The Eagle Ford Soared, Now it will Swoop

Everyone is waiting for the data that says US shale production is on the wane and it never seems to arrive. But the runes are out there for those who want to know.

The EIA publish a great little report which analyses, on a month by month and basin by basin basis, oil and gas production, declines in legacy production and new production added. They even predict a little. The latest report has projected production figures for August and they show the declines beginning to bite in the Eagle Ford, Niobrara and Bakken. The Permian not so much, 

The Permian is more robust for one reason, the decline rate in legacy production is much smaller than the other three basins. I have aggregated the last year's worth of the EIA's monthly decline rates into annual decline rates as that is the figure I am more familiar with. Here is the scoop.

In a year Permian legacy production declines about 36%, Bakken about 49%, the Eagle Ford 63% and the Niobrara about 65%. Those are pretty eye watering decline rates compared to conventional production, that's why growth in production took over 1,000 rigs working simultaneously in these four basis and why with less than half that number of rigs working, eventually decline will catch up with you.

The talk is that rig productivity and production per well is soaring and the US shale industry is using technology to defeat the market forces unleashed by OPEC.

Bakken, Rig Count and New-well oil production per rig; Source EIA

Bakken, Rig Count and New-well oil production per rig; Source EIA

To an extent that is true. But we have been here before. Take a look at this graph of new production per rig and rig count in the Bakken. When the financial crisis hit and oil prices collapsed in 2008 the rig count halved, just as it has done today. Productivity per rig soared, but it was a chimera, of course operators high-grade their portfolio drill up the best targets and discard the poor performers. Within 18 months the gains were reversed.

Now this time it is a little different, technology has definitely been helping long before the price slump, how long that can continue no-one knows, but eventually the industry will start to run into technical limits on performance. It is hard to project too far in advance but I would expect the gains of recent months to reverse as operators mop up the easier targets and eventually have to grind through some of the less promising areas.

How that will pan out is all speculation, but then speculation is my forte. I also expect a modest recovery in the number of rigs working as we approach the end of the year, maybe up from 465 in June 2015 to, say 540, by December. As I said, I expect some of the gains in productivity to reverse, but nothing massive and more to the point I also expect the relentless decline in legacy production to continue. To my mind that all adds up to the beginning of a reversal in US shale production. Production from these four basins peaked at c. 5.4 mmbbls per day in April of this year, but by the end of the year I am estimating that production will be down to 5.0 mmbbls per day.

Historical data: EIA; forecast The Steam Oil Production Company Ltd.

Historical data: EIA; forecast The Steam Oil Production Company Ltd.

If the price had never fallen it doesn't take a rocket scientist to see that production might have reached 6 mmbbls per day by December of this year. It seems clear that Opec will have forced a million barrels per day of US domestic production out of the market and its pre-emptive action will have protected its market share pretty effectively.

However, price recovery will depend on demand and events, and predicting events is jolly hard.