Innovation Effect? US Oil Production Exceeds Forecasts
The United States, against the backdrop of a decline in production by OPEC+ countries, increased oil production compared to forecasts a year ago. Bloomberg reported this on December 17, 2023.
Shale producers vs OPEC+
Abstracts of the publication:
- OPEC’s former foe, the US shale industry, is rearing its head just months after the sector was largely written off as a threat to the cartel’s influence on global oil markets.
- shale companies from the Permian Basin in West Texas to the Bakken Basin in North Dakota have boosted oil output far more than analysts had predicted, pushing production to record levels just as OPEC and its allies have slammed supply brakes in an attempt to stop falling prices.
- the rise is reverberating around the world, calling into question the OPEC+ group’s strategy of limiting supplies to prevent potentially catastrophic consequences of gluts and lower prices.
- this clearly shows that many companies extracting oil from US shale fields still have enough power to thwart OPEC+ efforts.
Recently, similar points were made by the International Energy Agency (IEA) in its December report. The IEA said continued production growth and slowing demand growth will complicate efforts by key oil-producing countries to protect their market share and maintain high oil prices. The agency assumes that oil demand growth in annual terms in the 4th quarter of 2023 will decrease to 1.9 million barrels per day from 2.8 million barrels per day in the 3rd quarter of 2023, which indicates a slowdown in growth demand for oil. However, the expected and traditional decrease in growth due to seasonal factors is presented as a trend.
Growth in US shale oil production
The IEA calls the growth in US shale oil production unexpected, since a slowdown in growth was previously expected due to inflationary costs and capacity limitations of oil service companies. The IEA attributes the growth to improved drilling efficiency and productivity from 950 wells in US shale basins.
In December 2022, the US Energy Information Administration (EIA) predicted that oil production in the United States in the 4th quarter of 2023 would amount to 12.5 million barrels per day, while in the forecast for December 2023 we are talking about 13 .3 million barrels/day. For the year as a whole, the forecast increased from 12.34 million barrels per day in December 2022 to 12.93 million barrels per day in December 2023. The forecast for 2024 was raised from 12.81 million barrels per day in the January forecast to 13.11 million barrels per day in the December report.
Bloomberg also calls the growth in US oil production surprising because… the number of drilling rigs in 2023 decreased by 20%. According to Baker Hughes, the number of active drilling rigs in the US oil fields for the week ending December 15, 2023 was 501, which is 18.9% less than at the beginning of the year. The agency blames the rise in production amid a decline in the number of operating drilling rigs in the introduction of innovations – from electric pump technology to new strategies for attracting workers during hydraulic fracturing (fracking) to minimize downtime. For example, drilling company Diamondback Energy has reduced the time it takes to drill an average well by about 40% over the past three years, thanks in part to drilling smaller diameter holes, adapting the drilling fluid and improving steel and polycrystalline diamond-tipped bits. In 2019, the average time it took the company to drill a well was 19.5 days, now it is 11.5 days. A similar optimization process affected the hydraulic fracturing process – according to Kimberlite International Oilfield Research, the duration of the hydraulic fracturing operation was reduced by 3 days to just over a week per well.
Meanwhile, the active growth of oil production in the United States against the background of a decrease in drilling activity is due to the development of unfinished wells. Since March 2023, the DUC reserve (drilled but uncompleted wells – unfinished wells drilled but not equipped for production), which indicates the possibility of quickly increasing oil production regardless of the pace of drilling activity, has been consistently declining. According to the EIA for October 2023 (latest available data), the DUC indicator was 4.524 thousand, which is an increase of 228 units. less than in January. Incl. in the Permian basin the indicator decreased by 210 units, to 832 wells.
Bloomberg notes signs that US drillers may once again show more restraint when it comes to expanding budgets. Annual industry spending growth is estimated by Evercore ISI to be just 2% in 2024, down from the 19% growth rate in 2023 and a fraction of the record 44% increase two years ago.
