US shale oil recovery underway

From Deutsche:

As a response to a both (i) a stronger oil-price environment and just as importantly (ii) a more reliably stronger oil-price environment, we believe a steeper increase is likely in US onshore rig activity in 2017 than we previously assumed. While our previous assumption (+5 rigs per week) have proven too aggressive relative to the recent slow-down, a resumption of this rate of increase now appears likely at some point. In our revised base-case scenario, we assume that additions currently running at +10 per month double to +20 per month from December 2016 through June 2017 and then level out. We also assume that rig productivity growth slows almost to a plateau instead of rising along the current trajectory as the effect of high-grading reverses.

The cumulative contribution of maintaining a larger number of active rigs over a longer period of time turns into a much larger effect in 2018 than 2017. The result is that while we would see only a 60 kb/d increase in 2017 average production (from US tight oil decline of -357 kb/d to -297 kb/d) we would expect a much more significant 459 kb/d increase in 2018 average production (from US tight oil growth of +200 kb/d to +659 kb/d).


After including our assumptions for other US production After adding growth in NGLs (+240 kb/d) and the Gulf of Mexico (+90 kb/d) this still leaves headline US liquids production roughly flat in 2017 (-30 kb/d), and up +750 kb/d in 2018. The summarized inputs and resulting production forecasts are seen in Figure 6 to Figure 9.


…Notwithstanding large swings in the inventory error term, the broad decline in US onshore tight oil production has largely progressed according to expectations, and could rise substantially under the high rig ramp scenario which we assume as a consequence of tighter fundamentals post-OPEC, Figure 28. Given that rigs were added at a faster-than-expected rate for most of July and August, Figure 29, and considering that we expect US Gulf of Mexico offshore production to grow by 90 kb/d in 2017, we now believe that US overall crude production may be bottoming over the course of the fourth quarter and that it will begin to show consistent growth in Q1. Given the progression of oil prices, we believe rig counts may now stabilize and show some bias towards small declines over the balance of the year, in response to the previously established 2-3 month lag to the oil price. In the US onshore tight oil sector, the overwhelming dominance of the Permian Region in terms of rig additions (accounting for 68% of additions since June) means that we expect Permian Basin production to exceed combined tight oil production from all other regions by April 2017.


Last year’s prospects for US onshore cost deflation have largely been realized. In September 2015, we stated that 32% of 2016 US tight oil assets by volume would breakeven (yielding 10% IRR) based on a -15% deflation assumption and the Cal-16 strip at USD49/bbl, while 83% of 2016 volume would breakeven at the same level on a -30% deflation assumption. Today, we revisit these metrics and see that 69% of US onshore oil-only assets totaling 36.6 bn bbl in remaining liquids reserves would be economic at or below WTI USD 49/bbl, Figure 30, suggesting that more than 15% and closer to 30% cost deflation has been achieved relative to the 2014 benchmark.

This is highly amusing stuff. If you combine the Deutsche forecast US turnaround with a rebounding Libya and Nigeria you get nearly 2mmb/d more oil versus a 0.2-0.7mmbb/d OPEC cut for 2017.

I wonder when markets will wake up!

David Llewellyn-Smith
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  1. Add to this the insights around China’s strategic stockpiles and a potential tapering of demand, and the moving parts are numerous. If they just happen to synchronize it will be interest to read the updated forecast as they play catch-up with the data

  2. US LTO production is presently falling by about 60K BOPD per month and conventional oil projects are dead in the water with recent additions sanctioned 2-3 years ago in a different oil price environment.
    Assuming a generous initial 30 day average flow of 800 BOPD from an average LTO well in the industry, stabilising output would require about 75 additional wells to be completed per month, which would need about 75 additional drilling rigs, if the process of drilling and completing a well takes 30 days. (ignoring wells that have already been drilled and sit in waiting for completion)
    Since rigs started to roll out, about 100 additional rigs have entered service and the rate of US light tight oil production decline from the LTO fields has fallen from about 130K BOPD to 60K BOPD. Many more rigs will be required to lift new production to the point where it offsets decline from legacy fields and thus stabilises output.
    If there is a cash operating margin (after finance and overhead outlays) of say US$25/bbl on oil produced at US$50/bbl, an average well might show payback after two years, given normal production decline rates.
    I wonder where the funds will come from to support this effort, since it will not wash its face on a cash flow basis?

    BHP has said that it needs an oil price of US$50/bbl with gas at US$3.50/mmBtu to be cash flow neutral. Given the large number of US oilers currently going to the wall, I am not as optimistic that US oil production will bounce back during 2018. Sure the rate of decline seen from 9.6 mmBOPD to 8.6 mmBOPD may slow, but a further 500K to 700K BOPD decline is almost inevitable I think.

    • Regardless of how this plays out, the big picture is: oil is going to be a lot cheaper for a lot longer, than the “peak oil” doomsayers have been going on about like a stuck record.

      Human ingenuity is going to win this one again. This guy is right:

      The biggest risk to humanity is unintended consequences of utopian, chicken-little policy responses in place of “markets and price incentives”.

      • A dramatic withdrawal of capital from the oil patch globally over the past two years will result in significant shortages of oil by 2018 with a much higher oil price required to clear and balance the market. The big issue will be at what price will oil again kill the economy, as it did when it went over US$140/bbl pre-GFC.

        The ‘abundance’ of oil that we saw in 2014 was delivered at a massive cost, with the support of funds from Wall Street, just as the preceding property boom in the early 2000’s was delivered by low-doc loans which were then collateralised and eventually caused the GFC when they defaulted. So far over 100 US based oil and gas companies have gone bust and many more are hanging on by a thread. Great work by the human economic machine!

        BHP Billiton has written off US$15.5 billion from its light tight oil business, which has never delivered a positive free cash flow. The whole Bakken Shale play in ND has so far absorbed about US$32 billion of funds and was free cash flow negative even at US$110/bbl. This is not a cash generating business!

        If you are interested to see what 7.5 billion people can do as far as crapping in their nest, have a look at some of these pretty pictures.

        There are significant challenges ahead as the current system creates massive wealth disparity. The wealthiest 0.1% of US families now hold as much wealth as the bottom 90% and in real terms. This sort of inequality is increasingly seen within and between countries and is increasingly a source of social instability. US real wealth per person peaked in 1973.

        But there is no doubt that humans are the the sapient ones, we just need to figure out how to stop that big brain from destroying us.

      • The cause of the accumulation of wealth by the top 0.1 % in Piketty’s data rests almost entirely on zero-sum inflation in urban land values, a legacy of modern-era regulatory distortions. Volatility in bubbles is also increased. These are widespread, and financial instrument market shenanigans are not essential for trouble to be caused.

        The real economy of resources and their conversion to real wealth, will find its own level regardless of artificially cheap credit availability. I am not in favour of the latter, period. Generally these policy approaches are not coming from advocates of “the free market”, but from liberal-left “central planning” believers. Central planning in money supply, central planning in urban growth, a mega-toxic combination.

        The best indicator of the connection between economic growth, human freedom and ingenuity, and environmental toxicity, is to be found in The Blacksmith Institute’s data base of the world’s most polluted places. Communist economies have tended to take all honours, historically. We are seeing unintended consequences of utopian centrally-planned policy responses to “crises” once again, as faith in central planning replaces faith in price signals. This is the biggest threat.

        The more developed an economy gets, the cleaner its environment gets, and the more land it salts away in reserves and parks and heritage. “Urban sprawl” is nowhere near the amount of land that used to be needed for growing food for horses and draft animals. Doomsayers are always myopically focused on “negatives” and don’t see net progress no matter how large.

      • 1. Nearly 700 million Chinese people drink contaminated water
        2. For every 1 million tons of oil that is shipped, 1 ton is spilled.
        3. If you spend one day in Beijing breathing the air, it has the same health effects as smoking 21
        4. While Americans make up only 5% of the world’s population, they account for 30% of the
        world’s waste and use 25% of the world’s resources.
        5. 1 in every 8 deaths on Earth can be linked to air pollution.
        6. The pollution hovering above China is visible from space.
        7. Marine creatures swallow plastic bags because they think they are edible jellyfish.
        8. 14 billion pounds of garbage are dumped into the ocean every year and most of it is plastic.
        9. Breathing the air in Mumbai for one whole day is equivalent to smoking 100 cigarettes.
        10. 3.4 million people die each year because of water related problems.
        11. Russia’s Lake Karachay is the most polluted and contaminated lake in the world.
        12. In 2012, 49 million tons of waste from electronics were generated.
        13. Plastic bottles take approximately 500 years to decompose.
        14. A child dies every 8 seconds from contaminated water.
        15. Almost a third of the air pollution in San Francisco comes from China

      • “Progress” is never worse than “no progress”.

        People in developing nations willingly come to polluted cities in their droves, to better themselves. Our ancestors did the same. Pre-development life was never utopia, that is an absurd delusion. They still had to keep warm, and cook food – how do you think they did that in all weathers without suffering smoke pollution? A high proportion of humanity in history (and still some today) burn dung, for pete’s sake.

        London was as dirty as Beijing is now, as recently as the 1950’s on some days. In one Sherlock Holmes story, it was mentioned as part of the process of finding clues, that the soot on a windowsill was inches deep. Generating electricity at scale in efficient coal-fired processes remote from cities, was a solution then. They called it “coal by wire”. Now utopian Greenies think coal-fired power generation, period, is evil. Particulate pollution is a problem needing eradication first, and efficient large-scale coal power generation was exponentially lower creator of particulate pollution than on-site burning for energy. Beijing will become clean within a generation.

        Developing countries today have a massive advantage in that the technology is already there, that took our ancestors centuries to invent and commercialise.

        Nothing caused deforestation like primitive hunter-gatherers setting fire to forests to drive prey into the open. The early industrial revolution used wood from trees to burn for energy. The utilisation of coal saved the forests. In Victorian times they were worried about “peak horse shit” in cities, if growth had carried on at the same rate, civilisation would be buried in horse shit. The automobile solved that, and also released a truly massive amount of land from the purpose of growing food for the horses. And so progress goes on, and all that a certain class of people can do is moan and bitch about the “negative externalities” associated with the stage of development we are at.

        The one political system of development that has scored a big fat “fail” is centrally planned systems and one-party state systems. Have you learned anything from this, in fact are you even aware of it? I can give you a reading list.