“The Big 3” – or as they are more commonly known, the Eagle Ford, Bakken and Permian Basin – are carrying the torch for the continued revolution in oil and gas production in the U.S. And the country’s supply growth will be integral to meeting global demand in the years to come.
That is the message from the latest oil-production report from Simmons & Co. International, titled “Renaissance in U.S. Oil Supply & Infrastructure Outlook 2013 to 2015.” Simmons forecasts that oil production in the U.S. will extend its trajectory well through 2015 at an average 900,000 barrels per day (bbl/d). Results from the Big 3 are ushering in this growth; however, the clear leader of the pack is the Permian Basin, which Simmons analysts say has exceeded their expectations.
Before 2009, U.S. oil production had been on a steady decline for many years. Since that time, however, it has dramatically turned around, growing by 2.4 million bbl/d. Simmons began documenting this period of new growth, or ‘renaissance,’ beginning in July 2012.
The analysts have revised their initial estimates twice as operators in the country continue to improve initial production (IP) rates and spud-to-sale efficiencies. The latest forecast revises 2013 expectations higher and expectations for 2014 and 2015 lower, driven by recent production performance, updated assumptions for rig activity, drilling efficiency gains and a $100/bbl WTI price assumption.
U.S. Oil Production Outlook
Recent data from the U.S. Energy Information Administration (EIA) show oil production was at 7.2 million bbl/d as of June 2013. By the end of 2013, Simmons forecasts U.S. oil production will average 7.4 million bbl/d. The growth leads to production averages of 8.2 million bbl/d and 9.2 million bbl/d for 2014 and 2015, respectively, with an exit rate for 2015 of 9.7 million per day. The growth will represent 850,000 bbl/d and 970,000 bbl/d in 2014 and 2015, respectively, a decline of 800,000 bbl/d from Simmons’ previous analyses.
A significant factor in the downward revision is a reduction in drilling efficiency gains for horizontal wells. Previously, Simmons projected 20% annual gains in drilling efficiency throughout 2013 to 2015. That figure has been reduced to 10% in 2013 and 5% in 2014. Other factors include a more measured rig count across all key areas and updated type curves. E&P companies have been slow to increase rig count in 2013 despite rising WTI prices.
In the Big 3, Simmons forecasts the Bakken will drop one rig per month; the Eagle Ford will remain flat; and the Permian will gain five rigs per month. The analysts look for a gain of 0.5 rig per month in the Denver-Julesburg (D-J) Basin; no change in the Anadarko; and a gain of one rig per month in the lower 48/other regions.
Simmons’ assumption for IP rates has also changed. The new forecast for horizontal oil wells IP rates for 2014 and 2015 in the Big 3 is no change in the Bakken or Eagle Ford, and a 10% improvement in the Permian. The D-J basin IP rates are expected to climb 5% and the Anadarko and Lower 48/other regions by 10%.
Global Price Outlook
The pace of infrastructure development is expected to exceed the pace of production growth in 2013 and 2014. In past years it was the other way around, but due to the elimination of bottlenecks in the Cushing and Permian Simmons expects this to be reversed. About 785,000 bbl/d of Permian pipelines and 1.15 million bbl/d of Cushing pipelines to the U.S. Gulf Coast are set to be added by 2014. On an important note, the report said “the new Permian pipeline projects are not only serving to debottleneck the Permian, but they also help debottleneck the Cushing.”
While U.S. oil production is projected to grow yearly by 900,000 bbl/d, it still would not meet the expected addition of 3 million bbl/d of pipeline and 2 million bbl/d of rail unloading capacity for 2013 and 2014.
Simmons has revised its forecast higher for the oil price range based on the tightness in global markets. The analysts expect Brent to be $95 bbl/d to $120 bbl/d. WTI is projected at $90 bbl/d to $115 bbl/d. The WTI/Brent differentials are expected to remain narrow through 2014 with the potential for modest widening the following year. After the planned infrastructure additions are completed in 2014, Simmons analysts expect Bakken and Canadian differentials to be limited to rail transportation costs to coastal markets.
On the global stage, U.S. production is wielding greater power. It has supplied more than 100% of non-OPEC supply growth during the past two years. Further, “U.S. oil production has grown by about 2.4 million bbl/d since 2009, while effective OPEC spare capacity is just 2.9 million per day, of which 2.2 million is in Saudi Arabia, where production is at a 32-year high,” the report notes. “Without U.S. supply growth, oil prices would be materially higher, especially considering OPEC supply outages in Iran, Libya and slower growth/potential maintenance outages in Iraq.”
The supply performance for non-OPEC countries has continued to deteriorate, with growth slowing to just 130,000 bbl/d for the period from 2009 to 2012. The outlook for non-OPEC countries is improving. Simmons’ analysis of non-OPEC projects on a country-by-country basis expects a growth trend in the coming years. Still, the U.S. is left as the significant contributor to total non-OPEC supply growth.
“U.S. supply growth has been, and will continue to be, necessary to provide stability to global markets,” the report says.
A declining rig count and flat IP rate will lead to a decline in oil production in the Bakken, according to the report. Production growth is expected to slow in the Bakken for 2013 from about 160,000 bbl/d to 125,000 in 2014 and 2015, driven in part by a slightly declining rig count and flat IP rates. Benefiting some operators will be lower well costs, which have helped to improve overall economics.
Continental Resources Inc. (NYSE: CLR) has decreased well costs from an average of $9.2 million to $8.2 million from 2012 to 2013. Continental expects to reduce well cost by an additional 3% to 5% by 2014. The company attributes the improved performance to geosteering, downhole motor performance and bit technology. Additionally, the company’s spud to total depth cycle time has decreased four days, and the average lateral drilling time has improved by 30%. However, the company reports it is experiencing flat to upward pressure on completion pricing.
Oasis Petroleum Inc. (NYSE: OAS) and Halcón Resources Corp. (NYSE: HK) also reported a decrease in well costs. Well costs for Oasis are forecasted to decrease by 24% to $8 million by the end of the year. Including the benefit of Oasis’ company-owned completion services, well costs are targeted to reduce to $7.8 million and $7.3 million in 2013 and 2014, respectively. Halcón expects year-over-year well costs to decrease by 10% in Fort Berthold and by 5% in Marmon. The company also forecasts 100% of their wells will be drilled on multi-well pads by 2014. Currently, about 80% of the company’s wells are being drilled on pads.
EOG Resources Inc. (NYSE: EOG) reports a reduction in spud to total depth times to 16.9 days in 2013 from the previous year’s 24.3 days. This, the company says, has helped reduce completed well costs to $9.5 million in 2013 from 2012’s $10.1 million.
The Eagle Ford is expected to surpass the Bakken mid-2014 and become the larger producing region out of the two. This is still forecasted even though growth is projected to slow in the Eagle Ford by 370,000 bbl/d in 2013 due to a flattening rig count and IP rate for the region. Production growth will continue to decline in 2014 and 2015 to 265,000 bbl/d and 245,000 bbl/d, respectively. Karnes, La Salle and Gonzales counties in Texas hold the best-performing acreage in the play.
The oil curve in Karnes County continues to improve, even after three years of development. The overall type curve continues to get stronger as operators increase their knowledge of the geology. At the same time, operators are driving down costs and increasing efficiencies.
The Permian is and remains the largest producing region. Production in the Permian has exceeded expectations, according to Simmons. Oil production will grow by about 185,000 bbl/d in 2013. Analysts see that continuing to accelerate in 2014 and 2015 by 205,000 bbl/d and 265,000 bbl/d, respectively. The production forecast for the region is higher than previously expected as IP rates continue to improve with horizontal drilling activity rising and non-horizontal activity remaining stable.
The drivers of production in the Permian are the Midland and Delaware basins. Operators in the area have had success in unlocking the embryonic stacked-pay potential in the two basins. “This could potentially result in several decades of incremental horizontal drilling capacity for several operators,” Simmons says.
According to Simmons, activity is expected to increase significantly during the next few years in the Delaware Basin. Concho Resources Inc. (NYSE: CXO) has expressed an interest in doubling its horizontal rig count in the basin by this time next year. EOG has noted that the Delaware Basin’s Wolfcamp in Reeves County, Texas, could be a significant growth engine for the company.
Similar to the Permian, results from the D-J Basin have improved. The IP rates are trending higher than what was previously forecasted for the basin. The improvement in both the Permian and D-J basins contributed to upward revisions for production in 2013 by Simmons.
Williston And Anadarko
The Williston and Anadarko basins have experienced slower growth and stabilizing IP rates than Simmons predicted in its previous report. The 2015 average annual production estimate is down 445,000 bbl/d for the Williston and 200,000 bbl/d for the Anadarko vs. previous estimates. The production decline in the Williston was driven by a recent slowdown in drilling, stabilizing IP rates, and a downward revision of rig counts. The Anadarko experienced similar reductions in IP rates since the last outlook, which influenced the decline in forecasted production.