With the Organization of Petroleum Exporting Countries reaching an agreement to cut production, Genscape expects resulting higher crude prices to spur U.S. producers to add 125 more rigs by mid-2017. A large number of these rigs will go back to work in the West Texas Permian Basin.
West Texas Intermediate prices above the 50 dollar per barrel support level should increase levels of drilling and investment, specifically in the Permian Basin, but also across other shale plays including the North Dakota Bakken, SCOOP/STACK in the Midcontinent, Niobrara mostly in Colorado, and South Texas Eagle Ford.
The cuts by OPEC members have stirred bullish sentiment towards U.S. producers by offering an opportunity to regain market share. At the same time, a new wave of U.S. production could cap oil prices as production rises. U.S. production is anticipated to grow again in mid-2017, and additional takeaway infrastructure will be required, particularly in the Permian Basin.
According to RigData, since bottoming in May, oil rig counts increased from 323 to 523 rigs during the week ending December 2, 2016. In the Permian alone, oil rigs have increased by 110 rigs during this time period. This accounts for 55 percent of overall Lower 48 rig count growth and shows that the Permian Basin is presently one of the most economic oil plays. Other areas have also seen an uptick in rigs since May, but to a lesser extent: the Eagle Ford (+17 rigs), SCOOP/STACK (+15 rigs), Bakken (+8 rigs), and the Niobrara (+6 rigs).
Each basin, and each new well drilled within these basins, have different economics based on multiple variables, primarily drilling costs, drilling times, initial production rates, and estimated ultimate recovery. As a result, each play has a different capacity for rigs at various prices. Also, there is a period of time, on average about six months, between a price signal and a rig movement to account for rig contracts and getting crews back to work, hedges that are in place, and cash flow concerns that pose short-term constraints to a producer.
Considering these factors (that are baked into the lag between a price signal and rigs spudding wells and the week-over-week WTI gain of $5.09 per barrel, week ending December 2, 2016), Genscape expects 2017 production to decline 91 Mb/d year-over-year, much less than previously thought. This decline is nearly half of the decline of 178 Mb/d expected for 2017 year-over-year that Genscape forecasted in early November (when 2016 WTI pricing fell to $44.07 per barrel in the week ending November 4, 2016). Production is now expected to grow to 8.9 MMb/d by the end of 2017 from current levels of 8.6 MMb/d. After declining since mid-2015, production is expected to grow again in Q3 2017, the period for which Genscape's forecast has been most impacted by the recent price uptick. The Permian Basin is expected to lead the way, growing 335 Mb/d year-over-year in 2017. Other areas such as the Midcontinent, Bakken, Niobrara, and Eagle Ford will also contribute to the rise in production.
With the growth projected in the Permian, primary outbound infrastructure could be challenged as early as mid-2017. The only new pipeline project proposed is Enbridge’s Midland, TX,-to-Houston 300 Mb/d line slated to be online in mid-2018. As Enbridge said in their third quarter earnings call, “The pipe is purchased. The right-of-way is all but done, 90 percent of the right-of-way. I think we're looking at April/May of 2018, and we’re going to build the pipe. And we think it’ll be full. Its initial capacity is 300,000 barrels and day, and we’ve got three contracts. So it’s going to be a success.”
The OPEC agreement to cut 1.2 MMb/d of production is a welcome relief to U.S. oil producers battered since late 2014 by sharp price declines. Uncertainty remains in how quickly U.S. activity will ramp up, though U.S. upstream producers will emerge from this downturn with much leaner cost structures and more efficient operations. As production grows again in late 2017, infrastructure requirements will need to be closely assessed, particularly in the Permian, which is likely to become constrained later next year. The downside risk in the next two years is that U.S. production could ramp too quickly, sending the market toward a relapse in oversupply. But with OPEC taking approximately 1.2 MMb/d off the market, and U.S. production only falling by 800 Mb/d since December 2014, U.S. producers are poised to regain some production losses. To keep up to date on new activity, request a trial of Genscape’s U.S. Crude Oil Production Report.