A post by Ovi at peakoilbarrel

Preparing this March post has been a surrealistic exercise. Here I am providing a January US production update when at a time, January, the world had no clue that it was going to be hit with a double Black Swan event in early March. There was a hint in January on the coming pandemic for those who were listening. However, there was no clue of the shock and awe attack that would be launched by Saudi Arabia (SA) after Putin and his oily oligarch friend Sechin made the wrong move in the world’s oil chess game. Russia thought that they had SA in check, instead Russia and the rest of world were End Played. Now, a way must be found out of this mess. Reports are circulating that Trump and Putin have been talking and that an OPEC+ meeting will be convened shortly. Let’s hope adults come to the table.

The silver lining, if there is one, is that the world will need lower oil prices to come out of the current economic slowdown. The question is, if an agreement can be brokered between US, Russia and OPEC, “What will be the right price for oil for both the producers and the economy?

The irony here is that Trump will be holding meetings with oil company executives shortly to see how the US can help. In the meantime, the NOPEC (No Oil Producing and Exporting Cartels Act) bill keeps circulating within Congress. Interesting how the world, US positions and thinking, can be flipped upside down over night.

All of the oil production data for the US states comes from the EIA’s Petroleum Supply Monthly. At the end, an analysis of three different EIA reports is provided.

The charts below are updated to January 2020 for the 10 largest US oil producing states (Production > 100 kb/d).

The March EIA report shows US production dropped from November to January by 119 kb/d to 12,744 kb/d. Note it dropped for two successive months. The January drop from December was 60 kb/d. From June to November, the US increased output by an average of 150 kb/d/mth. Are these two successive drops the beginning of slowing LTO growth going into 2020? For the lower 48 states, production from December to January decreased by 61 kb/d. Today’s extra low oil prices are not providing any incentive to increase drilling activity. Lowering capex and expenses are the new mantra.

In an attempt to provide the latest production estimates for the US, above is a comparison of the EIA’s weekly and monthly production numbers updated to April 1. While the weekly and monthly numbers are in reasonable agreement from August 2019 to November 2019, there is major divergence after that. Clearly, there is a lot of uncorroborated data coming out of the EIA’s oil production offices.

Oil states production ranking

Listed above are the 10 states with production greater than 100 kb/d. These 10 account for 10,315 kb/d (81%) of total US production of 12,744 kb/d in January 2020. US year-over-year production is now down below 1,000 kb/d to 888 kb/d. Not shown in the table is the GOM which produced 1,983 kb/d in January and would rank it between Texas and North Dakota.

January production in Texas grew by 22 kb/d to 5,393 kb/d from a revised 5,371 kb/d in December. There is a hint of slowing in the graph.

This chart provides an early indication of what to expect from Texas output over the next several months. From March 13 to April 3, the Baker Hughes (NYSE:BH) Rig report showed a drop of 40 rigs from 378 to 338.

North Dakota’s oil production has been dropping since October 2019 from 1,481 kb/d to 1,396 kb/d in January. In January, the drop was 41 kb/d from December’s 1,437 kb/d. Since January, the number of rigs operating each week has almost remained almost constant as it wandered between 51 and 53 and only dropped to 42 in the week ending April 3.

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January is the first month that has shown a production decrease in New Mexico since June. Output fell from 1,074 kb/d in December to 1,052 kb/d in January. While Texas has been getting all of the attention regarding its production growth, New Mexico has also increased its output and recently has exceeded 1 Mb/d. On a YoY basis, New Mexico has increased its output by 232 kb/d.

Above is the weekly BH rig count for New Mexico. The rig count increased steadily from 101 in December to a peak of 117 in the week of March 13. In the week of March 20, the first drop, 5, in rig count occurred down to 112. A second drop of 3 occurred down to 109 in the week March 27 and down to 100 on April 3. This is an early indicator of further production drops in the coming months.

January marked the fourth month in a row that Oklahoma output was down. Output was down by 33 kb/d to 531 kb/d. Oklahoma appears to have entered a decline phase. Its highest production occurred in April 2019 with output of 613 kb/d. The complex Louisiana geology has stymied hopes for a “Permian Jr”. In the last week of 2018, Oklahoma has 140 rigs in operation. In the week of April 3, there were 29, a drop of ten from the previous week.

Colorado production declined by 10 kb/d in January to 528 kb/d from 538 kb/d in December. From the peak of 563 kb/d in November, output has dropped 35 kb/d. New environmental regulations may be beginning to take their toll on drilling activity and the associated oil output decline. The current low oil price can only add to the drilling industry’s difficulties.

Alaska output continues its slow decline as shown by its annual peak production months of November, December and January touching the downtrend line. January was up by 1 kb/d to 482 kb/d. The line continues to show a decline rate of 1.35 kb/d/mth or 16.2 kb/d/yr.

The trend of gradually declining output is expected to continue until several new future projects now in development come on line. An expected 20 kb/d increment near the end of the year will mostly be offset by the estimated yearly decline of 16.2 kb/d.

California continues its slow decline. However, January production was up by 2 kb/d to 426 kb/d

Wyoming increased its output from January 2017 to December 2019 and reached a new high of 297 kb/d in December 2019. However, in January 2020, it had a small drop of 6 kb/d to 291 kb/d. Is this the beginning of a production drop associated with lower oil prices and a slow reduction in the number of rigs operating? Wyoming currently has 14 rigs in operation, down from a high of 25 in the third week of January. The week of April 3rd drop was 5 from 19 the previous week.

Louisiana continues is slow steady decline. After rebounding from a new low output of 109 kb/d in July 2019, the decline has begun again. January output was down by 2 kb/d from December to 117 kb/d.

Utah’s output was holding steady since July 2019 at slightly over 100 kb/d due to its new conventional field but is now giving indications of entering a new slow decline phase. January production fell below 100 kb/d to 99 kb/d, a drop of 3 kb/d from December 2020. The last peak occurred in September 2018 at 109 kb/d.

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The GOM’s output rebounded by 49 kb/d in January to 1,983 kb/d.

Updating EIA’s different oil growth perspectives

1) Drilling Productivity Report

The Drilling Productivity Report (DPR) uses recent data on the total number of drilling rigs in operation along with estimates of drilling productivity and estimated changes in production from existing oil wells to provide estimated changes in oil production for the five key tight oil regions.

This chart shows the monthly change in new well oil production and the decline from all previous producing wells for the onshore L48 states. The difference between the two gives the projected output increase for all tight oil basins. For April 2020, the projected increase is 17.5 kb/d. What is clear is that since November the difference between production increase and decline is very small and has gone negative for a few months.

Above is the DPR net growth chart updated to April 2020 and shows the difference between the monthly change in new well oil production and the decline from all previous producing wells for the onshore L48 states. The March update indicates that there has been further revisions to the 2019 data. The March report now shows that production decreased in both November and December 2019 and February’s net growth was only 1 kb/d. March and April are showing small increases. However, I expect the March and April data to be revised in the April report when the new oil price environment is factored into the DPR models.

The linear model in the chart is left over from the March post. Clearly, it did its job when it was first posted four months ago indicating that LTO oil production in the US was going to slow down.

Above is the total oil production from the 7 basins that the DPR tracks. Note that the DPR production includes both LTO oil and oil from conventional wells.

From February 2019 to October 2019, output grew at an average rate of 116 kb/d/mth. However, starting in November 2019, there has been virtually no growth. The reduced output rate is associated/consistent with the rapid monthly decline in the number of well completions shown below.

As can be seen, the number of completed wells from August 2019 to January 2020 dropped from 1,251 to close to 950 in January and February, a drop of close to 300 wells. Not clear if the 950 completions in January and February are an indication of a new base level for completions to just maintain a constant level of production and reduce expenses.

Of the 300 decrease in well completions since August, 117 are from the Permian. Interestingly, while completions are decreasing, the Permian was the only basin that indicated growing production out to April.

According to this DPR table, all basins except for the Permian will be in decline by April. With the new low prices for WTI, the Permian could also be in decline by April.

According to the DPR, Permian production growth from February to April will wander around 37 kb/d/mth. As noted above, there should be a significant change to the March to May numbers in the next report.

During the week of March 13th, 301 rigs were operating in the Texas portion of the Permian. By the week of April 3, it had dropped to 251, a drop of 50 rigs. Production decline should follow shortly.

2) Light Tight Oil (LTO) Report

The LTO database provides information only on LTO production from seven tight oil basins and a few smaller ones.

There was a significant downward revision to the LTO data in the March 2020 report. The revisions show up as a slowing/flattening in LTO monthly production growth, especially from October to January at approximately a constant 8,100 kb/d. January production was revised down from 8,232 kb/d to 8,121 kb/d, a reduction of 111 kb/d.

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Estimated output from all LTO basins for February was 8,201 kb/d, an increase of 80 kb/d from a revised 8,121 kb/d in January. I expect the February increase of 80 kb/d will be revised down in the April report.

This chart shows the monthly addition to LTO output and its shape is similar to the DPR chart above. The production increase in February was 80 kb/d and indicates a significant increase over January. The current March LTO report confirms the DPR trend of slowing growth starting in November to January 2020. However, while the LTO report is projecting an increase of 80 kb/d in February 2020, the DPR is estimating a smaller growth rate of 1 kb/d. This difference should be resolved in the April report and should also reflect the new oil price regime..

The Permian is the largest contributor to US tight oil growth. As can be seen in this chart, the average growth rate for 2019 is lower than 2018. While the average monthly growth rate for 2018 was 97 kb/d/mth, the average rate for 2019+ is lower at 58.7 kb/d/mth, a 40% reduction. The average LTO growth rate from November 2019 to February 2020 is slightly higher at 67 kb/d/mth. However as noted above, the current February increase of does not seem realistic.

3) Short Term Energy Outlook (STEO) Report

The STEO provides projections for the next 13-24 months for US C + C and NGPLs production. The March report presents EIA’s oil output projections out to December 2021

The chart compares the March 2020 STEO C + C projection with the January 2020 report. In the March STEO report, the estimated output for December 2020 has been reduced by 700 kb/d.

The March STEO was published on March 11. By then, the shock and awe oil production announcement by SA had been heard around the world and was felt on Monday, March 9 when WTI dropped by $10 from $41.28/bbl to $31/bbl. So on Monday and Tuesday, the EIA made drastic changes to its production outlook for December 2020 and 2021, as can be seen in the chart above.

Note that production continues to increase from December 2019 to April 2020 before beginning to decline. From April 2020 to December 2020, output falls from 12.71 kb/d to 12.3 kb/d, a decline of 410 kb/d.

There are two factors affecting the decline, the price of oil and the need for physical distancing during the pandemic crisis. For both the January and March update, production begins to increase in October 2021 due to new oil output coming from the GOM. See below.

Output in the GOM begins to increase in November 2021.

This chart compares the March 2020 STEO projection with the January 2020 report for the Onshore L48. The revisions in March STEO project that the onshore L48 output will be down by 1,280 kb/d in December 2021 as compared to the January report. The March report estimates that by December 2020 output is expected to be down by 410 kb/d from April 2020. The price environment projected by the STEO over the next two years is shown below.

Above is the STEO WTI price projection for 2020 and 2021.

This is the world C + C production to December 2020. In December, production dropped by 109 kb/d to 83,555 kb/d from 83,464 kb/d in November. The large increase of 2,646 kb/d from September to December was due to large contributions from Brazil, Norway and recovering production in Saudi Arabia after the September attack.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.