US Oil Supply – August 2015

US total oil supply is anticipated to grow by 0.95 mb/d to average 13.86 mb/d in 2015, representing an upward revision of 20 tb/d from the last monthly report. Nevertheless, US actual liquids production was registered at 13.96 mb/d in May, indicating a decline of 0.26 mb/d m-o-m. US total crude oil production decreased by 0.18 mb/d in May following a minor decline of 20 tb/d in April. Texas’ two main tight oil plays, the Permian and Eagle Ford, showed declines of 42 tb/d m-o-m to average 3.66 mb/d in May 2015. Oil production from the GOM also declined by more than 100 tb/d, while oil output in North Dakota, mainly from the Bakken shale site in the Williston Basin, increased by 32 tb/d to above 1.2 mb/d. This is, however, still lower than the output of 1.227 mb/d seen in December 2014. Oil production from Alaska also declined by 37 tb/d to average 473 tb/d in May.

Crude oil production in August from seven major US shale plays is expected to decline by 91 tb/d to settle at 5.36 mb/d, according to the US Energy Information Administration’s latest Drilling Productivity Report (DPR). Last month, the EIA also projected a 91 tb/d decline for July. The DPR focuses on the Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica sites, which altogether accounted for 95% of US oil production increases. The monthly drop will again be led by Eagle Ford, where output is expected to fall by 55 tb/d in August to settle at 1.54 mb/d. Production from the Niobrara site is expected to fall by 20 tb/d to 395 tb/d. In the Permian basin, where production has continued to grow, output is expected to increase by 5 tb/d to reach 2.05 mb/d.

Production from the Bakken site is projected to decrease by 22 tb/d in August to settle at 1.18 mb/d. The US Department of Transportation and Canadian regulators jointly announced new safety rules for crude-by-rail and other flammable liquid shipments on 1 May. The rules focus on tank car design and braking standards. This will add around 40¢-60¢/b to crude-by-rail transport costs. However, production slowdowns and more pipeline capacity coming on stream are likely to mean fewer barrels travelling by rail in the coming years than previously expected.

At the end of April, North Dakota passed a new oil tax framework that lowers the combined extraction and gross production tax rate to 10% (from 11.5% currently), but also reduces the impact of the widely anticipated ‘large trigger’. North Dakota currently has two main taxes on oil production.

The gross production tax, which is set at 5%, and the extraction tax, which has a headline rate of 6.5%, resulting in a combined tax rate of 11.5%. US crude oil prices would still need a significant drop before falling below breakeven prices in North Dakota’s four most prolific counties, according to new data released by the state’s Department of Mineral Resources. Breakeven prices for rigs in North Dakota’s Dunn, McKenzie, Mountrail and Williams counties range from $24/b in Dunn to $41/b in Mountrail. Those four counties accounted for 63 of the state’s 68 oil rigs in late July, according to the data.

The new-well oil production/rig count across the seven plays is projected to increase in August by a rig-weighted average of 10 b/d to 432 b/d, including a 26 b/d rise at the Bakken site to reach 691 b/d, a 25 b/d rise at the Eagle Ford site to reach 766 b/d, a 14 b/d rise at the Niobrara site to reach 516 b/d, and a 12 b/d rise at the Permian site to reach 327 b/d.

The GOM saw significant capacity additions in 2014. From late 2Q14, output started to pick up marginally as the Atlantis and Na Kika projects ramped up, in addition to output from the Mars II project that came online in February. Some maintenance work in 3Q14 kept a lid on output, although the absence of hurricane-related disruptions helped to offset planned works. New projects that started to come online in 4Q14 (peak production capacity of 0.26 mb/d) boosted GOM output at year-end, when it totaled 1.44 mb/d. The Cardamom (50 tboe/d) project came online in September, and mid- November saw the commencement of first oil at the Chevron and Hess Tubular Bells development, which is expected to produce roughly 50 tboe/d.

Finally, Jack/St. Malo also started up in December with a peak capacity of 0.1 mb/d. Averaged across the year, GOM volumes grew by 0.15 mb/d as high decline rates at existing fields offset most of the new additions.

In January of this year, Anadarko’s delayed Lucius project achieved first oil. Anadarko plans to drill six wells, with the aim of a hitting full capacity of 80 tb/d. The company also continues to develop the Heidelberg spar, a project which will match Lucius’ production capacity and expects first oil in 2016. Meanwhile, production has begun at the Delta House FPSO, which has a peak output of 0.1 mb/d. Mid-2015 was expected to see Chevron start up production at its 79 tboe/d Big Foot project, but it will delay the start of production from the Walker Ridge area of the GOM because of damage to subsea installation tendons installed for connection to the field’s tension-leg platform. Therefore, the company will move the 15-slot drilling and production TLP to sheltered waters. Chevron said production will not start late this year as planned. Overall, net yearly growth is estimated to accelerate to around 0.14 mb/d.

The long-term nature of Deepwater projects means they are less affected by fluctuating oil markets, although higher upfront costs will weigh on future project development. Through 2015 and 2016, 13 fields are expected to start up in the GOM. Half of these will be developed using a ‘subsea tieback’ approach, which can reduce costs and startup times in fields with reserves too small to justify the capex needed to fully develop an offshore field.

ConocoPhillips reported plans to further reduce its capital expenditures for deepwater exploration, with the “most significant reductions” coming from its operated programme in the GOM. The company did not specify, however, by how much capex would be decreased. At year-end 2014, the Houston-based independent slashed its 2015 capital budget by 20% to $13.5 billion compared with 2014’s capex plans. The company has provided notice that it will terminate its contract for the Ensco DS-9 deepwater drillship, which was slated for delivery to the Gulf late this year to start drilling at the company’s operated deepwater inventory under a three-year contract.

On a quarterly basis, US oil supply in 2015 is expected to average 13.78 mb/d, 13.98 mb/d, 13.83 mb/d and 13.86 mb/d, respectively.