By Stephanie Ritenbaugh
The new year has seen crude oil prices continue to stumble and U.S. oil production continue to soar, and those trends are not likely to subside — at least in the short term.
Total U.S. crude oil production reached 9.1 million barrels per day (bbl/d) during the week ending Jan. 9, an increase over last year’s total of 8.1 million, according to the U.S. Energy Information Administration.
And that figure is expected to grow. The agency forecasts total crude production will average 9.3 million barrels per day in 2015 and climb to 9.5 million in 2016, “which would be the second-highest annual average level of production in U.S. history; the highest was 9.6 million bbl/d in 1970,” the EIA said in its short-term energy outlook released last week.
Yet, despite what those production figures might suggest, exploration and production companies are cutting back on spending this year.
Range Resources, which operates in the Appalachian Basin — home to the Marcellus Shale — and in the Midcontinent region of Texas and Oklahoma, slashed its 2015 capital budget from $1.3 billion to $870 million, citing the “continuing erosion in commodity prices.”
Brent crude oil prices are expected to average $58 per barrel in 2015 and $75 per barrel in 2016, with annual average West Texas Intermediate prices expected to be $3 barrels per day to $4/bbl below Brent, according to EIA forecasts.
On the natural gas side, EIA expects the Henry Hub natural gas spot price to average $3.44 per million British thermal units (MMBtu) in 2015 and $3.86/MMBtu in 2016, compared with $4.39/MMBtu in 2014.
Range Resources plans to target “nearly 95 percent” of its budget to the Marcellus. That concentration “coupled with continuing operating efficiencies and now anticipated cost reductions, allows Range to target 20 percent production growth for 2015 with this revised capital budget,” the Texas-based exploration and production company said.
ConocoPhillips — the largest independent exploration and production company with global operations, according to Moody’s Investors Services — shaved its budget to $13.5 billion, a 20 percent cut.
Oilfield services companies, which handle the rigs for exploration and production companies, are scaling back their work forces. Schlumberger, the largest oilfield service company, said last week it would lay off 9,000 employees.
Impact on production delayed
In a report released earlier this month, Moody’s analysts said the broad-based capital reductions that companies have announced will have only a limited impact on oil production in 2015.
“This primarily reflects the production response from high 2014 growth capital spending levels, but also the relatively lower capital required to maintain production,” Moody’s said.
“If current oil prices persist into the first quarter of 2015, producers will make another round of capital spending reductions,” Moody’s analysts wrote.
The credit rating firm said capital spending by North American exploration and production companies would drop by about 20 percent from 2014 levels if oil prices were to average $75 per barrel. “But if oil prices remain below $60, companies will make more drastic cuts, reducing capital spending by 30 percent to 40 percent.”
“Further reductions would have a moderate downward impact on 2015 industry-wide production levels and will lead to production curtailments at producers with high-sustaining capital and have a much more pronounced impact on 2016 industry-wide production levels,” according to the Moody’s report.
Morningstar Analyst David Meats said this highlights the time delay between spending and production.
“We’ve seen a big drop in capital expenditures, so what’s going on is there’s a big lag time from producers cutting back on drilling and that showing up in the production numbers,” Mr. Meats said.
For exploration and production companies locked into contracts with rig companies, it’s often better to keep the contract in place and drill the wells, rather than to try to break the contract early, he noted.
“You’ll likely see a smooth peeling off of the rig count, rather than an abrupt fall off the cliff,” Mr. Meats said.
The other part of the story on production figures is that many of those wells were probably drilled in the previous quarter or earlier, Mr. Meats said.
“Capital expenditures are being cut around 20 percent to 40 percent, but you’re also seeing production forecasts increasing 10 percent to 20 percent, so there is still growth as companies dial back spending,” he said. “But I also suspect that the majority of those averages will be concentrated in first half of the year, and you’ll start seeing slow down in second half.”
Surviving in a low-price environment
Energy consultancy Wood Mackenzie expects that if the oil price were to average around $50 per barrel in 2015, the horizontal rig count could decline by 40 percent compared to 2014.
Anthony Starkey, an analyst with Bentek Energy, said that while the North American rig count inches down, speculation begins on which shale play will be better than the others.
“But when it gets down to the nitty gritty details, it’s going to vary from producer to producer,” Mr. Starkey said. “It depends on what their balance sheet looks like, what their assets look like, and what is required for them to operate. The guys who are cash heavy and not dependent on debt will survive.”
“If you’re a marginal player in a play that relies on a crude price of $80, those guys are getting knocked out first,” he said.
An environment with the pain of falling commodity prices also has the benefit of falling costs.
“A company might be bringing in less revenue, but they’re also getting taxed less on those revenues,” Mr. Starkey said. “There are ways to survive in a low-price environment.
“You also can never rule out further technological advances and multi-stage fracking that allows a quicker return on investment,” Mr. Starkey said. “In this price environment, I think you’ll see companies invest more in technology and look at other ways to survive to be the most competitive producer.”
Wood Mackenzie said that while there’s no consensus on when oil prices will stabilize and at what level, the firm expects service cost relief, asset high-grading, and efficiency improvements in operations.
“As long as operators can move to the core areas of plays and sub-play breakevens continue to fall with the drop in service costs, producers will keep chugging along until funding dries up,” said Delia Morris, senior North American upstream analyst for Wood Mackenzie.
Stephanie Ritenbaugh: [email protected] or 412-263-4910