U.S. oil production's post-pandemic rebound set to slow: Kemp

U.S. production of crude oil and condensates increased to 12.3 million barrels per day (bpd) in September, the highest since the first wave of the coronavirus pandemic in March 2020.

Production rose by 289,000 bpd from the previous month, with contributions from the Lower 48 states (+208,000 bpd), federal waters in the Gulf of Mexico (+64,000 bpd) and Alaska (+17,000 bpd).

Crude production has increased in five of the most recent seven months, according to data from the U.S. Energy Information Administration (“Petroleum supply monthly”, EIA, Nov. 30).

Output has rebounded from a pandemic low of 9.7 million bpd in May 2020, although it is still below the pre-pandemic high of 13.0 million bpd in November 2019.

So far in 2022, production has been growing at an annual rate of 0.6-0.7 million bpd, roughly 5-6%, less than half the speed at the height of the first shale boom in 2014 and the second in 2018.

EIA predicts output will increase even more slowly over the rest of 2022 and 2023, rising by just 240,000 bpd or 2% in the 12 months to September 2024 (“Short-Term Energy Outlook,” EIA, Nov. 8).

Chartbook: U.S. crude oil production

Oilfield services company Baker Hughes says the number of rigs drilling for oil has risen by 455 in 119 weeks from its post-pandemic low in August 2020, an average of 3.9 per week.

This has been much slower than in the same period after the price slump of 2016 (an increase of 544 rigs or 4.6 per week) or after the financial crisis and recession in 2019 (883 rigs or 7.5 per week).

The upturn has slowed even further over the course of 2022, with the number of rigs drilling for oil increasing by an average of just 3.1 per week since the start of the year and 1.5 per week since the end of June.

COMPLETION RATES

After a well has been drilled, it must be completed by pressure pumping, flow testing, installing surface equipment and connecting it up to the pipeline gathering system before it enters commercial production.

During a slump, exploration and production companies will often try to conserve cash by postponing completion of already-drilled wells.

Completion rates rather than drilling rates provide a more reliable guide to future trends in production in the short term.

The number of new oil and gas wells completed has been broadly stable just below 1,000 per month since March 2022 (“Drilling productivity report”, EIA, Nov. 14).

The stalled completion rate explains why EIA forecasts such a small increase in crude and condensates production.

So far, much of the upturn in drilling activity has been driven by the need to catch up with completion rates and prevent further depletion in the inventory of drilled but uncompleted wells (DUCs), which has fallen from a post-pandemic high of almost 8,800 in June 2020 to around half that number in 2022.

In recent months, however, the number of DUCs has appeared to stabilise, implying the rest are working inventory, plus some wells that may never be completed because they are deemed unprofitable.

Between August and October, the number of new wells drilled finally caught up with the number of wells completed for the first time since July 2020, which should stabilise the DUC inventory.

Unless competition rates accelerate, the number of rigs drilling for oil and gas is likely to plateau around current levels, and oil production grow much more slowly in 2023.

Related columns:

- U.S. oil drilling rises in response to higher prices (Reuters, Feb. 25)

- U.S. oil drilling likely to accelerate in 2022 (Reuters, Nov. 17, 2021)

John Kemp is a Reuters market analyst. The views expressed are his own