​U.S. shale producers have proven to be the ‘most resilient’: EY report

Led by the resilient unconventional sector, U.S. oil and gas production continues to strengthen and is poised for further growth, says a new EY study based on Evaluate Energy data.

The US oil and gas reserves and production study ( available here ) is a compilation and analysis of oil and gas reserve disclosure information as reported by publicly traded companies.

The report presents the U.S. exploration and production (E&P) results for the five-year period from 2013 through 2017 for the largest 50 companies based on 2017 end-of-year U.S. oil and gas reserve estimates. The study companies cover approximately 44 per cent of the U.S. combined oil and gas production for 2017 (45 per cent for 2016).

And despite the downward pressure on prices that began to take hold in mid-2014, the U.S. shale sector has managed to navigate the choppy waters as production has ramped-up and costs have decreased.

“Sustained high oil prices were initially required to unleash the unconventional revolution seen in the United States, but the shale patch has been the most resilient in response to downward price pressures beginning in mid-2014,” EY said in its report.

“Because of this resilience, U.S. oil production posted an average four per cent annual growth during the 2013–17 study period, even accounting for a modest decline in output in 2016.”

According to the report, total U.S. crude oil production averaged 9.3 million bbls/d in 2017. The Energy Information Administration (EIA) projects that U.S. crude oil production will average 10.8 million bbls/d in 2018, which would mark the highest annual average U.S. crude oil production level, surpassing the previous record of 9.6 million bbls/d set in 1970.

The EIA forecasts that 2019 crude oil production will again increase, averaging 11.8 million bbls/d.

U.S. dry natural gas production averaged 73.6 bcf/d in 2017. The EIA forecasts dry natural gas production will average 81.2 bcf/d in 2018, establishing a new record. The EIA expects natural gas production will rise by 2.9 bcf/d in 2019 to 83.8 bcf/d.

The growth in output occurred despite a challenging price environment.

EY noted that while the study period began with strong West Texas Intermediate (WTI) oil prices, the latter half of 2014 saw a drastic drop, followed by continual monthly price declines.

Between 2013 and the middle of 2014, average monthly WTI prices were in the US$92 to US$107/bbl range. Following improvement starting in 2016, WTI reached US$58/bbl in December 2017 and US$70/bbl in May 2018 — the highest level since December 2014.

Throughout the study period, natural gas prices were generally weak, with 2015 and 2016 being extremely low. Monthly average U.S. Benchmark Henry Hub prices languished below US$2/mmBtu during the early part of 2016, but recovered in the latter part of 2016 and averaged around US$3/mmBtu for the rest of the study period.

Cost efficiencies help output remain strong despite reduced spending

Capital investment fell during the 2015–16 down cycle, and reserve additions fell almost in lockstep. In 2017, reserve additions increased dramatically, with an improved price environment.

Although spending rose, the report said capital expenditure levels far below the 2014 spending peak were “sufficient to maintain production at near-record levels.”

Sustaining the surge were dramatic improvements in cost efficiency: between the spending peak in 2014 and 2017, the number of capital dollars required to add a bbl of reserves fell by more than half, from US$16.79/boe to US$6.62/boe for the study group.

“Some of that reduction is due to efficiency improvement and is sustainable; however, some of the reduction is due to service cost reduction and cannot be sustained without continued stress on the service sector due to increasing costs of labor and services,” EY said.

Existing drilled but uncompleted (DUC) wells inventory will contribute significantly to completions and new production in the coming months, as well as insulate short-term production from some cost pressure as activity ramps up further. According to EIA data for seven key U.S. regions, DUC inventory reached a record high of 7,692 wells in March 2018.

According to the report, DUC inventory has grown steadily with the improvement in the price outlook and drilling activity: DUCs stood at 5,549 at year-end 2016, rising to 7,361 (up 33 per cent) at the conclusion of December 2017.

Permian and Eagle Ford DUC inventory accounted for the largest portion of DUC inventory — 59 per cent as of March 2018, reflecting the overall emphasis on these two plays.

“Based on DUC wells inventory and recent trends, it’s expected that increased production from Permian will account for the major portion of the U.S. oil production increase,” the report said.

Incremental production from Permian increased by 282 per cent from the beginning of 2015 to March 2018 and dominated the tight oil production. This is significantly higher than any other tight oil play as demonstrated in the incremental tight oil production chart below for 2013 through 2018.

“However, this increase has started facing pipeline constraints. As production grows beyond the capacity of existing pipeline infrastructure, producers must use other forms of transportation, including rail and trucks,” EY said in its report.

As a result, WTI Midland price spreads widened to the largest discount to Brent since 2014: US$17.69/bbl on May 3, 2018.

“The sharp increase in Permian production also has impacted labour, rigs, equipment and oilfield services costs. Even though these may be short-term challenges, the impact on production will likely have immediate impact on crude supply given the significance of the play,” the report said.

Study highlights: 2017 versus 2016

Commodity prices improved in 2017 increasing revenues and results of operations. EY said the studied companies “continued to optimize their portfolio and cost structure” in order to respond to the cyclical nature of commodity prices.

Capital expenditures totaled US$114.5 billion in 2017, 32 per cent higher than 2016 and two per cent lower than 2015.

“Growth is observed in all categories of spend. Development and exploration spend increased the most by 49 per cent and 30 per cent, respectively,” the report said.

The studied companies drilled 30 per cent and 23 per cent more development and exploration wells, respectively, compared to 2016.

Revenues were US$135.9 billion, up 32 per cent from 2016 and the highest since 2014 as a result of improved commodity prices.

Impairments in 2017 were US$10.2 billion, a 47 per cent reduction from 2016 and the lowest since 2013 as the study companies’ outlook of future prices further stabilized.

Depreciation, depletion and amortization (DD&A) expenses decreased, mainly due to lower unit-of-production rates, which resulted from reserve revisions and dispositions as well as higher impairments in prior periods.

After-tax earnings of US$17.2 billion in 2017 were recognized a substantial improvement from US$33.8 billion in net losses in 2016 and the first combined net income position since 2014.

Oil and gas production and reserves

Oil production increased five per cent from 2.3 billion bbls in 2016 to 2.4 billion in 2017.

Oil production increased by 35 per cent from 2013 to 2017, with the independents’ production growing 88 per cent, compared with 25 per cent growth for the large independents and 20 per cent growth for the integrateds.

“Oil reserves for the study companies increased 21 per cent in 2017 due to significant extensions and discoveries, net upward revisions and purchases partially offset by production and sales. As a result, the study companies reported the highest oil reserves for the five-year study period,” the report said.

Extensions and discoveries increased by 76 per cent in 2017 from 2016 and, at five billion bbls, was the highest of the study period following the lowest level reported last year.

Natural gas production in 2017 was 12.5 tcf, a seven per cent decline from 2016, primarily due to sales of gas assets to companies outside the study group.

From 2013 to 2017, the large independents led the way and increased production by 10 per cent. The integrateds decreased by 17 per cent; independents decreased by one per cent.

End-of-year gas reserves for the study companies increased 19 per cent in 2017 to 176 tcf, marking the highest level of gas reserves since 2014.

“The increase is mainly due to extensions and discoveries, upward revisions and purchases, partially offset by sales of proved gas reserves and production,” the report noted.

Study companies recorded net upward revision of 9.9 tcf in 2017— the first net upward revision for the study period. The study companies reported 13.3 tcf upward revisions and 3.4 tcf downward revisions. The large independents posted the biggest portion of 2017 revisions (46 per cent), which was followed by the independents (31 per cent) and the integrateds (23 per cent).

Download your free copy of EY's US oil and gas reserves and production study report here.