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Fundamentals 2B: U.S Production Potential & Relationships

Fundamentals 2B: U.S Production Potential & Relationships

Introduction

In the last series (2A), we discussed global oil production ranking, with the United States (U.S) topping the chart for 2018. Here, we look at the production potential of the U.S vis-a-vis the relationship between production, rig counts, Drilled & Uncompleted wells, and Take-away capacity.


Relationship Between Rig Counts and crude oil production

Rig counts have commonly been used as a metric of investor confidence (indicating the willingness for oil and gas companies to continue investing)-and they have been useful in informing production trends (fig 1A&B), although not completely.

When rig counts go down, it means that investors are not having strong faith in the oil industry. This can largely be seen between 1988 and 2009 when rig counts were on a general decline; likewise production (fig 1A&B). Similarly, after plummeting between 2015 and 2016, the number of rigs drilling for oil rebounded sharply over the next two years (2016 to 2018) – with oil production mimicking same pattern. However, between 2014 & 2015 the same pattern could not be established; drill count fell but then domestic production continued to rise!

There are several factors that inform U.S crude oil production potential. Rig count, though revealing, can also be misleading when interpreted as an ‘exclusive’ criterion in determining production movements. This is because oil does not begin to flow right after a rig drills a well through a formation. After a well has been drilled, it must be completed before hydrocarbons can be produced. Completion often involves casing, tubing, gravel packing, cementing, perforating and hydraulic fracturing. Some wells are completed shortly after drilling is concluded, and other wells remain drilled but uncompleted (DUC) for several months or years.

Fig1A: Crude oil rig count 1988 to 2018
Source: U.S Energy Information Administration, 2019
Fig1B: U.S domestic production 1980 to 2018
Source: U.S Energy Information Administration, 2019

DUC Movements

Drilled but uncompleted wells DUCs are wells that have been drilled but still awaiting completion. It is sometimes seen as the missing link in understanding the relationship between US drilling (rig count) and production.

Looking at the 5 crude oil regions captured in the EIA’s Drilling Productivity Report (DPR), there has been an increase in DUC count in the last 5 years in each region (with the exception of Niobrara – attributed to its attraction
as not having any crude oil pipeline constraints). Of significant interest is the Permian where the DUC count increased by 187% between 2014 and 2019 (fig 2a).

Fig 2 (a): DUC count in each shale play of the DPR region (b) Total DUC count in the crude oil DPR regions
Source: U.S Energy Information Administration, 2019

Overall, the number of DUCs has mostly been on an increase since the end of 2016 (fig 2b). There are several factors responsible for this. For example, a low-price environment might delay well completion activities. Also, transportation constraints might push completion activities later in time – such as pipeline networks being insufficient to accommodate supply (takeaway capacity).


Take-Away capacity

As the U.S production continues to rise, the need to get the oil out of production sites and into the market is rising as well.

Fig 3: U.S crude oil pipeline capacity
Source: U.S Energy Information Administration, 2019

For a long time, producers in the D-J and Powder river basins have been fortunate as midstream companies “overbuilt” take away capacity to transport the incremental barrels being produced from the region since the start of the 2010’s (with quadrupled production growth between 2010 and 2018). However, part of a pipeline system moving crude out of the D-J basin (in the rocky mountain region – fig 3) is now being re-purposed to transport natural gas liquids (NGLs), amidst growing crude oil production from the PRB and D-J basins – making the need for new pipeline capacity such as the 100Mb/d Iron Horse pipeline that has recently begun moving crude from PRB to Guernsey, Wyoming.

Most of the increased take away capacity in the mid-west region (fig 3) in the last two years is from the 525 Mb/d Dakota access pipeline (DAPL) which runs from the Bakken production in Northwest Dakota and continues through South Dakota and Iowa to Patoka, Illinois. The pipeline was put in service in 2017, with expansions beginning as early as 2018 – and in 2019, plans have already been announced to increase its capacity by another 530 Mb/d, a project that has been stalled by environmentalists in North Dakota and is currently undergoing public consultation. With these expansions and planned capacities, the Bakken might be heading towards a crude pipeline overbuild.

Production in the Permian is known to have increased at a rate significantly more than the takeaway capacity in the region, causing depressed Permian crude prices. After suffering from a lack of adequate takeaway capacity in 2018 and part of 2019, there are now new major pipeline capacities being added to relieve the crisis. A 400 Mb/d Epic line has just begun shipping crude oil from the Permian to the U.S Gulf coast, with a planned 200Mb/d expansion expected to come online by January 2020. Also, three pipelines with a combined capacity of about 2 million barrels per day (connecting the Permian basin to the U.S. Gulf Coast) are expected to be in service before the end of the year. The pipelines are: Gray Oak pipeline, Cactus II pipeline and Gulf Coast Express (GCX) pipeline. Other planned capacities include a new 1MMb/d Jupitar pipeline from the Permian basin to three different deep water ports in Texas (Houston, Corpus Christi and Brownsville) and expected in 2020; a 450 Mb/d Midland-to-Echo 3 pipeline expansion that will transport crude from Midland (the heart of the Permian basin) to the ECHO terminal in Houston and is expected to be fully completed by the third quarter of 2020; And a new 1MMb/d Wink-to-Webster pipeline that will flow crude oil from Midland, Texas and Winks, Texas to multiple locations near Houston, with full operations expected in 2021.

In conclusion, the rising U.S DUC inventory is like a bomb waiting to explode. Think of the amounts of crude oil that can be produced from these wells, combined with the growth trends in pipeline capacity! The economic impact from just completing and bring these wells online as well as moving them to markets (at the right price) could in fact sustain the U.S as the true global energy leader for many years to come.


Reference

EIA: “Crude Oil and Natural Gas Drilling Activity”, May 21, 2019, https://www.eia.gov/dnav/ng/ng_enr_drill_s1_m.htm

EIA: “Drilling Productivity Report”, September 16, 2019, https://www.eia.gov/petroleum/drilling/

EIA: “New liquids pipeline projects database shows new U.S crude oil pipeline capacity”, May 30, 2019, https://www.eia.gov/todayinenergy/detail.php?id=39672

RBN Energy: “Rocky Mountain High?”, October 28, 2018, https://rbnenergy.com/rocky-mountainhigh-
part-2-niobrara-crude-production-growth-and-takeaway-pipeline

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