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While the EIA and others see U.S. shale production rising through the end of 2024, there are some worrying signs that production may already be slowing.
The two main drivers of U.S. shale production, DUC withdrawals and the rig count, are in decline while 82% of wells drilled in 2022 were to replace legacy production.
With analysts already warning of an oil price spike later this year, a dramatic drop in U.S. shale production will add significant upside to any rally.
I have argued in several Oilprice articles, and most recently in February 2023, that the era of increasing output from shale wells did not have much more room to run absent a price signal that caused a huge increase in drilling. A price signal similar to the one the market received with the onset of the Ukraine invasion, that added 153 rigs in U.S. shale plays from January to June of 2022. Instead, as the market adapted to the loss of Russian oil and gas, and worries about the strength of the economy cast doubt on demand, prices began to soften throughout the rest of the year.
As we approach the midpoint of 2023, WTI prices have mostly stayed in a $70-$80 range, continuing a pattern that established itself in late Q-4, 2022. There is nothing in the next few months that will interrupt this pattern, but if we look a little farther out, in the next six to eight months, we can make a case for a transformative drop in U.S. domestic production.
Subtle changes in the U.S. E&P landscape
Low oil prices from 2019 through December, of 2021 drove a decline in DUCs from ~4,000 to 1,446, more than 75%. During this period, oil companies desperate for revenue and needing to control costs thanks to oil prices below $70 per barrel, turned to DUCs to maintain output. Post-January 2022, higher oil and gas prices drove a rapid increase in drilling, and attenuated the trend toward DUC activation as the year wore on. From January of 2023, both DUC withdrawals and drilling have declined and shale output has essentially flatlined around 9,300 mm BOPD, according to the monthly EIA-Drilling Productivity Report.
Drilling doesn’t begin to pick up until June 2021 and it’s not until June 2022 that the rig count-dedicated to oil, rises above 600. The rate at which I estimate is necessary to grow production beyond the natural decline rate, ~40% annually, of shale typically.
We have had about 600 oil rigs turning to the right since the middle of last year. Since June 22, we have gone from 8.7 mm to 9.4 mm BOPD in shale output, or about 700K BOPD of increase. That’s less than 58K per month of new production, meaning that about 82% of the ~14K wells drilled in 2022 were to replace legacy production. It only gets worse from here.”
What happens from here?
I’ll start with another graph. Beginning in January of 2023, you see a sharp decline in the rate of new oil added per month. This is consistent with the fact that the first DUCs since Jan-21, are watering out as production falls below 50 BOPD, just as the oil-rig count has dropped below 600. This means that the two drivers – DUC withdrawals and an increasing rig count – that have propelled production to post-Covid highs are in retreat, and there is only one outcome possible. Daily shale output is nearing an inflection point and may soon start a rapid decline, that will be impossible to reverse, absent a huge increase in the rate of drilling new wells that cannot be sustained in today’s market.