Under a price-recovery scenario that assumes West Texas Intermediate oil prices will hit $60-70/bbl from 2019 onwards, shale drilling and completions will increase at 20%/year and production will increase at 12%/year through 2021, according to the newly released North American Shale Oil Outlook by McKinsey Energy Insights (MEI), an energy data and analytics specialist.
Meanwhile, US shale oil production is estimated to reach 9 million b/d by 2025, but this could vary by 5.4 million b/d depending on oil price scenarios.
According to MEI, although North American shale oil margins have struggled to bounce back after the market plummeted in 2014, drilling activity since second-quarter 2016 has more than doubled. The report highlights that recent key operational improvements—such as increased drilling efficiency, better completion designs, and high-grading—will help margins widen and enable drilling to become profitable beyond the most resource-rich basins.
MEI found that operators have reduced drilling time by an average of 5 days while improving initial production (IP) by 33% from 2014 to 2016. Wells with better completion designs—like high-proppant-volume wells—have experienced 35% higher IP than average, but these gains are subject to additional costs because of water and sand sourcing.
MEI forecasts that the number of wells completed will rise at 21%/year until 2021, requiring total capital expenditures to increase 25% each year to reach 2014 spending levels.
MEI expects the Permian basin to be the primary shale oil area to watch over the next 10 years due to its resource quality and size, proximity to markets, and existing infrastructure. The Permian’s average core breakeven price for 2017 is less than $41/bbl. Low breakeven is enabling the Permian to remain profitable despite well cost increases of 30%.
The Permian’s IP growth rate for the past 5 years was 20% compared with Eagle Ford and Bakken, at 2%, and the Permian has more remaining drilling locations as it is still in the early development stage.
From 2016 to 2021, MEI projects that 47% of growth in rig activity will come from the region with remaining activity similarly spread across the other major basins.