Notes on the Decline of US Crude Oil Production

 

shutterstock_227012731My first job after the Navy was running operations, compliance, and finance for a small exploration and production company based out Farmington, New Mexico. I remain involved in the industry through non-operated working interests in Kansas, drilling consultancy in the Permian Basin, upstream operations consulting moving drilling rigs, and am the principal of Blacklion Capital Management, a Commodity Trading Advisor.

We’re in the middle of the downstroke of an oil cycle that starts with over-production and/or a decline in demand (this time, both of those, combined with a rising dollar) that causes prices to fall, exploration to dry-up, and production to slow. However, given how many steps there are between a rig and your gas tank, it takes a while for this information to process through the industry before the upstroke can happen. Rising oil prices are in our future, though exactly when is not certain.

North American Crude Oil Market

In July 2014, NYMEX Light Sweet Crude Oil began a precipitous decline from more than $100/barrel to less than $50/barrel. By late October, oil began dropping exploration. When oil subsequently dropped below $80, operators started disassembling and storing (stacking) drilling rigs as further exploration and new production became uneconomic and short term funding for operations became scarce.

Exploration and Production

The total count of land rigs in North America peaked in November at 1,864, dropping to 760 in the latest report, a 59% decrease in almost a year, as detailed below:

BHTotalRigCount

Figure 1, Total Rig Count

Similarly, land rigs exploring for oil peaked at 1,609 in October 2014 and declined to 605 in the most recent report, a 62.4% decline:

BHRigCount_Oil

Figure 2, Exploration Count

These declines were expected and prudent with falling oil prices (prices fall, supply contracts). The sharp reduction in exploration and production activity should curtail hydrocarbon production, reduce storage, and ultimately bring supply and demand back to equilibrium and stabilizing prices.

US Production

But even as exploration and production activity began declining in the fall of 2014, US oil production — i.e., how much oil we were actually pulling out of the ground — continued to to set weekly records, months after rigs had started to be stacked out.

US continental field production — i.e., production in the lower 48 states — was 8.6 million barrels/day in late October 2014. By June 2015, that had risen to 9.2 million barrels/day:

US Continental Production

Figure 3, US Continental oil production in millions of barrels/day.

Since then — about a year after rig count began declining — production has dropped to 8.7 milllion barrels/day, though that’s still above the figures from last fall.

Similarly, total US production (i.e., including Alaska) peaked at 9.6 million barrels/day, and has declined to 9.17 million barrels/day, which is still above the 9 million barrels/day production rate from the fall of 2014:

USTotalProduction

Figure 4, Total US oil production in millions of barrels/day.

The drop in production is intuitive and consistent with a more than 50% decrease in exploration and production activity. The lag in production and storage response to rig count decline continues to impact petroleum storage and ultimately prices.

Petroleum Storage

Commercial Crude Oil Storage (non-Strategic Petroleum Reserve) continued to climb while production rose until storage peaked at its all-time high of 490 million barrels in April 2015:

CLStorage

Figure 5, US commercial petroleum storage.

Commercial crude oil peaked and then began its seasonal decline associated with spring and summer driving season, but total petroleum in storage continues to rise as the lag in exploration and production activity filters through the industry.

Likewise, Total Petroleum Storage — the total of twelve refined products, plus commercial crude oil storage tracked by the Energy Information Administration — has continued to set new records almost every week:

TotalPetroleumStorage

Figure 6, Total Petroleum Storage

Summary – Timeline

The significant lag in supply responding to a more than 50% price drop in crude oil continues to pressure prices and it is still early to call the bottom in oil prices.

The following timeline highlights the lag in the hydrocarbon supply chain:

  • July 2014 – NYMEX Light Sweet Crude Oil trades above $100 for the last time in recent history.
  • October 2014 – Operators begin stacking out rigs.
  • April 2015 – Commercial Crude Oil Storage peaks prior to summer driving season.
  • June 2015 – US Field Production peaks.
  • ??? – Total Petroleum Storage peaks.

The continued rise in refined products turns attention to weakness in demand while reduced exploration and production works its way through the upstream supply chain.

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  1. RushBabe49 Thatcher
    RushBabe49
    @RushBabe49

    Oil not pulled from the ground today remains in the ground for tomorrow.  Natural gas not “fracked” today remains in the ground to be “fracked” tomorrow.  What a perfect demonstration of the laws of supply and demand.

    • #1
  2. iWe Coolidge
    iWe
    @iWe

    All good and solid data, thanks!

    I believe that the high number of independent operators operating at the margin makes it possible for supply to be extremely variable. As costs drop, so, too, will the price of oil.

    Absent war, I don’t see an (inflation-adjusted) oil staying above $60 for any length of time. It could hang around $40 or less for the rest of our lives.

    I am astonished that capital is so desperate for a home that it keeps going into an industry that is so heavily commoditized, and whose larger producers suffer from the very same capacity issues that make it impossible to make a sustained good margin in, for example, the airline business.

    • #2
  3. BrentB67 Inactive
    BrentB67
    @BrentB67

    RushBabe49:Oil not pulled from the ground today remains in the ground for tomorrow. Natural gas not “fracked” today remains in the ground to be “fracked” tomorrow. What a perfect demonstration of the laws of supply and demand.

    Indeed and something our global competitors just don’t grasp about how energy production in a mostly free market works.

    • #3
  4. BrentB67 Inactive
    BrentB67
    @BrentB67

    iWe:All good and solid data, thanks!

    I believe that the high number of independent operators operating at the margin makes it possible for supply to be extremely variable. As costs drop, so, too, will the price of oil.

    Their efficiency and cost management is admirable. The quality players can accomplish a great deal with fewer rigs.

    Absent war, I don’t see an (inflation-adjusted) oil staying above $60 for any length of time. It could hang around $40 or less for the rest of our lives.

    Unless we see further decline in the Dollar Index or a war as you suggest I agree with your assessment.

    I am astonished that capital is so desperate for a home that it keeps going into an industry that is so heavily commoditized, and whose larger producers suffer from the very same capacity issues that make it impossible to make a sustained good margin in, for example, the airline business.

    The power of 7 years of ZIRP is amazing.

    • #4
  5. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    How easy is it to ramp up production on dormant rigs once prices rise above the break even point for NA fracking and oil sands?

    How does the current supply glut affect producers ability to push for fracking and oil sands efficiency and reduce the break even price for NA oil and gas production?

    • #5
  6. BrentB67 Inactive
    BrentB67
    @BrentB67

    Jamie Lockett:How easy is it to ramp up production on dormant rigs once prices rise above the break even point for NA fracking and oil sands?

    By production, I assume you mean return them to drilling activity. That is a man-power question. The hands that were laid off were mostly able to find work in lower paying jobs. A lot of guys I know went to construction, some in the auto industry, etc. The ability to get a rig out of the yard and back to drilling is based on the ability to assemble the team of ~24-30 hands required to run it 24/7.

    Most of the guys will come back to the oil field quickly. From getting a contract for the rig, to going through it, moving it out of the yard, rig up, and drilling could be as little as 3 weeks.

    How does the current supply glut affect producers ability to push for fracking and oil sands efficiency and reduce the break even price for NA oil and gas production?

    It has already given operators huge leverage to do so. With the possible exception of some tubulars I think every supply chain item or service associated with exploration and production is 1/3 or less of what it was 16 months ago.

    Additionally, operators still have leases that are not held by production that have to be drilled in the primary term. They are streamlining to meet those deadlines.

    • #6
  7. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    What are the policy goals we should be looking to in the short and long term? I assume it goes beyond the pipeline?

    Personally I am partial to corporate tax reform to allow full deductions for business investment, but are there others?

    • #7
  8. James Madison Member
    James Madison
    @JamesMadison

    Question for BB67 or anyone.

    You frack a well.  How long typically does that fracked well produce before it has to be fracked again or it is done?  18 months to decline – longer.  Understand this can vary.

    Any rules of thumb on life cycle?

    • #8
  9. BrentB67 Inactive
    BrentB67
    @BrentB67

    James Madison:Question for BB67 or anyone.

    You frack a well. How long typically does that fracked well produce before it has to be fracked again or it is done? 18 months to decline – longer. Understand this can vary.

    Any rules of thumb on life cycle?

    JM, that is a great question.

    Hydraulic fracturing has primarily been applied in 2 ways: non-conventional (shale) formations and very low permeability formations.

    When the process was first applied in the Barnett Shale it was common to stimulate (frac again) as soon as 18 months. We are not re-visiting wells that often any longer, but that is as much a function of commodity prices as it is engineering.

    Tight formations that I’ve worked around don’t appear to respond to subsequent stimulation as well as shale beds, but I have only anecdotal/2nd hand knowledge.

    Non-conventional formations will produce a very long time and is one of their attractive features. They may have high initial production, an initial sharp decline curve, and once stable will produce that for as long as a generation.

    • #9
  10. BrentB67 Inactive
    BrentB67
    @BrentB67

    Jamie Lockett:What are the policy goals we should be looking to in the short and long term? I assume it goes beyond the pipeline?

    The USA doesn’t have a shortage of hydrocarbons we have a shortage of infrastructure to transport them. 80%+ of our hydrocarbon production happens within vicinity of 20% of the population.

    Gathering and processing systems for natural gas and interstate pipelines for oil and gas will all help balance the market and increase efficiency.

    Exports would be helpful. The recent exchange program with Mexico is a good start. We could probably use more like it.

    Lifting the export ban will have more of an affect on refineries than upstream producers.

    Personally I am partial to corporate tax reform to allow full deductions for business investment, but are there others?

    Any corporate tax reform that benefits American industry will most likely help independent oil and gas operators.

    The treatment of intangible drilling costs isn’t as big a deal in drilling because we have such a high success rate drilling. There are very few dry holes where the capex and IDC must be capitalized in full cost accounting or expensed in successful efforts.

    In the past 3 years I can’ only think of one well that was not completed and produced and that is out of 100+ I’ve worked on. Those costs are generally capitalized and put on the depletion schedule.

    • #10
  11. jetstream Inactive
    jetstream
    @jetstream

    Brent, are you going to buy some leases at attractive discounts?

    I once owned an oil well. It wasn’t a gusher but was steady and profitable -no babes came with the well.

    • #11
  12. BrentB67 Inactive
    BrentB67
    @BrentB67

    jetstream:Brent, are you going to buy some leases at attractive discounts?

    There are always groups of guys looking for leases and I have worked with/for them occasionally. I only have one project right now similar to that and it is working with a mineral owner whose been approached to lease minerals he inherited.

    There is a lot of money as iWe points out still chasing this industry. There aren’t many discounts to be had. The leases expiring right now were mostly taken in 2012 and some may have been top leased.

    I always know folks willing to take leases at discount. The problem is there are a ton of them in the market place right now so not many discounts to be had.

    I once owned an oil well. It wasn’t a gusher but was steady and profitable -no babes came with the well.

    The babes usually don’t come with the well, but they do tend to flock around royalty checks. At least that is what my buddies tell me.

    • #12
  13. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    Should we be looking to expand refining capabilities closer to the point of extraction? I am completely ignorant of the logistics and engineering challenges here, but it seems crazy to me that the major refining points are concentrated in areas that are a long distance from the current drilling locations.

    • #13
  14. BrentB67 Inactive
    BrentB67
    @BrentB67

    Jamie Lockett:Should we be looking to expand refining capabilities closer to the point of extraction? I am completely ignorant of the logistics and engineering challenges here, but it seems crazy to me that the major refining points are concentrated in areas that are a long distance from the current drilling locations.

    I think the best we can do is lower regulatory hurdles related to refineries and let the market determine where to put them.

    Only the most recent major fields do not have a substantial amount of refinery infrastructure. Specifically the Bakken and Utica/Marcellus areas.

    The other major basins have infrastructure you mention. We can add refining infrastructure there and my guess is that is already happening. We will still need pipeline infrastructure to move the refined products.

    I think the gulf coast is the largest refinery complex and it is strategically located to service Gulf of Mexico production.

    • #14
  15. Manny Coolidge
    Manny
    @Manny

    It will come back up.  Give it a year.

    • #15
  16. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    BrentB67: I think the best we can do is lower regulatory hurdles related to refineries and let the market determine where to put them.

    That was my intent, I am not well versed in the regulatory environment surrounding refineries other than a general knowledge that it is vastly over regulated.

    • #16
  17. Steve C. Member
    Steve C.
    @user_531302

    One factor in the consumer’s favor, our frenemies have built their economies on oil sales = government revenues. I’m sure it causes no end of frustration for them that they planned expenditures on $120 a barrel oil and are getting $60. If only there was a way to use this to our advantage. A tactic employed in the past perhaps. No, that’s just crazy.

    • #17
  18. Ned Walton Inactive
    Ned Walton
    @NedWalton

    Great report Brent!

    • #18
  19. RushBabe49 Thatcher
    RushBabe49
    @RushBabe49

    Get rid of the environmentalists (and their greedy lawyers), and you will see more new refineries.  It’s a crying same that the enviros have totally shut down the building of new refinery capacity.

    Refiners’ raw material costs are lower, so you see lower gas prices and higher share prices of refiners.

    • #19
  20. iWe Coolidge
    iWe
    @iWe

    RushBabe49:Get rid of the environmentalists (and their greedy lawyers), and you will see more new refineries. It’s a crying same that the enviros have totally shut down the building of new refinery capacity.

    Refiners’ raw material costs are lower, so you see lower gas prices and higher share prices of refiners.

    We have no new refineries in decades – but the old ones have expanded many-fold, so it is not as bad as it may seem.

    The different state rules for different formulations really reduce the economies of scale, though. There is not a single 87 Octane unleaded gas – there are, I am pretty sure, well over 50, depending on the state and season. That increases costs.

    • #20
  21. Randy Webster Inactive
    Randy Webster
    @RandyWebster

    At what price point do they start unstacking the rigs and putting them back into production?

    • #21
  22. iWe Coolidge
    iWe
    @iWe

    Randy Webster:At what price point do they start unstacking the rigs and putting them back into production?

    All up and down the scale, depending on all the factors involved. Think of domestic US supply like a tap (almost-infinitely variable).

    • #22
  23. BrentB67 Inactive
    BrentB67
    @BrentB67

    Randy Webster:At what price point do they start unstacking the rigs and putting them back into production?

    Every basin is different.

    The biggest issue this time is how efficient the rigs still running have become. We are currently doing in 10 days what used to take a month.

    • #23
  24. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    I just wanted to say that this post is Ricochet at its best – someone with vastly more knowledge on a topic than the rest of us who is willing to educate us.

    • #24
  25. BrentB67 Inactive
    BrentB67
    @BrentB67

    Jamie Lockett:I just wanted to say that this post is Ricochet at its best – someone with vastly more knowledge on a topic than the rest of us who is willing to educate us.

    Thanks for the props and I agree. I remember Skipsul (I think) doing a series on high tech manufacturing that a lot of us found very interesting. I also like Concretevol’s discussion of what he does.

    I also enjoy the break from political combat.

    • #25
  26. Illiniguy Member
    Illiniguy
    @Illiniguy

    I was in TN over the weekend and paid $1.97/gallon. Brent: are petroleum prices leading or following indicators of economic activity, and what would the price of oil be if all that crude hadn’t been pumped back into the ground for storage?

    • #26
  27. BrentB67 Inactive
    BrentB67
    @BrentB67

    Illiniguy:I was in TN over the weekend and paid $1.97/gallon. Brent: are petroleum prices leading or following indicators of economic activity,

    Prices lead the market that is why it is hard to pick a bottom right now.  Prices will turn back up before supply is constrained enough to justify a higher price.

    It is especially hard right now because the market is underestimating how weak demand is and as iWe mentioned there is still a lot of money chasing a bottom in oil. From a general market perspective we don’t put bottoms in when everyone is looking for it and calling it. We put a bottom in when everyone is disgusted with losing money and walks away. I think we may have a way to go.

    and what would the price of oil be if all that crude hadn’t been pumped back into the ground for storage?

    I am not sure I understand this question. I am not aware of underground storage for crude oil the way we store natural gas.

    Oil is stored above ground, on lease, at terminals, at major refining complexes and in Cushing OK.

    Our infrastructure is still inadequate (people with pipeline MLP’s will disagree with me right now), but we can move oil from storage to refinery to market timely so the storage overhang suppresses price.

    • #27
  28. BrentB67 Inactive
    BrentB67
    @BrentB67

    Illiniguy:I was in TN over the weekend and paid $1.97/gallon. Brent: are petroleum prices leading or following indicators of economic activity, and what would the price of oil be if all that crude hadn’t been pumped back into the ground for storage?

    I saw $1.99 in rural Texas this weekend.

    • #28
  29. Illiniguy Member
    Illiniguy
    @Illiniguy

    BrentB67: I am not sure I understand this question. I am not aware of underground storage for crude oil the way we store natural gas.

    My bad, I’m still working on my first cup of coffee after driving from Illinois to Knoxville and back over the weekend.

    BrentB67: Prices lead the market that is why it is hard to pick a bottom right now. Prices will turn back up before supply is constrained enough to justify a higher price.

    You explain that very well, but I like this explanation better:

    • #29
  30. MikeHs Inactive
    MikeHs
    @MikeHs

    Thanks, Brent, for this post and all the follow-up information in answers to members’ questions.  I’ve been out of the upstream part of the business for a long time (now way, way downstream – more like off in the crevasse splays [groundwater investigations for fuel spills, primarily]) and my network has mostly moved off or aged out.  I try to check the Chronicle’s Fuelfix site for info; Oil and Gas Journal not so much as I’m not a subscriber.  What do you recommend as a good source of exploration and production news?

    • #30
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