A new study shows that rapid growth in U.S. oil production may come to an end by mid-2015.
According to a new report by the industry research firm IHS, low oil prices will begin to constrain tight oil production, which has been the dominant driver of world oil supply gains in recent years. The company says growth is still expected in the early months of 2015, but that momentum will level off in the latter half of the year, as oil prices reach lows not seen since the 2008-2009 recession.
The new report is based on an IHS study of 39,000 wells and points to the possibility of month-to-month U.S. oil production growth coming to a halt in the second half of 2015, assuming that West Texas Intermediate (WTI) prices remain below $60.
The study identified a wide spectrum of breakeven prices for U.S. crude oil production. About a quarter of new wells in 2014 had a breakeven WTI price of $40 or less. Just less than half of new wells in 2014 had a breakeven price of $60 or less. At the opposite end of the spectrum, nearly 30 percent of new wells had breakeven prices of $81 or higher. The breakeven level is the WTI price needed to cover capital and operating costs and generate a 10 percent return.
Hedging programs, finishing work on uncompleted wells, contractual obligations and further drilling of the most economic tight oil plays mean that many new wells will still be drilled in 2015. But adverse economics and lower spending will lead to fewer wells drilled than in 2014, the report says.
Monthly average U.S. production at the close of 2015 is projected to be about half a million barrels per day (bpd) above the January 2015 average, but nearly all of that growth will come in the first half of the year. By December 2015, the report shows that U.S. oil production growth will have been flat for several months.
“U.S. oil production has been the main engine of global supply growth in recent years,” said Jim Burkhard, vice president of IHS Energy. “Momentum from strong growth in the second half of 2014 means the impact of lower prices will not immediately drive production lower. But the reality of lower oil prices and less spending on new wells will affect production as 2015 progresses.”
The fate of U.S. oil production growth past 2015 and into 2016 will be shaped by global economic conditions, geopolitics and changes in industry costs, all of which are in a state of flux, according to Raoul LeBlanc, IHS Energy senior director of financial markets and co-author of the report.
“So much can happen over the course of a year,” LeBlanc said. “If oil prices remain weak and confidence in future prices remains shaken, U.S. production in 2016 could possibly flatten or even decline. But there is plenty that could happen — a recovery in oil prices, lower upstream costs and improved well productivity — that would quickly change the calculus of drilling new wells and reinvigorate U.S. production growth.”Tags: IHS, oil prices, Oil Production