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"It is no surprise the US is not seeing a strong rebound in production: the shales are suffering from depletion, a topic we first discussed in late 2019. Every shale basin except the Permian is experiencing outright decline. Over the last 12 months, the Eagle Ford and Bakken have declined by 4,000 b/d per month on average compared with monthly growth of 20,000 b/d as recently as late 2018. The Permian is the least developed of the major basins and we have often predicted it will still be able to grow, albeit at a much lower rate than in years past. Over the past 12 months, Permian growth averaged 35,000 b/d per month – 65% less than it grew in 2018. The remaining shale basins are declining by a total of 13,000 b/d per month compared with 25,000 b/d monthly growth a few years ago. Taken together, shale production is only growing 14,000 b/d per month compared with 160,000 b/d in late 2018 – a slowdown of 90%.
Even this meager growth is being distorted and will likely drop in the coming months. The distortion is being caused by the harvesting of drilled-but-uncompleted wells (DUCs). During last year’s oil collapse, companies elected to postpone completing a well where possible to save on capital expenditures (completion is half of total well costs). This caused the DUC inventory to swell to unprecedented levels. As prices recovered, completing the DUCs generated extremely high incremental returns on investment given the drilling capital was already “sunk.” Since June 2020, twice the number of wells were completed than drilled in the Eagle Ford and Bakken. In the Permian, 66% more wells were completed than drilled. Across all the shale basins, 60% more wells were completed than drilled. Our neural network estimates that without the DUCs, shale production would be 800,000 b/d lower than it is presently and that every basin, including the Permian, would be in sustained decline.
Clearly this trend cannot persist indefinitely. A certain number of DUCs are required for normal shale development. Historically, the industry operated with a DUC inventory equivalent to five months of drilling activity. Using this metric, “excess” DUC inventory (i.e., over and above five months of drilling) peaked at 5,000 locations across the Eagle Ford, Bakken, and Permian in June 2020. As of September 2021, the “excess” inventory had fallen to 1,300 locations – a decline of 75%. At the current rate, we estimate DUC inventory will reach the equivalent of five months of drilling activity by mid-2022, at which point it will be difficult to draw down DUC inventory any further. For shale production to grow, drilling activity will need to increase dramatically – unlikely given the ESG capital pressures faced by publicly traded oil companies.
Furthermore, depletion problems across the shales persist. Our neural network initially pointed to the fact that once a basin has developed 50% of its Tier 1 wells, total production begins to plateau and then decline. We used this to correctly predict the Eagle Ford and Bakken would peak in late 2019. At the time, we stated that Permian production would still be able to grow for the next few years given only 35% of Tier 1 wells had been developed. Our models now tell us that 45% of Tier 1 Permian wells have been developed, implying we are much closer to its inevitable plateau and decline as well. By the end of 2022, we believe the final US shale basin will cease to grow.
The IEA currently estimates US production will grow by 1 mm b/d in 2022 and by 900,000 b/d from the last monthly reading, but our models suggest this is too optimistic. We admit that we underestimated US growth for most of 2021, but this was largely due to accelerated DUC harvesting. Given the vast majority of excess DUC inventory has now been completed, we believe our initial predictions will take hold starting in mid-2022. Instead of growing by 900,000 b/d from here, we believe US production might only grow 300,000 b/d."