U.S. tight-oil producers have absorbed up to 40 per cent of global cuts to capital expenditures, but have cushioned the resulting production declines by boosting productivity per well, a leading industry consultancy says.
Edinburgh-based Wood Mackenzie said Thursday that the global industry will cut capital expenditures by $370-billion (U.S.) in 2016 and 2017 compared with its 2014 forecast, with $150-billion in the onshore United States sector, which is now dominated by the tight-oil producers.
The much-watched rig-count numbers fell precipitously after prices collapsed in 2014, bottoming out in May before climbing slightly in the past two months. But companies have found ways to squeeze out more production than the lower rig numbers would suggest, WoodMac analyst Jeanie Oudin said.
"People expected that overall tight-oil production would collapse when companies stopped drilling; however, it hasn't collapsed, it's only declined," Ms. Oudin said.
That's because companies have focused their spending on higher-yielding properties, improved drilling techniques to boost productivity and slashed prices paid to service companies.
Still, companies will require significantly higher prices – sustained above $60 (U.S.) a barrel – to increase activity enough to halt the decline in crude production in the lower 48 states, she said.
U.S. tight-oil companies are considered the swing producers in the global marketplace because they have shorter lead times for projects than oil-sand or deep-water producers, and are more sensitive to market pricing than state-owned oil companies. Even as Canadian supply continues to grow, U.S. production declined by 1.1 million barrels a day between its peak in April, 2015 and this past June, the U.S. Energy Information Administration said this month. And it is expected to continue to fall until early 2017, based on the EIA's current price forecast.
Oil prices breached $50 last month but have fallen back amid continuing signs of glut, both of crude and of oil products, such as gasoline. North America's trendsetting West Texas Intermediate lost $1 a barrel, or 2.2 per cent, to close at $44.75, as analysts pointed to swollen gasoline inventories in the U.S. that will lead refineries to cut back on their crude demand.
Despite the sharp decline in American production, Wood Mackenzie and the EIA say there have been offsetting factors that kept U.S. supply from falling even further and faster.
The productivity of new wells has soared over the past year in the leading tight-oil areas: up 24 per cent in North Dakota's Bakken; 30 per cent in the Eagle Ford area of southeast Texas; and 31 per cent in West Texas's Permian basin, according to the EIA.
"While declines from existing wells are expected to result in a net decrease in production, increased drilling and higher well productivity are expected to soften the decline," it said this week.
Crude prices sank below $30 in January, and the EIA said the increase since then has stimulated increased drilling. The number of rigs working in the U.S. is up 43 over the past two months, although activity is still half of what it was a year ago.
Ms. Oudin of WoodMac said the higher productivity comes from a number of factors, some of which may be reversed when prices recover and activity picks up. But she added that tight-oil producers are unlikely to ramp up production as quickly as they cut it back.
"We don't see it rebounding quickly back," she said in an interview from Houston. "We think operators are going to be a bit cautious and controlled in their response. They're going to need to see a more steady state – oil above $60 for a considerable period of time – before they increase capital allocation to some of these plays."