US shale oils crash diet likely to bring forward output dip

(MENAFN- Arab News) HOUSTON: Shale oil producers are throttling back so quickly on drilling that US crude output could fall sooner than expected within months executives say as they slash costs to cope with tumbling crude prices and compete with Gulf rivals.

About a dozen chief executives who talked to Reuters or who spoke publicly acknowledged they were taken aback by the scale and speed of the cutbacks noting how this oil price downturn was different from several previous episodes in their careers.

For one companies are cutting costs deeper and faster than before as Wall Street investors increasingly place a premium on capital discipline rather than just production growth. Some also say the nature of shale makes it easier for companies to defer work and wait for prices to recover. The wells that drove the US energy boom of the last decade rapidly deplete so overall output will fall unless new holes are constantly bored and oil extracted via hydraulic fracturing or fracking.

"The thing that has surprised me ... is that companies large and small financially strong financially weak have really cut capital spending much quicker than I have seen before" said Bruce Vincent who retired as CEO of Swift Energy Co. this month after 40 years in the industry.

Just few weeks ago the prevailing view among industry insiders and analysts was that US oil production would keep rising for several months despite falling rig numbers because of rising productivity of active wells and drilling inertia.

In the past if a producer had a rig contract they would continue drilling. Now producers are paying fees to break those contracts a fact that has hastened the steep drop in the rig count said Vincent.

LOCKED IN ROCK

In the old days producers felt compelled to pump in a downturn fearing competitors with wells in the same reservoir would take the oil. That is no longer a risk as shale is locked in rock.

"(Now) you can leave it in the ground. In the old days you had to produce because everybody was sucking on the same straw" Harold Hamm CEO of Continental Resources said at a conference in January.

Already many companies have announced 25-70 percent reductions in drilling and a total of at least $25 billion in spending cuts.

Some went even further. Magnum Hunter Resources Corp. has halted all drilling and told services firms it will not resume work unless its costs fall 40 percent the company's Chief Executive Gary Evans told a conference in Houston.

Such pullback combined with shale well decline rates of some 60 percent or more a year has Evans predicting U.S. production will begin falling "in the next two months."

His view is largely echoed by several other executives though they say their own output will hold up or rise and expect much of the decline come from the shuttering of older low-yielding wells known as strippers.

Assuming that many drilling contracts will be carried out the US Energy Information Administration (EIA) still sees output climbing early this year to peak at 9.42 million barrels per day in May with a decline starting in June.

After nearly doubling since 2008 US crude production should stabilize though not necessarily decline in the second half of this year analysts at IHS said.

Lower output along with rising gasoline consumption would help reduce 1.5 million bpd in estimated global oversupply and might allow crude prices to recover from a 50 percent slide since mid-2014.

While some analysts expect the slide to continue for some time with Citibank predicting US benchmark prices to bottom out at $20 per barrel industry insiders count on a faster price recovery because of two factors pulling U.S production down.

One is the much faster than expected decline in the number of active rigs. Oilfield services company Baker Hughes said on Friday nearly 50 rigs were shed last week bringing the US land rig count to 1250 about the level EIA had forecast would be reached in October.

"There's been a real rapid response probably faster than I've ever seen" Jack Stark president of Continental Resources told an IHS conference in Houston this month.

LEANER AND TOUGHER

The rig fleet alone is not the best predictor of output because well lengths and the frequency of fracks along a well have been rising rapidly to boost output. However in the past few weeks companies have also started to refrain from fracking wells to bring them online so-called completion which normally accounts for 60 percent of a well's total cost.

On its fourth-quarter earnings call Devon Energy Corp. said it had cut its completion crews working in the Eagle Ford oil basin to four from nine while Anadarko Petroleum said it reduced its completion crews by a third.

After years of breakneck growth top shale companies Apache Corp. and EOG Resources have said their oil and gas output this year will be flat.

Producers who had grown accustomed to oil at $100 a barrel say they aim to cut costs to profitably drill shale wells at $40 a barrel or less. That is well below the $70 now needed to work in some basins and less than current US benchmark crude prices of about $51 a barrel.

The path to slash costs is to pressure service companies already cutting thousands of jobs to lower prices as well as rely on technology to speed up drilling and improve well productivity.

"The services companies have always found a way through time to do business" said Stark. "The shale business will continue to exist and this renaissance will continue."

US executives some of whom proudly call themselves wildcatting "rednecks" from "cowboyistan" say they will come out leaner and meaner from the downturn and be able to better compete with top OPEC producers.