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The sharp decline in oil prices over Q4 2014, which has continued in January, is already having a significant effect on drilling activity in the US, according...

US EIA: Lower 48 oil production outlook stable despite expected rig count reduction

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The sharp decline in oil prices over Q4 2014, which has continued in January, is having a significant effect on drilling activity in the US, according to the US Energy Information Administration (EIA). Information from Baker Hughes indicates a 16% decline in the number of active onshore drilling rigs in the Lower 48 states between the weeks ending on 31 October 2014 and 23 January 2015.

EIA’s January Short-Term Energy Outlook (STEO), issued on 13 January, forecasts Brent crude oil prices averaging $58/bbl in 2015 and $75/bbl in 2016, with annual average 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. Other key factors in the outlook for Lower 48 production include the efficiency of drilling, the rate of decline in production from existing wells, and changes in the amount of time between spudding and the completion of the well.

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, according to the EIA. 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.

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 US, 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.

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