US Oil Production Forecast Scenario

Readers are keen to know when US oil production will begin to fall. This is not an easy question to answer but in the comments to last week’s rig count update some interesting links were posted. Among them I came across a link to an Energy Information Agency (EIA) report into US drilling efficiency that sought to link future production to drilling activity and this seemed an interesting avenue to explore. The analysis presented here is jam packed with multiple lines of uncertainty, but a simple analysis based on many assumptions suggests that US production may actually increase further by about 1 Mbpd, due to an estimated 18 month time lag between drilling and first production, improved drilling efficiency and a growing backlog of drilled but idle wells. US oil production may not actually begin to fall in earnest until the middle of 2016.

Figure 1 US oil production (RHS) and total rig count from Baker Hughes (LHS). While we feel instinctively there should be a connection between drilling and production, it is not at all obvious from this chart. The production spike down in 2008, whilst coincident with the financial crash and plunge in drilling, is I believe linked to a hurricane. The essence of this post links production decline in 2010 to the drilling decline of 2008/09.

The starting point for this analysis is to look at recent history. In the wake of the 2008 finance crash, US drilling plunged then as it has done now. What impact did that have on production? There is a small dip in production aligned with the crash but I believe that dip has nothing to do with it and was instead caused by a hurricane closing down US Gulf of Mexico offshore rigs. So when did the decline in drilling show up in production?

It is at this point important to understand that in 2008 / 09, most shale drilling was for gas and it was in the post crash rise that there was a massive migration to drilling for oil (Figure 2). However, gas wells produce some liquids (natural gas liquid (NGL) and condensate) and oil wells produce gas. In some cases the lines can be blurred between the two. In this post I look at total rigs (oil + gas) that is compared to crude + condensate + NGL production as reported by the IEA.

Figure 2 Individual counts of US oil and gas rigs shows that following the 2008 crash, when the drilling recovery came it was led by oil and the shale oil revolution. This post combines oil and gas rig counts.

There is surprisingly no obvious plunge in production that is clearly linked to the plunge in drilling (Figure 1). The only feature is a small oil production decline that began around March 2010, about 18 months after the decline in drilling began and at a time when shale oil drilling was already building a head of steam. The impact on oil production then was muted because most of the preceding drilling frenzy was to target gas.

So why should there be and is it conceivable that there is up to 18 months delay between a well being drilled and production coming on line? It is well known that there has been and still is a major backlog of drilled but idle wells. In the Bakken there were 900 wells awaiting completion (HT Olav) at end February compared with a need of 110 new wells per month to sustain production levels. And so in the Bakken there is a  backlog of wells already drilled that could maintain production at current levels for 8 months at end February. That was 4 months into the recent oil price and drilling crash, so there we already have a 12 month delay. But they are still drilling and the backlog is still growing. 18 months may seem a long response delay but these data do substantially back it up.

Once a well is drilled it must then await the fracking crews. And in most cases wells must also await for a pipeline system to arrive to capture associated gas. And more recently, operators are waiting for higher prices before switching production on. The flood of initial production is required to pay for a well. Produce that at the wrong price and a profit may never be made.

Figure 3 In this chart the rig count is offset by 18 months bringing into line the the drilling decline and oil production decline of 2010. It also brings the main rise in US oil production into closer alignment with the major growth in drilling shale oil wells.

Applying an 18 month offset to the rig count data makes a degree of sense (Figure 3). It first of all aligns the 2008 drilling crash with the 2010 production decline. But it also makes it easier to link the recent strong growth in production to the strong growth in drilling that actually ended in 2011.

Figure 4 This chart attempts to link US drilling to production growth using the 18 month offset data series. The big spike has nothing to do with drilling efficiency but rather with the 2008 crash and the resumption of drilling. The baseline (dashed line) shows how production growth may be linked to growth in drilling efficiency.

An attempt to link drilling to production is shown in Figure 4 by simply dividing production by rig count. The large spike is the transient response to the decline and rise in rig utilisation. The underlying baseline may reflect the improved drilling efficiency. The improved efficiency of oil drilling is first of all down to targeting oil instead of gas. In addition to that wells are being drilled better, faster, cheaper with improved flow rates. The implication is that several years ago a single rig could sustain 4000 bpd production. Today, that figure has grown to 7000 bpd. Note that sustaining production is not the same as providing that production.

Pushing the boat way out, I have applied the 7000 bpd efficiency to the 18 month time shifted rig count data. Somewhat surprisingly, and worryingly for the oil industry, it shows US production rising by a further million barrels per day into the middle of 2016. That is because, before the oil price crash, US shale oil drillers were drilling more and better wells. What we see in terms of production today may have been set by drilling over a year ago.

Figure 5 Same as Figure 3 but with a  forecast scenario linked to the 18 month time shifted rig count data applying 7000 bpd per rig. The production decline is rather too severe and the model requires refinement, but alas I am out of time to make revisions.

The EIA are now forecasting that US oil production may fall in the months ahead. Many will assume this is due to drilling going off a cliff edge, starting in October 2014. This analysis introduces the prospect that the cliff edge in US oil production may still be about one year in the future. The analysis presented here is incredibly speculative and is dependent upon understanding the time lag between drilling and first production. 18 months may seem a long time but it seems to be backed up by data from the Bakken. When the US oil production cliff edge comes it will be severe. When the cost of money begins to outweigh the cost of waiting for a higher oil price, the backlog of wells will be brought on stream. The minimisation of losses replacing the hope of making a profit as the driving mechanism. The cliff when it comes will be severe because by then shale oil drilling will have all but stopped and the backlog of wells will by then all be on stream. There will be no new production on hand to combat and replace declines.

Note added 12:00 Monday 20th: I was in a bit of a hurry last night and was not entirely happy with the forecast scenario. I have done this a different way now assuming a baseline of 8 Mbpd of legacy conventional production and adding 2333*rig count for shale oil. The picture now looks more sensible. The basic message is the same, the main fall in US oil production may not happen as soon as many expect.

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5 Responses to US Oil Production Forecast Scenario

  1. Willem Post says:


    Project schedules regarding drilling an area and finally bringing it on line to produce oil should show the various phases and how long it typically stakes from start to finish. Various project schedules would show a range of times.

    Because of availability of manpower and equipment, regulatory inspections, etc., projects may have significant down times during the project time lines.

  2. Hugh Sharman says:

    Thanks for keeping us a breast of events Euan. Reality is catching up with fantasy.

  3. Sam Taylor says:


    Recent presentation from the CEO of schlumberger had some interesting information,

    ” After having doubled the horizontal length and number of stages per well in the past five years, while also significantly increasing volumes of water and proppant per stage, the average well production has still not improved noticeably. ”

    The number and length of wells drilled in the US is frankly staggering. The 3000-odd backlog is around 10% of the total number of wells and sidetracks drilled last year. It seems far from a huge buffer. Also the following caused me to raise my eyebrows:

    “tight oil and deepwater fields, which today consume around 40% of the global liquids-related E&P capex, while only representing around 12% of global oil production.” Ouch.

    • Euan Mearns says:

      Dean, I hadn’t seen that. I guess we’ll find out soon who is more correct. The backlog of uncompleted wells still growing while drilling is in free fall and production continues to grow tells ya something.

      The recent IEA OMR Public didn’t mention US production which I found a bit odd, or maybe I just missed it. But we’ll get March figures soon.

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