Permian leads production declines among US shale basins

Texas Shale

Midland Reporter-Telegram – U.S. operators have been slashing production in response to the collapse in both oil demand and oil prices.

Those cuts will be led by the nation’s shale-producing regions, Bloomberg is reporting, with production levels set to fall to two-year lows. Bloomberg is also reporting that the Permian is expected to lead those cuts, with the Energy Information Administration forecasting output will fall 87,000 barrels a day in June to 4.29 million barrels.

The speed at which operators shut in wells and the amount of production being taken offline didn’t surprise Sarp Ozkan, director of energy analytics at Enverus.

“The decline in demand is unprecedented,” he said in a phone interview. “Supply doesn’t decline that much naturally. There needed to be wells shut in to ensure the market wasn’t overwhelmed.”

While the production declines have eased fears of overwhelmed storage facilities, Ozkan said the bad news is it took negative oil prices and a storage scare “to get us here.”

Producers will be keeping a watchful eye on the markets before deciding it’s time to bring those wells back into production, he added, saying they need to regain confidence demand has recovered enough to support the additional supplies.

“Just because prices have jumped to $32, which I think is too fast and finance guys have a role in, if operators didn’t want to sell oil at $15, they won’t automatically want to sell it at $32,” he said.

Permian Shale Decline

He said that new shale well-drilling completion activity will be very limited because operators don’t want to put those “flush initial potential wells” into a $30 oil market. Activity won’t start to pick up, he said, until prices are $45 and can sustain higher activity and generate free cash flow that Wall Street wants operators to return to investors.

In the aftermath of the twin crises of demand destruction and oversupply, Ozkan said the nation’s shale production “will have much, much more measured growth, which Wall Street has an appetite rather than the ‘growth at any cost’ of earlier days. This will be shale 2.0 or shale 3.0. It will look a lot different than the unprecedented growth that made us the No. 1 producer in the world.”

Chevron referred the Reporter-Telegram to its first quarter earnings call with investors, in which the company said it would cut its 2020 capital expenditures by up to $2 billion and cut 125,000 barrels a day of Permian production while operating just five drilling rigs.

Chief Executive Officer Mike Wirth commented in the call, “We’re not done improving in the Permian. Our results even as we sit here today, continue to improve. And so well costs come down, drilling efficiency improves, completion design and execution improve. And the hydrocarbons haven’t gone away… I think that’s a resource that will continue to be very important in the overall supply picture and certainly it will be for our company.”

ExxonMobil announced plans to shut in about 100,000 barrels of oil equivalent from its Permian Basin operations in the second quarter.

EOG Resources referred the Reporter-Telegram to comments from Chief Executive Officer Bill Thomas during the company’s first quarter earnings call: “We believe that the historic and prolific oil production growth by US shale may have been forever altered.”

EOG currently is targeting full year 2020 production of about 390,000 barrels per day, down 15 percent compared to full-year 2019 levels. The company’s low point is expected to be 310,000 barrels in the second quarter, rising to about 420,000 barrels in the fourth quarter. EOG has also sharply cut the number of wells being brought into production this year to about 485, down from the previous forecast of 800 wells. The focus will be on the Delaware Basin, with about 220 wells, and the Eagle Ford.

Pioneer Natural Resources pointed the Reporter-Telegram to its first quarter earnings call, in which it said expects its revised oil production to average 198,000 to 208,000 barrels per day and total production of 341,000 to 359,000 barrels of oil equivalent per day, down about 7,000 barrels per day.

Parsley Energy told the Reporter-Telegram that, in its first quarter earnings call, it began voluntarily shutting in approximately 400 wells in mid-March. Most of those were vertical wells, shut in for economic reasons. Net oil production associated with these higher per-barrel of oil equivalent cost wells was approximately 1,000 to 2,000 barrels per day. In mid-April, Parsley voluntarily shut in several pads that were flaring natural gas, most of which were recently acquired from Jagged Peak in the Delaware Basin. These wells had combined net oil production of approximately 4,000 to 5,000 barrels per day.

In addition to the aforementioned shut-ins of 5,000 to 7,000 barrels per day, Parsley expects to voluntarily curtail up to 23,000 barrels per day per day of net oil production volumes in May based on near-term regional pricing dynamics. The company also said it has suspended all new drilling and completion activity in the near-term. Parsley’s future activity plans will continue to be driven by unhedged return profiles.

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