Energy Prospectus

Natural Gas | Oil 12 Sep 2019 | 20:42 UTC Denver

US oil and gas rig count hits 29-month low at 949: Enverus DrillingInfo

Author J. Robinson Editor Bill Montgomery Commodity Natural Gas, Oil

Highlights

Oil rigs account for 70% of weekly 17-rig decline

Texas, Oklahoma plays hardest hit by slowdown in activity

Rig declines knock Haynesville production growth

Denver — A late-summer rally in Henry Hub gas prices, which edged up to a 15-week high Monday at $2.64/MMBtu, wasn't enough to stem the slowdown in gas-directed drilling activity this week.

Rig counts in North America's most active dry gas basins, including the Marcellus and the Haynesville, continued to hover at or just above recent multiyear lows this week at 46 rigs and 52 rigs, respectively, data released Thursday by Enverus DrillingInfo showed.

Among the major oil plays, Texas has been the hardest hit by the recent slowdown in drilling.

Producers in the Permian Basin of West Texas shed another four rigs this week to 414 -- the fewest since November 2017. In the Eagle Ford, a gain of four rigs this week to 77 still left the basin's total count just above a recent 31-month low.

A steady slide in SCOOP/STACK drilling continued this week, with rig counts in the Oklahoma play dropping by three to 62, down from early first-quarter highs at over 100 rigs.

Drilling in North Dakota's Bakken Shale and Colorado's Denver-Julesburg has been seemingly less affected by the recent slowdown. Rig counts in the two basins, estimated at 58 and 27, respectively, were little changed week on week and were down only two to three rigs from first-quarter averages.

Overall, the US oil and gas rig count declined by 17 this week to 949, marking a fresh 29-month low for the upstream industry.

"US land continues to be the most challenged sub-sector, with little visibility to a bottom in activity," Marc Bianchi, an analyst at Cowen, said in a research note Thursday.

Capital expenditure tracking shows that among 45 exploration and production companies reporting second-quarter results, an aggregate 56% of 2019 budgets was already deployed through the end of June, Bianchi said.
HAYNESVILLE SLOWDOWN

As the upstream industry, and especially dry-gas producers, continue to beat the drum of capital efficiency with the investor community, many are hoping to do more with fewer rigs in an effort to keep production volumes growing this year.

In the Haynesville Shale, though, a nearly 24% decline in rig count since January now appears to be catching up with producers there.

Month to date, dry gas output from the basin has averaged just under 11.6 Bcf/d, which is down sharply from a record high at over 12.1 Bcf/d in early August, data from S&P Global Platts Analytics shows.

An abrupt pause in the Haynesville's recent and spectacular growth rate comes as gas prices at one of the basin's primary market locations, the Henry Hub, have trended near three-year lows this summer.

From June to August, prices at the benchmark hub averaged just $2.27/MMBtu, significantly below the breakeven cost for an average dry gas producer there.

In fact, according to Platts Well Economics Analyzer, even half-cycle breakeven cost in the Haynesville -- which excludes acreage, development and exploration expense -- averages about $2.52/MMBtu.

Sample production receipts from the Haynesville show that declines, concentrated in Louisiana, have been widespread at processing and gathering locations on multiple pipelines, suggesting that the recent drop in production is real and not the result of maintenance or temporary flow constraints.

https://www.spglobal.com/platts/en/mark ... illinginfo

If WTI went to $100 tomorrow, I doubt we'd see an increase in the active rig count this year. Capex budgets are set for 2019 and most of them were front end loaded.

Last week I sent a note to John Kemp (based in London) telling him that there was NO WAY that U.S. oil production would grow at the rate that EIA has been telling the world. It looks like John finally considered that without completing more and more wells year after year there is not going to be an increase in U.S. oil production. IMO the revised EIA forecasts are still too high unless WTI goes to $65/bb. At the current active rig count it will be difficult to replace the declining production from just the wells completed in 2018. Permian Basin IP90 rates are 10% lower than the Permian HZ wells completed a year ago. - Dan

By John Kemp
LONDON, Sept 13 (Reuters) - U.S. crude production remained close to a record level in June but growth has slowed significantly since the end of last year in response to lower oil prices and the slowdown is set to extend into 2020.

Crude output averaged 12.1 million barrels per day (bpd) in June, essentially unchanged from record levels in May and April, according to data from the U.S. Energy Information Administration (EIA) published on Thursday.

Nevertheless, the shale boom is moderating in response to the decline in oil prices since the start of the fourth quarter of 2018, and the deceleration is expected to continue through the remainder of 2019 and 2020.

Output in the three months between April and June was up by almost 1.6 million bpd (15%) compared with a year earlier ("Petroleum supply monthly", EIA, September 2019).

But annual growth has slowed from a peak of 2.0 million bpd (21%) in August-October 2018, and production was broadly flat during the first six months of the year after strong growth throughout 2018 and 2017.

Record output in the first half of the year is the delayed response to the drilling boom and period of very high prices in the middle of 2018 (https://tmsnrt.rs/2ZQLRwd).

Prices typically affect production with a delay of about 12 months — given the time needed to contract rigs, move them to the site, drill and complete wells, and hook them up to pipeline gathering systems.

So current output reflects high prices last year, when WTI prices were above $65 and even $70 per barrel, rather than the much lower prices that are currently prevailing, with WTI trading at $55.

LAGGED RESPONSE

The persistence of high U.S. output in first half of 2019, when global consumption was growing at the slowest rate since 2014 and before that 2012, contributed to significant oversupply.

With production growth outstripping consumption through mid-year, inventories rose and prices have come under renewed pressure to enforce the required adjustments of consumption and especially production.

As the fall in prices since the fourth quarter of 2018 works it way through to lower drilling and completion rates, production growth should moderate towards the end of 2019 and especially in 2020.

The EIA forecasts output will rise by 880,000 bpd (7.3%) in the year to December 2019 and another 580,000 bpd (4.5%) in the year to December 2020.

But that would be significantly down from the increase of 2.1 million bpd (20.7%) in the year to December 2018 ("Short-Term Energy Outlook", EIA, September 2019).

Much slower growth in U.S. production, implying WTI prices in the $50-60 per barrel range, is likely to be an essential part of the global market rebalancing process.

Oil producers in the United States as well as the members of OPEC and its allies in the wider OPEC+ group show evident frustration with prices at current levels.

But lower prices are a necessary signal to slow production increases at a time when consumption growth is lacklustre owing to the poor performance of the global economy.

Kemp writes about EIA's production forecast:

"The EIA forecasts output will rise by 880,000 bpd (7.3%) in the year to December 2019 and another 580,000 bpd (4.5%) in the year to December 2020."

He then notes that such numbers would be a decline from earlier production growth rates, but he does not ask whether increasing production in July - Dec. 2019 by 880k bopd is likely (we are essentially flat for Jan-June, so the 880k growth in production has to occur in the July - Dec time frame) given flattish production Jan-June. I.e., what changed starting in July to support the opinion that production has started growing again?

What evidence is EIA using (what assumptions are they making in their formulas) that lead them to conclude that while production was flat in Jan-June, it will increase by 880k bopd by December?

When actual production for July is reported at the end of September it will show a decline of 150,000 to 200,000 BOPD from June to July.

There is really no way to explain why EIA has been forecasting big increases in U.S. oil production month after month in each STEO report while the U.S. active drilling rig count continues to decline.

This afternoon Baker Hughes reported that the North American active drilling rig count declined by 25 during the week ending 9/13/2019. Down 12 in the U.S. and down 13 in Canada. In the U.S. the number of rigs drilling for oil declined by 134 over the last twelve months, from 867 to 738. < We are simply not drilling enough new wells to keep production flat.