The Energy Report 12/13/19

Christmas Deals

Trump doesn’t want a lot for Christmas, There is just one thing he needs. He won’t care about Impeachment, underneath the Christmas tree. He wants a trade deal he can call his own. Get President Zi on the phone. Forget about the coup. Trump wants a Christmas Breakthrough.

It looks like President Donald Trump got his trade deal just in time for Christmas. Yet is this ready to be wrapped up with a bright shiny Christmas bow? While the markets jumped on the news that a deal has been reached, we are still awaiting confirmation by the Chinese. The Wall Street Journal reports that China indicated that a near-term trade agreement with the U.S. has yet to be completed despite President Trump’s signoff, highlighting the unpredictability of a negotiation process that has rattled global markets and businesses. Yet there are also reports that say that the China Cabinet will not transfer their technology.

Yet for the oil market, a trade deal will be positive. Already oil prices are looking strong as U.S. economic data suggest robust U.S. demand. There are also more concerns about the U.S. shale production outlook. The Energy Information lowered its shale production forecasts and they may have to do it again if some reports on oil production decline rates.

The EIA in their Short Term Energy Outlook reported that they expect, “U.S. crude oil production to average 13.2 million barrels per day (b/d )in 2020, an increase of 0.9 million b/d from the 2019 level.  The predicted 2020 oil production growth will be slower than 2018 growth of 1.6 million b/d and 2019 growth of 1.3 million b/d. Slowing crude oil production growth results from a decline in drilling rigs over the past year that EIA expects to continue into 2020.

Yet despite the decline in rigs, the EIA forecasts production will continue to grow as rig efficiency and well-level productivity rises, offsetting the decline in the number of rigs. But some are not so sure. A report by IHS Market is reporting the decline rates in the Permian basin is accelerating. That means for production levels to rise, there will have to be more investment and a lot more drilling. “Data from the new IHS Markit Automated Well Forecasting Technology showed that the base decline rate of the more than 150,000 producing oil and gas wells in the Permian Basin has “increased dramatically” since 2010. The surge in shale drilling and output in recent years has been accelerating that inherent production decline because newer, younger wells decline much faster than older wells. “Base decline” is calculated by identifying the actual or forecasted production of all the wells onstream at the start of the year, then tracking their cumulative decline by the end of the year. Understanding those base declines is critical for engineers/operators who must determine what level of drilling and production targets must be achieved for their company to grow production, and hopefully, maintain performance and provide returns to investors.

“Base decline is the volume that oil and gas producers need to add from new wells just to stay where they are—it is the speed of the treadmill,” said Raoul LeBlanc, vice president of Unconventional Oil and Gas at IHS Markit. “Because of the large increases of recent years, the base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate. As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat.”

The new IHS Markit production outlook expects total U.S. oil production growth to flatten by 2021 due to a major slowdown in growth from U.S. shale. The new IHS Markit outlook for oil market fundamentals for 2019-2021 expects total U.S. production growth to be 440,000 barrels per day in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022. But those volumes would still be in stark contrast to the boom levels of recent years, LeBlanc said.

The Permian provides the comparison between traditional wells and shale wells. At the start of 2010, IHS Markit noted that production for the Permian Basin was approximately 880,000 barrels per day, with virtually all production coming from conventional operations. By the end of 2010, that group of wells produced 767,000 barrels per day—a decline of 110,000 barrels per day, or 13% of production. Fast forward to 2019 when most wells drilled in the Permian Basin were shale wells (hydraulically fractured), which decline much faster, and the situation became even more dramatic. In 2019 Permian Basin production started the year at 3.8 million barrels per day, a million barrels per day higher than the year before. IHS Markit expects that base production will decline by approximately 1.5 million barrels of oil per day by the end of 2019–a staggering 40% base decline rate. “Unless intentionally choked back, new, individual unconventional wells decline very rapidly, often 65% to 85% in the first year, so companies with many young wells in their inventory see significant declines in production compared to companies with a balance of younger and older wells,” LeBlanc said. “However, these high initial decline rates of individual shale wells become shallower over time, with older wells showing annual declines of 20% or less. So, the key here is that older wells in an operator’s inventory help offset the rapid declines of newer wells.” Because of these older wells, base declines can also decelerate if the weighted average age of the wells in the production base rises. Just as a production base with mostly young wells exhibits high decline rates, the older the production base, the more stable it is, IHS Markit said.

There has been a lot of focus on China oil demand but what about India? In the U.S., Energy Information Administration’s (EIA) International Energy Outlook 2019 , India has the fastest growing rate of energy consumption globally through 2050. By 2050, EIA projects India will consume more energy than the United States by the mid-2040s, and its consumption will remain second only to China through 2050.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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