US Shale: 2019 Smashes Records But Is Growth Running Out Of Steam?

US crude output is set to average 12.25mn b/d for 2019, up 1.26mn b/d on 2018’s previous record of 10.99mn b/d, finishing the year just fractionally shy of 13mn b/d, according to the latest EIA stats.

Whilst 2019 growth is well below 2018’s record 1.64mn b/d it is only slightly below the previous record of 1.29mn b/d set in 2014 (MEES, 3 July 2015). And, whilst output largely flatlined in the first half of 2019, it has since leapt, with new records every month since August. Output hit 12.88mn b/d in November and a forecast (based on drilling data) 12.99mn b/d for December.

Keeping spending under check remains the lodestone of the independents who still dominate the US shale sector (although majors are rapidly expanding – MEES, 15 March). But pipeline constraints that also conspired to cap output gains in the first half of 2019 have since been removed (MEES, 18 May 2018).

PERMIAN: MORE WITH LESS

The key Permian shale formation of Texas and New Mexico continues to lead the way in terms of US output growth. Average 2019 Permian crude output of 4.33mn b/d was up 851,000 b/d on 2018, year-on-year gains that are second only to 2018’s 1mn b/d leap. And, despite a reduction in the region’s rig count to 408 for November from 490 a year earlier, the gains show little sign of slowing.

For November, new Permian wells were producing an average of 794 b/d per rig, up from 677 b/d a year earlier and just 215mn b/d at the height of the previous boom in 2014 when the region’s rig count peaked at 559. This figure is unlikely to ever be topped – US services firms continue to lay off staff, an indication that they do not expect a radical uptick in activity anytime soon.

Permian output rose by a monthly average of 66,000 b/d in 2H 2019, up from 51,000 b/d in the first half of the year, as new takeaway pipelines narrowed the discount of crude at the Permian pricing hub of Midland versus Houston on the coast. Discounts have since stabilized at $2-2.50/B. Combined with higher outright prices, this means that Permian producers can currently hedge their 2020 output at an average of $56/B, $10/B up on typical 1H 2019 prices.

Having only topped 4mn b/d for the first time on February, Permian output is set to finish the year with consecutive records of 4.635bn b/d in November and 4.694mn b/d for December, according to the EIA’s December drilling productivity report.

2019’s 851,000 b/d growth in Permian output accounts for more than two-thirds of 2019’s overall 1.23mn b/d growth in US shale output and 1.26mn b/d growth in US output overall (whilst output at other US onshore fields fell, Gulf of Mexico offshore output rose 140,000 b/d to average a record 1.90mn b/d for 2019, breaking 2mn b/d for the first time in August).

2019 also marked the first time that the Permian produced over half of US shale output, a mark that the basin first passed in May and has not relinquished since. The Permian’s 35.3% share of overall US output is also, not surprisingly, a record and twice the share of five years earlier. Shale formations now account for a whopping 70% of US crude output, up from 30% at the start of the decade.

Overall shale production topped 9mn b/d for the first time in November (9.054mn b/d), exactly a year after first hitting 8mn b/d. Average 2019 output of 8.605mn b/d is up 1.226mn b/d on 2018’s previous record of 7.378mn b/d with the year-on-year increase second only to 2018’s 1.56mn b/d (the previous record year of 2014 saw 1.125mn b/d gains).

NOT JUST THE PERMIAN

Beyond the Permian, 2019 saw North Dakota’s Bakken overtake Texas’ Eagle Ford as the number two US shale formation. The Bakken produced an annual record of 1.44mn b/d in 2019, up 157,000 b/d on 2018, whilst Eagle Ford saw more modest 55,000 b/d annual growth at 1.37mn b/d.

Of the top six US shale plays, the well-worked Eagle Ford was the only one not to post record output in 2019. Here 2015’s 1.59mn b/d is unlikely to ever be topped.

Whilst the Bakken is also considered mature, output continues to set new record levels: October (1.510mn b/d), November (1.516mn b/d) and December (1.523mn b/d – projected) were successive all-time highs. It is a similar pattern at the number four Niobrara formation (largely in Colorado), where record 2019 output of 717,000 b/d is up 94,000 b/d (15.1%) on 2018 with October (739,000 b/d) and November (743,000 b/d) seeing successive monthly records.

In Oklahoma’s Anadarko basin, containing the ‘Scoop’ and ‘Stack’ formations, average 2019 output of 565,000 b/d is up 40,000 b/d (7.7%) on 2018’s previous record of 525,000 b/d, with September’s 595,000 b/d setting a monthly record. This is particularly impressive given that the Anadarko basin has seen the largest rig count fall of any shale basin – at 48 for November the number of active rigs is little more than a third of the year-ago 141 figure.

Overall the US shale rig count of 729 for November is down by a hefty 223 since January with numbers lower in all basins.

US output of NGLs as well as crude is hitting new records. Average 2019 output of 4.88mn b/d is up 510,000 b/d on 2018. Output topped 5mn b/d for the first time in October (5.24mn b/d) and hit a new record 5.30mn b/d in November. For 2020, the EIA forecasts output of 5.39mn b/d, up a further 510,000 b/d on 2019 as a ramp up in US LNG export capacity increases the ability to process Permian gas.

2020 FLATLINING?...

US output grew strongly in the second half of 2019 despite a fall in rig numbers. But is production set to flatline in 2020?

Latest EIA projections have production topping 13mn b/d for the first time in January 2020, up some 1.2mn b/d year-on-year. But the EIA projects lacklustre growth for the remainder of 2020: December 2020 at 13.28mn b/d, is up a relatively modest 290,000 b/d on the December 2019 figure.

Nevertheless, the rapid growth of recent months means that average 2020 output is projected at 13.18mn b/d, up 930,000 b/d (8%) on 2019 – a hefty growth figure by any normal comparison.

…OR BOOSTED BY OIL PRICES?

And 2020 investment could get a further boost from oil prices: as MEES went to press the WTI forward strip for 2020 was trading at an average of $58.5/B, some $3.5/B firmer than the $55.0/B price the EIA factors into its latest projections.

More than anywhere else globally, US shale output projections are highly sensitive to oil prices. For example, analysts Rystad earlier this month predicted shale investment will fall by 11.6% to $115bn for 2020 on the back of a 6% fall to $129bn for 2019 – if correct, a strong headwind to increasing output, though not an insurmountable one if past experience is anything to go by.

But, as with the EIA projections, the key health warning concerns oil prices. Rystad’s key justification for its projection is that “the lower oil price and weaker cash flows will force shale companies to reduce activity.”

But, whilst Rystad’s base case model has output from US shale formations rising from 2019’s 8.6mn b/d to 9.9mn b/d for 2020, a variant that plugs in $75/B WTI has 2020 output a full 1mn b/d higher at 10.9mn b/d. Of course, $75/B looks highly unlikely. But crude prices are up $5/B since Rystad published its projection at the start of December (Rystad’s base 2020 projections presume that WTI will average $54/B WTI next year, down $1/B from 2019).

INDEPENDENCE DAY?

Having become a net oil exporter for the first time in September (to the tune of 89,000 b/d), net exports leapt to 856,000 b/d in October and a still substantial 592,000 b/d in November, the latest EIA stats indicate. The EIA reckons net exports will average 570,000 b/d for 2020, a 1.06mn b/d swing from net imports of 490,000 b/d for 2019. The key boost to exports comes from products and NGLs, up 1.31mn b/d to a forecast 4.76mn b/d net exports for 2020. For crude, the US will not only remain a net importer for the foreseeable future, these net imports are set to edge up from 2019’s 34-year low of 3.93mn b/d to 4.19mn b/d for 2020.