Stunning growth in US oil production may come to a halt by mid-2015 as low oil prices begin to constrain US tight oil production, which has been the dominant engine of world oil supply gains in recent years, according to a new report by information and analytics provider IHS. Growth is still expected in the early months of 2015 but that momentum will level off in the latter half of the year amidst prices at lows not seen since the 2008-09 Great Recession.
The new report, based on an IHS study of 39,000 wells, points to the possibility of month-to-month US oil production growth coming to a halt in the latter half of 2015, assuming that West Texas Intermediate (WTI) prices remain below $60.
The study identified a wide spectrum of break-even prices for US crude oil production. About a quarter of new wells in 2014 had a breakeven WTI price of $40 or less. Just less than half of new wells in 2014 had a breakeven price of $60 or less. At the opposite end of the spectrum, nearly 30% of new wells had breakeven prices of $81 or higher. The break-even level is the WTI price needed to cover capital and operating costs and generate a 10% return.
Hedging programs, finishing work on uncompleted wells, contractual obligations and further drilling of the most economic tight oil plays mean that many new wells will still be drilled in 2015. But adverse economics and lower spending will lead to fewer wells drilled than in 2014, the report says.
Monthly average US production at the close of 2015 is projected to be about half a million barrels per day above the January 2015 average, but nearly all of that growth will come in the first half of the year. By December 2015, US oil production growth will have been flat for several months, the report says.
“US oil production has been the main engine of global supply growth in recent years,” said Jim Burkhard, vice president, IHS Energy. “And momentum from strong growth in the second half of 2014 means the impact of lower prices will not immediately drive production lower. But the reality of lower oil prices and less spending on new wells will affect production as 2015 progresses.”
The fate of US oil production growth past 2015 and into 2016 will be shaped by global economic conditions, geopolitics and changes in industry costs, all of which are in a state of flux, according to Raoul LeBlanc, IHS Energy senior director, Financial Markets and co-author of the report.
“So much can happen over the course of a year,” LeBlanc said. “If oil prices remain weak and confidence in future prices remains shaken, US production in 2016 could possibly flatten or even decline. But there is plenty that could happen—a recovery in oil prices, lower upstream costs and improved well productivity—that would quickly change the calculus of drilling new wells and reinvigorate US production growth.”