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U.S. Oil and Gas Production and Price Outlook

Following years of suppressed market conditions, many view 2017 as the comeback year for the U.S. oil and gas industry. In the wake of the crude oil price collapse in 2014, U.S. production for both crude and natural gas flattened, then dropped through 2016. And even though prices for crude continue to hover around $50 per barrel, U.S. producers have tightened their belts and reemerged with lower breakevens, more efficient operations and wells that are bigger than ever. As a result, Drillinginfo is forecasting dramatic growth through 2018 and beyond.

Drillinginfo tracks 72 of the most important operators across U.S. unconventional plays. Specifically, the company follows their capital expenditure plans; operational trends (such as drilling and completion costs); lease operating expenses; and merger, acquisition and divestiture activity. This information is paired with Drillinginfo’s detailed production and type-curve data to generate short-term volume forecasts. These forecasts represent the company’s best outlook for production through the end of 2018.

Total U.S. crude production is currently forecasted to grow 906,000 barrels per day (BOPD) between December 2017 and December 2018. Meanwhile, gross natural gas production is forecasted to grow 5.14 billion cubic feet per day (Bcf/d) between December 2017 and December 2018.

The dramatic increase in production is a result of a sharp increase in rig activity, shorter drill times, bigger wells and relatively low drilling and completion costs. As tracked by Drillinginfo’s Rig Analytics, at the start of December 2017, the rig count stood at 1,083, up from the low of 433 rigs observed in May 2016.

Global Crude Prices

The growth of U.S. production is also a key driver of global crude prices. Expected to be the marginal supplier going forward, U.S. basin breakevens will establish global prices.

U.S. breakevens, adjusted for quality and transportation costs, range between $25 per barrel and $100-plus per barrel, but $50 West Texas Intermediate (WTI) is a key price threshold that allows U.S. production to grow. At $60 WTI, the U.S. can increase domestic crude production by more than 750,000 BOPD. As a result of these key price thresholds, combined with trends in demand and storage levels globally, Drillinginfo is currently forecasting WTI prices to average $52 through 2018.

Regarding natural gas prices, Drillinginfo is forecasting an average of $3 for Henry Hub prices in 2018. This price is a result of detailed knowledge available to analysts on supply and demand forecasts by sector for power generation, industrial end uses, residential/commercial load, exports to Mexico and LNG exports.

Beyond 2018

Looking beyond 2018, U.S. production breakevens, plentiful supply and short cycle response times will keep both crude and natural gas price ranges bound for the foreseeable future. Specifically, the U.S. oil and gas industry’s ability to produce a lot of crude and natural gas at $60 WTI (U.S. crude benchmark price) and $3 Henry Hub (U.S. natural gas benchmark price) will keep global prices from reaching historic peaks again. U.S. unconventional supply has changed the crude and natural gas markets.

While numerous basins are influential to overall U.S. production growth, the Permian Basin is unparalleled as the single most important driver of crude growth through 2018.

Permian Basin Oil and Gas Forecast

The Permian is long known as a legacy conventional basin. Operators are now enjoying the benefits of decades of geologic research, numerous economic stacked pay zones and a friendly business environment for oil and gas. Producers have taken lessons learned from other explored unconventional plays such as the Haynesville, Barnett, Fayetteville, Bakken, Eagle Ford, Marcellus and Utica, and are now applying them in West Texas. Type curves are improving, activity is up and the basin now represents the largest contribution to growing U.S. oil production.

More specifically, Drillinginfo tracks 29 individual operators in the Permian Basin, many of which are members of the Texas Independent Producers & Royalty Owners Association (TIPRO), ranging from large players like Concho Resources, Apache and ExxonMobil (XTO Energy) to up-and-comers such as EP Energy, Matador Resources, Diamondback Energy and Parsley Energy.

Currently, Drillinginfo is forecasting the region to grow crude production by 544,000 BOPD between December 2017 and December 2018. Among the producers, ExxonMobil and Parsley Energy are each expected to grow by more than 30,000 BOPD of crude production by December 2018, compared to the same point last year. On the natural gas side, Drillinginfo expects 1.24 Bcf/d in growth between December 2017 and December 2018.

Figure 1

U.S. Oil and Gas Production and Price Outlook_KB FIRST EDIT DONE

In line with broader U.S. rig trends, the changes in the Permian’s rig count since 2016 have been dramatic. The basin’s rig count reached a low of 129 in May 2016, but has since rebounded to 418. As of the first week in December 2017, Pioneer Natural Resources and ExxonMobil were leading activity with 20 and 19 rigs, respectively, followed by Concho Resources and Parsley Energy at 18 rigs, Apache at 17 rigs, Chevron and Occidental Petroleum Corporation each running 15 rigs, and EOG Resources at 14 rigs. Other operators make up the remaining approximately 280 rigs.

Not only is activity up in the region, but each rig is now more productive than it has ever been because producers are able to drill wells faster and have increased the overall intensity of well completions to maximize productivity. These efficiency gains are here to stay and include more proppant injected per lateral foot, extended laterals and multi-bench drilling (drilling multiple formations from one wellbore).

The impact of efficiencies on breakeven economics is dramatic. Permian crude breakevens are illustrated in Figure 2 and range between $27.52 for the Delaware Basin Bone Spring formation tier-one assets to $100 for numerous tier-three assets and small basins on the outskirts of the Permian such as the Val Verde and Marathon-Ouachita.

Figure 2

U.S. Oil and Gas Production and Price Outlook_KB FIRST EDIT DONE

U.S. Oil and Gas Production and Price Outlook_KB FIRST EDIT DONE

2017 Marks Turning Point

Led by production gains from the Permian Basin, 2017 proved to be the right time for a comeback for the U.S. oil and gas industry. Drilling and production efficiencies are at all-time highs, the rig count has increased by 224 percent since the low in May 2016, and the United States is on track to grow production in 2018 and for years to come.

 

About the author: Bernadette Johnson joined Drillinginfo through the acquisition of products and services from Ponderosa Energy. She serves as Vice President of Market Intelligence for Drillinginfo and is responsible for helping to grow and expand the company’s analytics offerings, building on her work as a founding partner of Ponderosa Energy leading consulting engagement and research efforts. With more than 10 years of experience in the energy industry, Johnson has earned the reputation of industry expert with extensive experience providing crude, natural gas and NGL fundamentals analysis and advisory services to various players in the North American and global energy markets. A regular commentator for and speaker to the energy industry, her specific market expertise spans financial trading, production forecasts, demand forecasts by sector, infrastructure analysis, midstream analysis, storage value analysis and price forecasts.

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