New Production High

Jim Brown
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U.S. production rose only 13,000 bpd but it was a new record high.

U.S. production rose to 10.283 million bpd and roughly matching production from Saudi Arabia. Another few barrels and the U.S. will move solidly into the number two position behind Russia, which is producing at a 30-year high of 10.95 million bpd. In early 2017, Russia did produce just over 11.0 mmbpd but they have slacked off because of their agreement with OPEC to cut 300,000 bpd until at least the end of June. Oil prices at the time will determine if the cuts continue.

The U.S. will eventually be in the top spot. The EIA expects U.S. production to reach 11.5 mmbpd in 2019. The EIA is expecting shale production to rise 2 to 3 million bpd over the next three years. Once production exceeds 12.5 mmbpd they expect it to level off until 2050 because depletion will be occurring at roughly the same rate as new production is rising.

Personally, I believe forecasting oil production more than two years in advance is useless. Since price is the controlling factor a sharp decline in prices like we have seen in recent years, will cause a sharp decline in production. Similarly, a sharp increase in prices will cause producers to ramp up production to capitalize on the price.

The EIA covers this scenario in their "low oil price" case projections. If prices decline they expect shale oil production to only increase about one million bpd through 2022 then decline steadily through 2050. Their "high oil price" case projects a nine million bpd increase through 2025 and then flat line through 2050.

Obviously, they have all their bases covered so they can eventually say we told you so. Since they revise their projections every year, they are never wrong because they plot the projections to the actual reality of production.

Shale producers in some areas are being restricted by the oil/gas mixture. There is no infrastructure to handle the gas so they flare it. However, there are limits to how much they can flare. As they reach those limits they have to cut back on overall production. If there were gas processing facilities available and gas pipelines to those areas, the rate of crude production would increase.

In the Permian well permits continue to rise with 1,166 permits issued last month, a 21% increase. However, well completions were only 963. The balance become drilled but uncompleted wells or DUCs. There were 2,777 in the Permian in December, up 137 from November and up 119% from the prior December. In total, there were 7,493 DUC wells at the end of December.

As I have pointed out before, if there was takeaway capacity from the Permian, these producers would be racing to put these wells into production.

Tudor Pickering Holt & Co estimated it would take 4-5 million additional fracking horsepower to meet demand for fracking services this year. Keane Group announced last week they signed a contract for a new build fracking fleet that will be dedicated to one producer with a long-term contract.

EOG Resources warned in their earnings that servicing costs were rising because of the shortage of equipment, crews and sand to complete wells. All of the sand companies reported record demand for frac sand.

In the shale fields, the drilling activity is increasing with many producers moving to the "cube" concept. This means drilling a lot of wells from the same location in different directions and in different geologic zones.

Encana completed a 19 well cube in the Permian with more than one million pounds of rigs, trucks, tankers, etc spread over a 16-acre space. By drilling repeatedly from the same pad they minimize expenses and downtime from rig movement. Those 19 wells are now producing more than 20,000 Boepd. Having all this production coming from the same pad means it is easier to process, transport and maintain the wells. It takes fewer people to monitor and maintain the installations and they are not driving from well to well over miles of bad roads.

Encana said after years of experimentation by producers, the Permian is now moving into "manufacturing" mode. They know what works, what zones are producing and how to frac each one. Encana may not have pioneered this technique but they are exploding it. They have multiple 12 and 14 well cubes in Texas and a monster 28 well pad in the Montney shale play in Alberta and British Columbia. Encana said all their wells in 2018 will be part of large scale cube projects. Devon Energy has more than 10 cube developments scheduled for 2018. They have an 11 well Boomslang pad and a 24 well cube under development in Oklahoma. Concho Resources drilled a 10 well cube called the Brass Monkey in the Permian in 2017.

EOG is still experimenting with 6-8 well pads while they monitor production to see if the added drilling and fracking adjoining reserves adds to or subtracts from overall production. There were concerns a couple years ago that fracking of multiple reserve layers could diminish overall pressures. Early production was strong but it fell off rapidly. Experimentation has eased those early mistakes.

Given the jump from individual wells into massive pads with multiple pay zones all producing at the same time, we should expect to see U.S. production move swiftly higher as long as prices hold. In the graphic below U.S. production has risen from 9.492 mmbpd on January 5th to 10.283 mmbpd on Feb 23rd. That is an increase of 791,000 bpd in only 7 weeks. Without a significant drop in crude prices, we should hit the 11.0 mmbpd level in Q3.

Cushing inventories have declined sharply to 28.8 million barrels and the lowest level since December 2014. The peak was 69.4 million in April 2017. Inventories have declined more than 50% and still falling. This is due to a slowdown in volume on the Keystone pipeline and the ramp up in exports to more than 2.0 mmbpd. This should help to keep WTI prices over the $60 level as we go through the spring maintenance season.

Drilling rig activations have been relatively stagnant over the last several weeks. Rigs only increased by 3 last week to 981. Offshore rigs declined by 3 to 14 and a multiyear low. There are multiple major developments in the Gulf but exploration elsewhere has slowed significantly. A deepwater well requires a minimum of $75 and closer to $100 to be profitable unless it is a very strong resource base with high volume.

Libyan production is declining again. The El-Feel field has had problems over the last several weeks and now the 300,000 bpd Sharara field has halted production. Sources claim Libya is producing 1.1 mmbd as of March 1st but that included the Sharara field. The halt is due to a pipeline closure to a local refinery. The El-Feel field declined from 75,000 bpd to 25,000 bpd due to a protest by security guards. In a perfect world with all the various groups cooperating, Libya could produce 1.8 mmbpd.

With U.S. refinery utilization falling to 87.8% last week we have a clear indication that the spring maintenance season has begun. This will run for the next two months but they will be back in full operation before the Memorial Day weekend when summer gasoline demand begins to surge. Inventories would normally continue to rise over the next six weeks, but the surge in exports is keeping inventory gains to a minimum.

Prices should continue to be volatile around the $60 level but will rise over the summer months. Analysts claim gasoline prices are going to rise 30-40 cents over the next three months. Happy driving!

Jim Brown

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