Lower oil prices and ongoing financial stress in the U.S. shale industry are creating headwinds for drillers, and it appears increasingly likely that supply growth could undershoot forecasts.
U.S. oil production fell in June to 12.082 million barrels per day (mb/d), according to new data released by the EIA on Friday. That is a decline of 33,000 bpd from May – not a huge drop off, but a decline nonetheless.
In previous months, maintenance at offshore oil fields made up a big chunk of the declines. While the overall figures for the entire U.S. appeared to disappoint, temporary declines offshore masked ongoing growth in the Permian. But this time around, blame cannot simply be pinned on offshore maintenance.
Remarkably, production in Oklahoma fell by a rather substantial 58,000 bpd, a sign of problems in Oklahoma’s SCOOP and STACK plays, which have proved to be somewhat of a disappointment. Anecdotally, companies have said that they were pivoting away from Oklahoma’s shale because of higher-than-expected costs and lower-than-expected production volumes. The latest EIA data suggests that lower investment in Oklahoma could be taking a toll.
Alaska also lost 19,000 bpd in June, which is noteworthy in light of BP’s recent decision to sell off its assets in the state and withdraw. Alaska has higher breakeven costs than U.S. shale in places like the Permian. According to S&P Global Platts, onshore Alaska breaks even with Brent at $55 per barrel (and $65 offshore), while a ballpark breakeven price for U.S. shale is $45 per barrel. Alaska’s output has been in long-term decline so the latest figures are consistent with that downward trend (although output will likely continue to seesaw month-to-month). Related: Colorado Drillers Ramp Up Production As Stricter Regulation Looms
New Mexico has become one of the major sources of oil growth, due to its share of the Permian. But output in New Mexico fell slightly in June, down by 14,000 bpd. Production in Texas actually grew, but only by 13,000 bpd, a figure that was consistently five or six times higher on a monthly basis last year.
In fact, a prior forecast from the EIA’s Drilling Productivity Report predicted that production in the Permian was going to grow by 56,000 bpd in June. That turned out to be overly optimistic.
Colorado saw another uptick in its output, rising by 19,000 bpd, which points to a rebound in output despite uncertainty over new drilling regulations.
What should we make of all of this? It’s only one month’s worth of data, but it represents another disappointment. The EIA maintains that the U.S. will average 12.3 mb/d in 2019, which is looking increasingly optimistic. The U.S. only averaged 11.95 mb/d in the first six months of the year, so output would need to dramatically accelerate in order to bring the overall average up. It would seem that the agency may soon be forced to revise down annual growth estimates.
To be sure, the weekly EIA estimates have output currently at 12.5 mb/d, which indeed is significantly higher than June figures. But these numbers are rougher estimates, and are subject to revision. For instance, at the time weekly EIA data in June estimated output was averaging 12.2 mb/d. But the monthly data that was just published, which is seen as more accurate, show that production was actually 12.08 mb/d.
This may seem like nitpicking, but the point is that unless production surged in July and August, the current estimates of 12.5 mb/d for late August may need to be revised down. The EIA itself said that production probably fell in July to 11.7 mb/d (in its most recent Short-Term Energy Outlook), due to temporary outages offshore from Hurricane Barry. Related: US Rig Count Slides But Oil Prices Can't Catch A Break
The more important point is that the oil industry is slowing down more generally.
Most oil forecasters expected explosive production growth to continue through this year and into 2020. But with June U.S. production at 12.082 mb/d, output is only about 80,000 bpd above levels seen at the end of 2018. In other words, growth has been pretty slow this year.
Financial stress is really setting in, forcing drillers to cut back. The rig count fell by 12 in the last week of August, part of an ongoing slide since reaching a peak late last year. Bankruptcies are on the rise. As the Wall Street Journal notes, an estimated 26 U.S. oil and gas companies have declared bankruptcy this year, which is close to the full-year 2018 total. More are expected.
Worse, there is a tsunami of debt that comes due in the years ahead. According to the WSJ, roughly $9 billion worth of debt was set to mature over the second half of 2019. But a whopping $137 billion in debt matures between 2020 and 2022, a massive total that stems from the huge debt issuance following the oil market meltdown a few years ago. A serious reckoning is just around the corner.
By Nick Cunningham, Oilprice.com
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