September 24, 2019

UPSTREAM EXTRA! The Million Barrel Question

Stratas Advisors

Rising Middle East tensions and the recent strikes on Saudi Aramco facilities that took out 5.7 million barrels per day (~5% of global supply) of production capacity raise the specter of continuing attacks to global oil supplies. While leaders ostensibly want a peaceful outcome, real progress appears elusive. It is with this backdrop that Stratas considered shale’s ability to respond to deep and lasting disruptions to crude oil supplies.

What does it take to lift U.S. liquids production by a million barrels per day?

Over the years, much has been made about how quickly shale development can ramp up. And at first blush this seems plausible, even reasonable. After all, operators are sitting with large swaths of undeveloped acreage, permits are easy and quick to obtain, and more rigs can be deployed. Adding to this, it is all but impossible for any industry tracker to miss the impressive growth story of the Permian. An area producing ~4.8 million b/d of liquids, up from about 4.1 million b/d at yearend, and under 3 million b/d at yearend 2017. However, even the mighty Permian has limits. Natural gas infrastructure and flaring restrictions, disappointment with tighter well spacing, and weakness in commodity prices, until recently. To name a few. Still, infrastructure solutions are underway, companies will adjust spacing accordingly, and oil prices and costs will sort themselves out. One thing’s for sure, shalers proved their mettle in the past, so let’s assume they do so again.

For this exercise, Stratas chose to focus on the Wolfcamp, Bone Spring, Eagle Ford, and Bakken plays. These areas have ready access to known resources, equipment, crews, existing and emerging infrastructure, and other qualities amenable to growth. At this point, it is worth noting that onshore rig counts hover in the mid-800’s, down almost a hundred units since midyear. Hence, plenty of rigs and restless rig hands should be available if shale were to be called upon to fill a gap from disruptions elsewhere in the world.

 

Based on our assessment on variances in well performance by play, and our outlook for future drilling and completion trends, approximately 275 more rigs than currently planned will need to make hole month-in and month-out, an increase of about a third from current total counts and 40% above the current L-48 oil rig count in order for production to rise an additional million b/d by March 2020.

The addition of 275 more rigs throughout the six-month period ending March-2020 would add another 470 producing wells per month (assumes 16.4 days spud-to-spud for drilling and a lag from drilling-to-first production of 3 months) and almost $4 billion per month of additional spending ($8.3 million drilling and completion per well* 470 wells). Importantly, with an estimated 400 operators in the plays, there will be a great deal of coordination required to get things right. Hence, this is no easy feat.

Each rig move requires 20 or more truckloads to move, and while pad drilling reduces the need for rig moves, 275 rigs * 20 truckloads * 4 moves (over 6 months) = 22,000 truckloads moved. That does not take into consideration the massive volume of proppant, water and MRO shipments, nor moves of completion equipment. In short, any idea that shale could quickly backfill for lost production totaling millions in b/d is simply optimistic.

This Upstream Extra report compliments our Global Supply in Crisis series. As a reminder, Stratas began coverage with a report on the turmoil at and around the Strait of Hormuz, which can be accessed via thislink.

 

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