WoodMac: US Lower 48 producers record $150 billion in capex cuts during 2016-17
The US Lower 48 has accounted for $150 billion of the $370 billion in global capital expenditure reductions by upstream firms during 2016-17, according to analysis from WoodMackenzie.
The dramatic cuts by US operators are largely due to shorter lead times and the less capital-intensive nature of the US unconventional space, the research and consultancy firm explains.
"The plays that saw the highest proportion of their capital expenditure cut were in the Eagle Ford and the Bakken," said Jeanie Oudin, WoodMac senior research manager, Lower 48. "That's because the two plays were in full-scale development, with most operators' acreage held by production at the time oil prices began to fall, allowing for a more responsive slowdown in activity."
The Bakken and Eagle Ford alone has accounted for 36% of US capex cuts during 2016-17. Spend across the Rocky Mountains region, namely in the Bakken-Three Forks and Niobrara, has taken the deepest cuts, down 66%, or $44 billion. The Gulf Coast region has been similarly hard hit, particularly in the Eagle Ford, whose cuts have comprised nearly 20%.
Although reduced service costs and overall cost deflation have also contributed to falling spend, deferred investment continues to be the foremost influence on capex declines in the US Lower 48.
Output decline below expectations
As rig counts have plummeted, a large backlog of drilled but uncompleted (DUC) wells has provided cash flow to operators, allowing them to focus on completions as rig contracts expire-meaning production volumes are no longer tied directly to rig count.
"People expected that overall tight oil production would collapse when companies stopped drilling. However, it hasn't collapsed-it's only declined," said Oudin. "Not only have operators built up a backlog of DUC wells, they are also utilizing longer laterals and enhanced completions to increase the productivity of wells as they bring them online. They're just not adding new volumes as quickly."
The current WoodMac production outlook expects a 7 billion-boe decline in production globally through 2020, with 70% of those volumes lost from the US Lower 48 in the near term, through 2017.
The Midland and Delaware basins, meanwhile, have experienced smaller declines in drilling activity. The Permian's resilience is partly due to many of its rigs being concentrated in the best areas and the stacked pay potential of the plays.
WoodMac says largely mature producers and basin incumbents have the most remaining economic inventory. Although some of these established operators are less characterized by the high-growth metrics of some of their offset-acreage peers, they have a bright and sustainable future, the firm adds.
"Combined with our outlook for Permian production growth, this is extremely positive for Midland and Delaware stakeholders," noted Oudin. "The Midland and Delaware basins hold the largest number of undrilled, low-cost tight oil locations in the Lower 48. No other region comes close."
