US shale oil output falls as drilling activity slumps, highlights an Argus Media news source.
US shale oil output is expected to fall next month
US shale oil output is expected to fall next month as drilling and completion activity slows and legacy output declines exceed new well production.
Oil production in the seven major shale formations covered by the EIA’s monthly Drilling Productivity Report (DPR) is forecast to fall by 18,000 b/d in August — the first drop since December, when bad weather disrupted operations. DPR-7 output growth is expected to slow to just below 6,000 b/d this month as fewer new wells are completed, while legacy declines continue to rise. Output growth has slowed month on month since the start of this year, as drilling and completion activity in the shale sector slumped owing to rising costs, labour shortages and lower oil and gas prices.
US oil rig counts have fallen again
US oil rig counts have fallen again, dropping by 15 since mid-June to 537 by mid-July — the lowest count since April 2022, according to upstream service firm Baker Hughes (see graph). Fewer new wells are being drilled and firms are drawing on their inventory of drilled-but-uncompleted (DUC) wells to help sustain output. Only 933 wells were drilled in June in the DPR-7 regions — 7pc down on the end of last year. But 957 new wells were completed as 24 DUC wells were also deployed to bring new production on line last month. And DPR-7 DUC wells are at their lowest in nine years (see graph).
The business activity index for the oil and gas sector in Texas, northern Louisiana and southern New Mexico stalled in the second quarter, according to the Dallas Fed’s quarterly energy survey. Oil and natural production growth slowed as firms reported rising costs for a 10th consecutive quarter and oil service firms indicated worsening conditions. Around 71pc of oil and gas firms expect that input costs — excluding labour — will be higher at the end of 2023 than at the end of 2022. “Expenses for everything have increased dramatically,” one respondent says. “I would drill if costs were not so high.”
Diverging expectations
But the survey also reveals divergent expectations between large and small firms. Nearly half of larger firms producing 10,000 b/d or more expect drilling and completion costs to be lower at the end of this year than at the end of 2022, while two-thirds of smaller firms producing less than 10,000 b/d expect costs to be higher. Bigger firms typically lock in costs in advance, buying steel and other inputs ahead and agreeing term contracts with service companies, while smaller firms are more exposed to spot pricing. “Wells that are being completed today have been drilled a few months back under a higher service price environment, so things are, I think, softening,” EOG Resources chief executive Ezra Yacob says.
Slowing activity in the sector means that new-well production no longer offsets legacy declines from existing wells, and output will inevitably go into reverse. Legacy oil declines in the DPR-7 regions are expected to rise again to 611,000 b/d (6.5pc of total output), but new-well production is dropping as fewer wells are completed (see graph). DPR-7 well completions were 11pc down in June, compared with the end of last year, and look unlikely to recover soon as firms are cutting back completions. The number of “frac spreads” — completion crews — active in the US remains on a downward trend, data from industry monitor Primary Vision show.
EIA forecasts of US lower-48 onshore oil production, which is driven by shale oil, show output falling slowly this summer from a peak of 10.45mn b/d in April and not recovering to that level before May next year. Overall output is expected to rise by 600,000 b/d year on year for 2022-23, but entry-to-exit growth this year is only 390,000 b/d.
DPR-7 shale oil production drivers
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Source: Argus Media
