One month ago, we reported that based on recent data, June oil output from shale producers would post the first double-digit production growth since July of 2015, when oil prices tumbled and a substantial portion of US production was briefly taken offline. While the final data has yet to be tabulated, it is safe to say that this is now the case.
Indicatively, while over the past year total U.S. production was up roughly 525kb/d, virtually all of it, or 98.5%, was the result of horizontal rig production in the Permian Basin, where output rose by just over half a million barrels per day.
The Permian basin has been leading the increase in horizontal oil rig count (+184%)
Also of note is that while US rig shows not signs of slowing yet, in its latest Weekly Oil Rig Monitor, Goldman predicted that $45/bbl is the price below which shale output would finally slow, although that price may also prove a substantial hurdle for many gulf budgets, whose all in cost of production – including mandatory and discretionary government outlays – is roughly the same if not higher.
Rig count (lhs), WTI spot prices (rhs, $/bbl, 3-mo lag)
But what is more notable, is that according to the June EIA Drilling Prodctivity Report forecast, in July total shale (note: not total) basin output would rise by 127kb/d from May's 5.348mmb/d, and hit 5.475 mmb/d, surpassing the previous record of 5.46 mmb/d reached in March 2015. Today the EIA released its latest Drilling Productivity Report, and while the number is not official just yet, it is safe to say that as of July, the total US shale basin is producing a record amount of crude oil, which the EIA pegged at 5.472mmb/d, up almost exactly as predicted, and is expected to rise by a further 113kb/d in August to a new all time high of 5.585mmb/d.
A look at the productivity breakdown, reveals the following picture:
Looking beyond the immediate production horizon, over the weekend Goldman's commodity team predicted that "assuming the US oil rig count stays at the current level, we estimate US oil production would increase by 840 kb/d between 4Q16 and 4Q17 across the Permian, Eagle Ford, Bakken and Niobrara shale plays", a number that is slighly higher than the 835kb/d Goldman predicted one week ago. Goldman also notes that annual average US production would increase by 320 kb/d yoy on average in 2017. The yoy production would rise by 490 kb/d in 2017 if we account for the impact of the estimated remaining county-level well backlog being gradually brought back online between May and Dec-17."
And, as we said last month, this is bad news for OPEC, which continues to price itself out of the market by not only keeping prices high enough to make production profitable for US companies, but by allowing shale to capture an increasingly greater market share.
Worse news is that shale is just getting started: both the Energy Information Administration, OPEC and the International Energy Agency have chronically underestimated the contribution of U.S. crude oil supplies in their forecasts. As Shale River notes, each has significantly increased their estimates for 2017 U.S. crude oil production during the year, with recent upward revisions larger than prior increases. In fact, the EIA recently conducted its 11th consecutive upward revision of its 2017 estimate.
But the worst news – for OPEC yet again – is in the long-term, where if 5.5mmb/d is considered a record, just wait until shale hits more than double that amount, or over 12mmb/d, which Goldman expects will be achieved some time in the 2020s.
The reason: shale breakeven costs are dropping on a monthly, if not weekly basis, and which over the next 4 years Goldman expects will plunge to prices where US production will become competitive with the lowest-cost OPEC producers: Saudi, Iran and Iraq.
Impossible? The chart below showing the collapse in breakevens in the past 9 years suggests otherwise:
Here is Goldman:
We believe the Big 3 shale plays (Permian Basin, Eagle Ford Shale and Bakken) combined with Cana Woodford plays (SCOOP/STACK) and the DJ Basin can together drive on average 0.8 mn bpd of annual production growth through 2020 and 0.7 mn bpd of annual production growth in 2021-25. We see production plateauing towards the end of the next decade at present. Importantly, as described below, we still see room for additional productivity gains; our estimates incorporate expectations for 3%-10% productivity gains per year through 2020.
While rest of the world is finding ways to move breakevens down towards $50/bbl WTI, we still see shale as the dominant source of growth and as a critical source of short cycle production. Our global cost curve from our recent Top Projects report shows continued decline in shale breakevens, though at a smaller pace vs. in past years. Outside of shale, we increasingly see industry – majors, national oil companies (NOCs) and governments – working to accommodate new projects that break even at $50/bbl WTI or less with a goal of becoming more competitive with shale. This largely is occurring through a combination of improved tax/royalty terms by host governments, more limited scale by producers (smaller projects that come online more quickly) and cost reduction/efficiency gains. We still see production from new projects falling off towards the end of the decade as a result of the reduction in investment after oil prices collapsed post-2014. As such, we expect shale will continue to be a critical source of marginal supply because shale along with OPEC spare capacity are the principal sources of short-cycle supply.
The bad news for OPEC is that it is trapped when it comes to oil prices: on the bottom by plunging state revenues and booming budget deficits, which spell out austerity, social instability and eventually revolution if prices are not boosted, and on the top by shale technological advances, which consistently reduce breakeven prices, and allow shale to stale market share from OPEC the longer prices are kept artificially high.
The solution, short-term as it may be at least according to Goldman, is that oil prices "need to stay lower for longer." That however is a non-starter with Saudi Arabia, which for obvious reasons, is rushing to IPO Aramco before math and physics finally declare victory over cartel-controlled supply, and oil prices crash. It remains to be seen if it is successful.
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