With nearly US$1 trillion to be slashed from upstream capital spend globally out to 2020, the US Lower 48 is in a unique position, accounting for US$250 billion in cuts over the next five years, or one quarter of the global total. Unconventional operators in the Lower 48 have been particularly responsive to the oil price collapse, prompting a dramatic drop in capex spend and high-grading development to the core areas. Our US upstream research analysts look deeply into the causes, correlations and projections associated with these capex cuts in the first of our regional spending cuts series.
Out of the more than US$370 billion in global capital expenditure cut by upstream developers across 2016 and 2017, US$150 billion was slashed in the US Lower 48 alone — more than three times any other single country. Largely due to responsiveness and flexibility in the unconventional space, spending in the US dropped 56% compared to a global 30% decline.
The shorter lead times and less capital-intensive nature of US unconventional plays has allowed the dominant independent operators to react more nimbly than larger IOCs, NOCs, and Majors, quickly altering development plans in response to the oil price collapse.
Regional US capex cuts
Regionally, the Rocky Mountains — specifically the Bakken/Three Forks and Niobrara — took the deepest cuts in the US, slashing spending by 51%, or US$83 billion across the five-year period spanning 2016-2020. The Gulf Coast region was similarly hard hit, particularly in the Eagle Ford, whose cuts comprised nearly 20% of the US total.
Although capex cuts were widespread in the US, the Bakken and Eagle Ford plays alone account for over one-third, or approximately 36%, of total lost US spend in our analysis covering Q4 2014 to Q2 2016.
Bakken well decline and Eagle Ford high-grading
The largest 15 Bakken operators averaged a 60% drop in capex spend across 2016 and 2017, with Continental scaling back its Bakken rig count by 82% and ConocoPhillips dropping down to just a single rig in 2016, despite previous plans to expand. The Bakken is largely dominated by independents, many of whom were agile enough to completely halt operations in the face of market decline. Because of this reactivity, the Bakken is now home to more drilled but uncompleted wells (DUCs) than any other play in the US.
Despite removing more than 1,700 wells from our Bakken drilling forecast to 2017, we estimate that the play will be back on track by 2019 — but at a slower pace of growth due to the prolonged low-price market.
In the Eagle Ford, core Karnes Trough and Edwards Condensate sub-plays accounted for one-third of Eagle Ford capex decline despite comprising less than 10% of the play's overall area. Non-core sub-plays have seen a far greater capex decline by percentage, however, highlighting operators' preferences for sticking to the play's most prolific, economic areas.
Looking beyond rig count for future production
Although reduced service costs and overall cost deflation have also contributed to falling spend, deferred investment continues to be the foremost influence on capex declines in the US Lower 48. As rig counts have plummeted, a significant backlog of DUCs has provided cash flow to operators, allowing them to focus on completions at will as rig contracts expire—meaning production volumes are no longer tied directly to the rig count.
Improvements to well productivity further distort the relationship of rig count to production, with EURs steadily rising over the last 18 months in key US tight oil plays. Optimized completion techniques such as longer laterals, greater use of water and proppant, and increased frac stages will also continue to bolster production despite sustained low rig count.
Production losses to average 4.2 million boe/d through 2020
As our outlook has evolved since 2014, we now expect 7 billion fewer barrels of oil equivalent production globally through 2020 — but with 70% of those volumes lost from the US Lower 48 in the near term, through 2017. These losses will be especially apparent across two major tight oil plays, particularly the Bakken and Eagle Ford.
Permian promise: a dark horse emerges
Cutbacks in investment and production across these key play areas naturally also has a trickle-down effect of scaled-back activity and lost value throughout the entire US Lower 48. And while no area is immune to the downturn, there are some bright spots emerging.
The Permian has held strongest in the last 18 months due to its substantial drilling inventory of stacked pay and low breakeven resource, and its future spend is trending higher than both the Rocky Mountains and the Gulf Coast. After being overshadowed in the last decade by the rise of tight oil in the Bakken and Eagle Ford, the Permian suddenly seems poised to dominate the US Lower 48 in oil production once again.
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