US oil production surged to a record 11.36 million b/d in August 2018, more than 2.11 million b/d increase from the previous year, reports Platts.
US oil output
Four months later, US oil output would break the 12 million b/d mark for the first time. The US Energy Information Administration (EIA) forecasts that US oil output may have broken the 13 million b/d threshold just last month.
Largely fueled by continued growth in the Permian, US oil output is expected to continue to shatter records well into 2020.
US crude oil growing pains
But US crude oil could be feeling some growing pains and, while more records will be broken, the explosive development of US shale oil may have peaked.
Peak growth hit
“Without a substantial oil price increase, we have likely hit peak growth even as peak production remains in the future,” said Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact.
US oil production year-over-year growth rates have been more than halved in just over a year as production growth in Texas and North Dakota, the US’ top oil producing states, has fallen to the lowest levels in roughly two years.
YEAR-OVER-YEAR US OIL PRODUCTION GROWTH SINKS
Texas
- In September, for example, US oil output averaged 12.47 million, yet another record high, but an increase of only 965,000 b/d from September 2018.
- A year earlier year-on-year oil production growth was at nearly 1.99 million b/d.
- Texas produced a record 5.23 million b/d this September, up only 593,000 b/d from September 2018, its lowest rate of year-on-year growth since October 2017.
- Just a year earlier, Texas was seeing year-on-year growth of nearly 1.1 million b/d.
North Dakota oil output averaged 1.4 million b/d in September, up just 58,000 b/d from September 2018 and the lowest year-on-year growth since July 2017.
Domestic oil growth slowdown
No one disputes that a slowdown in domestic oil growth has taken root, but there is rampant debate over what may be causing. There are multiple factors, analysts said.
Frank Verrastro, a senior vice president at the Center for Strategic and International Studies’ energy and national security program, said that some “below-ground” issues are contributing to the slowdown in growth, including frac hits and flowback issues and declining productivity of longer laterals in marginal areas, but “above ground” issues are always adding complexities to US producers.
These include demand growth questions, trade issues and regulatory concerns, including potentially stricter flaring rules, Verrastro said.
Slowdown in demand
Sami Yahya, a senior energy analyst with S&P Global Platts Analytics said that a slowdown in overall global oil demand, caused by everything from Iran sanctions to the dip in global GDP, is one issue. Another big one, of course is price.
Brent has generally traded between about $53/b and $75/b over the past year.
“The lower realized crude price environment has pushed most operators to shift their priorities, focusing less on growth and more on paying back debt and investors,” Yahya said.
Capital discipline
Operators have reduced their active rigs, dipping more into their inventory of drilled but uncompleted wells, which offer a cheaper production options since wells are already drilled and capital already spent.
Capital discipline, analysts said, has become a major factor in the slowdown in production growth.
“Gaining additional capital to spend isn’t as easy coming around as it used to be,” Yahya said. “The focus is on increased returns, not really further production growth.”
The influence of the financial community is having a direct impact on production growth, said Webster with Boston Consulting Group.
“The shift from an internet-style company that was rewarded for growth, to a more traditional company that needs to return cash to investors, changes the dynamics considerably and effectively increases their cost of production,” Webster said.
“We have already begun to see the shift toward the majors and, in the future, these will be the leading indicators.”
But the stagnation in growth could prove to be cyclical and, ultimately, result in higher prices and more record-breaking year-on-year growth, said John Auers, executive vice president with Turner, Mason & Company.
“We do think this will lead to higher prices and a bit of a rebound post-2021,” Auers said. Growth, it seems, will be somewhat constrained until then.
EIA forecasts US oil production to average 13.41 million b/d in November 2020, up just 380,000 b/d from November 2019 and just one-fifth the rate of production growth the US was seeing two years earlier.
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Source: Platts
