Source: U.S. Energy Information Administration, January Short-Term Energy Outlook. Note: Graph does not include production from Alaska and the Federal Gulf of Mexico.
The
sharp decline in oil prices over the last quarter of 2014, which has
continued in January, is already having a significant effect on drilling
activity in the United States, as shown by the 16% decline in the
number of active onshore drilling rigs in the Lower 48 states between
the weeks ending on October 31, 2014 and January 23, 2015, according to
data from Baker-Hughes.
Moving from what has happened to
forecasting the future is challenging, in part because market
expectations of uncertainty in the price outlook have increased as
reflected in the current values of futures and options contracts. When
the latest edition of EIA's monthly Short-Term Energy Outlook
(STEO) was issued on January 13, the 95% confidence interval for market
expectations for prices in December 2015 was extremely wide, with upper
and lower limits of $28/barrel (bbl) and $112/bbl, respectively. The
growing uncertainty surrounding oil prices presents a major challenge to
all price forecasts. EIA's January STEO forecasts Brent crude oil
prices averaging $58/bbl in 2015 and $75/bbl in 2016, with annual
average West Texas Intermediate (WTI) prices expected to be $3/bbl to
$4/bbl lower.
Should its price forecast be realized, EIA projects
that the number of operating rigs will decrease by approximately 24%
from January to October 2015 before beginning to rebound in November
2015. However, the outlook for Lower 48 production reflects more than
just the rig count. Other key factors include the efficiency of
drilling, which EIA tracks in its Drilling Productivity Report,
the rate of decline in production from existing wells, and changes in
the amount of time between the start of drilling (called spudding) and
the completion of the well.
As discussed in a previous Today in Energy article on the effect of declining crude oil prices on U.S. production,
permits and drilling in North Dakota declined during the financial
downturn of 2008-09, but production rates did not decline as
substantially. At the time of the July 2008 oil price peak, drilling
activity in the Bakken-Three Forks formations outpaced well completion
activity as increasing numbers of wells were drilled. Averaging about 70
days before the oil price peak, spud-to-completion times almost doubled
within two months, reaching more than 130 days. This increase created a
backlog of wells that had been drilled but not yet completed. As fewer
wells were drilled during the subsequent drop in oil prices, the
spud-to-completion times decreased. Increased drilling activity in the
Bakken since 2011 has once again increased spud-to-completion times,
which have stabilized at more than 120 days per well, almost twice
previous minimum levels.
Source: U.S. Energy Information Administration
This
backlog of wells acts as a cushion for production rates, offsetting the
more immediate decreases in drilling and permitting activity. At most
major plays in the United States, the backlog currently ranges from
three to seven months. When drilling activity remains at reduced levels
long enough to outlast the cushioning effect of the well-completion
backlog, the number of new wells brought online will begin to decrease,
which can eventually reduce production rates.
While the cushion
provided by the well-completion backlog changes from formation to
formation, EIA's forecast of rising crude oil prices in the second half
of 2015, if realized, is expected to be accompanied by a stabilization
of drilling activity that would be sufficient to prevent a substantial
production decline in the Lower 48 region. Different outcomes are
entirely possible under other price scenarios.
http://theenergycollective.com/todayinenergy/2187316/lower-48-oil-production-outlook-stable-despite-expected-near-term-reduction-ri
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