Note: We wanted to take the time to applaud Johnny Cage (subscriber) for his work so far on the fracspread and modeling! Great job and keep it up!
Over the last few months, the shale slowdown narrative is gaining steam but it has not made it into the big agencies’ supply and demand forecasts yet. As we wrote over the weekend, one stark contrast in IEA’s estimate for 2020, for example, is that IEA has a steadily increasing US oil production profile throughout 2020 with Q2 showing a sizable ~450k b/d bump in total liquids.
The evidence at hand suggests otherwise and the difference between everyone’s model really just comes down to well completions. No one is really arguing that US shale well productivity is slowing. In fact, Rystad Energy, one of the most bullish on US shale, is showing the same thing.
With US shale well productivity barely making any gains, it really just comes down to how many wells you complete.
In our model, we are currently assuming 12,250 wells to be completed in 2020. Permian, Bakken, and Niobrara will continue to show gains y-o-y, while Eagle Ford and Anadarko will decline in 2020.
Source: EIA, HFI Research
Well completions will once again be dominated by the Permian, and we think our assumption of 12,250 wells per year is conservative. EIA had December 2019 at 946 wells completed per month and this figure is likely to be revised lower in our view.
Source: Rystad Energy
Rystad is also showing 4 different well completion levels in the chart above.
- The high scenario assumes 3,600 wells completed per quarter or 1,200 wells per month.
- The flat scenario assumes 3,000 wells completed per quarter or 1,000 wells per month.
- The conservative scenario assumes 2,700 wells per quarter or 900 wells per month.
- The low scenario assumes 2,100 wells per quarter or 700 wells per month.
The low scenario is unlikely as this takes us all the way back to 2016 levels. Our estimate is that it will be between the conservative and flat scenario with us modeling slightly above flat.
Rystad’s other differentiation in its model is the well productivity. Rystad is assuming a flat well productivity while we have a slightly declining one. The net effect is that we have US oil production finishing 2020 at ~13.2 mb/d or up 500k b/d exit-to-exit. One thing we do need to keep in mind is that production is likely to decline or stay flat into mid-2020 before rebounding into year-end.
Interestingly, Rystad’s estimate is even more conservative under the lower well completion scenarios.
Source: Rystad Energy
- In the flat scenario, Rystad has growth of 470k b/d y-o-y from Q4 2019 to Q4 2022. Given a Q4 2019 average of 12.72 mb/d, this would put us at ~13.19 mb/d for Q4 2020.
- In the conservative scenario, Rystad has growth of 235k b/d y-o-y from Q4 2019 to Q4 2022. This would put us at 12.96 mb/d.
As you can see, if well completion activities don’t pick-up into the middle of the year, we are very confident that US oil production is likely to end the year between ~12.96 mb/d and ~13.19 mb/d.
And in order to reach that growth, the drilling will have to be summer weighted, which means production will likely fall from ~12.7 mb/d today to ~12.5 mb/d or lower.
We suspect the importance of well completions in 2020 will be a dominant driving force for oil market fundamentals. With global conventional oil projects coming to a halt (already), the world will turn their eyes to US shale. If well productivity stays flat (which is highly probable to do), the only variable that could surprise to the upside would be well completions, and given current fracspread counts, this is very unlikely.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.