US onshore oil production set to gradually decline after August peak

Oil production from the US lower 48 states, excluding Gulf of Mexico, peaked at 9.2 million b/d in August following back-to-back increases since June. The climb helped push the nationwide total above 11 million b/d and is likely to keep it above that mark for the rest of the year, according to Rystad Energy estimates.

A gradual decline in Lower48 output may nevertheless set in from September as onshore drilling remains below the level required to maintain production in nearly all US oil basins, despite a robust fracturing exercise where operators are bringing on line their inventory of drilled but uncompleted (DUC) wells. Rystad Energy projects US onshore production to start rising again in second-half 2021.

Preliminary well production data for July has been reported for most major oil and gas producing states. After recovering by around 540,000 b/d in June, oil volumes for the lower 48 states excluding GoM seemingly posted a second monthly increase of more than 400,000 b/d in July. Rystad Energy estimates an additional rise of 230,000 b/d in August from the same regions, which would take the total for the month to a peak of 9.2 million b/d.

Production from the GoM and Alaska increased 160,000-170,000 b/d in July. The nationwide total likely surpassed 11 million b/d in July and it could potentially remain above that level through the remainder of the year. Based on updated July data, US dry gas production increased by about 550 MMcfd between June and July and is expected to average around 90 bcfd in the year’s second half.

Fracturing activity rebounded sharply in July, driven by the Permian basin. After holding stable in August, the industry delivered another sequential increase in September. According to Rystad Energy’s estimates, about 650 fracturing operations were started in September. Operators are bringing DUC completions forward, taking advantage of low oilfield services costs in the spot market, as the WTI strip rose to the mid-$40/bbl range weeks ago.

Oil production in the Williston basin – North Dakota and Montana combined – increased by 170,000 b/d in July, raising the basin total to almost 1.1 million b/d. Most shut-ins were restored by end July, though select wells will exhibit full production potential in August data.

Texas oil production increased by 125,000 b/d and New Mexico added 60,000 b/d in July. The July recovery was not limited to the Permian basin. South Texas’s Eagle Ford also contributed as curtailed volumes were reactivated. Thousands of stripper wells in Texas remained inactive as of July, but these wells account only for a marginal share of the statewide total.

Each major state in the Rockies – Colorado, Wyoming, and Utah – posted production increases, with the total of the three increasing 25,000-30,000 b/d in July. Pennsylvanian gas production posted a gain of about 600 MMcfd in July, but total dry gas output from some of the core gas regions, such as Appalachia, Louisiana, and the rest of Texas still saw a sequential decline as regions outside of Pennsylvania remained in decline. Oil production from Alaska rose by 80,000 b/d and by 85,000 b/d in the Gulf of Mexico in July.

“We still anticipate US oil output to average at 10.82 million b/d in 2021. A gradual decline is expected in the first half of the year, followed by a recovery in the fourth quarter. The outlook for the lower 48 states, excluding Gulf of Mexico, has been revised up by 90,000 b/d for the second half of next year, as we start hearing about modest increases in the oil rig count before the end of this year,” said Artem Abramov, Rystad Energy’s head of shale research.

This uptick will be limited to a handful of producers without a significant DUC inventory. Most producers with a large number of DUCs plan to increase rig activity only in the first half of next year to allow for a smooth transition from a DUC-supported completion program to a normal operations mode.

“We have revised our dry gas production forecast for 2021 up by 500 MMcfd, with the most significant contribution coming from a more resilient base decline in gas basins. In the Appalachia region there are still significant numbers of older wells that produce at restricted rates, and these wells might make a positive contribution of up to 600–700 MMcfd to base production in the next three to four quarters.”

Even with additional supply of 500 MMcfd in 2021 compared to the previous outlook, the US domestic gas market is still heading toward a structural supply deficit, with the possibility of stronger domestic gas prices if the global gas market recovers further.