPEC), Rystad Energy is forecasting “a substantial build” of global crude oil stocks leading to a drop in oil prices.

The U.S. shale sector is also seeing a retrenchment in investment, following a string of in-the-red balance sheets and bankruptcies. Shale investments are down 6 percent to $129 billion in 2019, and they are expected to fall another 11 percent in 2020.

The industry hasn’t seen two successive years of declining investment since the recession and oil price crash of 2014.

The number of horizontal drilling rigs operating in the U.S. has also dropped with a rig count of 695 on Dec. 6, 2019, compared with 933 a year earlier, according to oilfield services company Baker Hughes.

Still, Rystad Energy said it has not seen a significant fall in the number of wells spud.

“In spite of the decline in spending and activity levels, the North American shale supply is not following the downward trend,” Sonia Mladá Passos, a Rystad Energy product manager, said in a statement.

Rystad Energy said it expects drilling activity to remain relatively flat at around 17,000 spudded wells per year, on average, in its base case scenario.

If prices remain flat, however, at $45 a barrel for WTI production through 2022, production is projected to plateau at 10.1 million barrels a day in 2022, with North American shale-drilling activity to be cutback as much as 26 percent in 2020 compared to 2019.

In contrast to shale oil, shale gas production is cooling after years of breakneck growth, according to Enverus.

After annual increases in output of 8 to 9 billion cubic feet a day in 2018 and 2019, Enverus is projecting a 2 billion cubic feet a day in 2020.

“Natural gas production has been increasing rapidly since 2006, with a notable growth acceleration taking place starting in 2017,” Rob McBride, Enverus senior director of strategy and analytics, said in a statement.

In the last three years, some shale-gas plays grew by 32 percent, equal to 23 billion cubic feet of gas a day, while at the same time, demand for natural gas in the U.S. was only 6 percent above the average.

“We’ve also seen a steady drop in prices, which may be great for consumers, but challenging for producers,” McBride said.

Adding to the brakes on production have been pipeline constraints and the same pressure on balance sheets and investment oil drillers have seen.

“We’re expecting a significant slowdown in the growth of U.S. natural gas production next year,” McBride said.

The Enverus projections were made on commodity prices of $55 a barrel for WTI and $2.50 a million British thermal units (MMBtu) of natural gas.
“There is also downside risk on this forecast, which is most likely expected to get reduced once guidance is finalized in the next couple of months,” Enverus said.

Exports of liquefied natural gas (LNG) will provide a needed growth market for U.S. production, but Enverus said it expects gas inventories to remain high at the end of the season, at 1.7 to 2 trillion cubic feet. “This level will push prices down in 2020. Enverus expects gas prices to average $2.50/MMBtu starting in 2020,” the company said.

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