EIA report, shale output growth coming to a standstill

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According to the US Energy Information Administration’s (EIA) latest Drilling Productivity Report (DPR) published Monday, US shale oil production is projected to see a net gain of only 1,000 barrels per day (bpd).

Data on major shale plays, such as the Eagle Ford, Niobrara, and Bakken shows net production falling in April. The EIA began publishing the DPR back in November of 2013, and this is the first time it has recorded declines.

Consequently, the only region showing a projected net gain is the Permian shale play. In April, it’s expected to gain a net of 21,000 bpd compared to February’s report projecting for March growth of 30,000 bpd.

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The DPR takes data from the total number of drilling rigs in operation, along with estimates of drilling productivity and estimated changes in production from existing oil and natural gas wells. The projection is based on seven major key shale plays — the Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian, and Utica.

These shale plays accounted for 95 percent of US oil production growth between 2011-13.

Net gain is calculated by subtracting legacy declines from new production. Shale oil wells have an explosion in output upon completion, but taper off over the first and second years of production. New production rises faster than legacy declines while drilling activity expands, which result in net gains. On the flip side, as well completions and drilling activity decline, new production peaks, and the falls. As a result, legacy declines continue to rise based on the drilling of the previous 12-24 months.

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Over the same period, projections for total new production from the seven major shale plays have shown marginal gains. For two consecutive months, projections have fallen with the EIA forecasting new production at 336,000 bpd in April, down from 399,000 bpd in March.

Legacy declines are expected to increase continuously and subtract from new production figures. In March projections for April, legacy declines reached new record highs of 335,000 bpd.

The US shale industry is facing a stress test where legacy declines start overwhelming new production; net gains start to become a loss and shale output starts contracting. Nevertheless, US oil production continues to rise.

Related: Oil prices have hope as supply & demand try to find market equilibrium

As of the last week of February, the EIA’s supply projections estimated output at 9.324 million bpd, up from 9.134 million bpd at the beginning of the 2015.

Hopefully, the equilibrium between supply and demand happens soon before legacy declines supersede net gains. Although domestic drilling has US oil supplies at an all-time high, once the market stabilizes, dependency on foreign oil will not be the same as before.


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