Shale Production Will Hit An All Time High Next Month... And That's Just The Beginning

Tyler Durden's picture

While the June oil production data is still pending, it is safe to say that the June oil output from US shale producers - estimated today by the EIA at 5.348mb/d - will post the first double-digit production growth since July of 2015, when oil prices tumbled and a substantial portion of US production was briefly taken offline.


Chart courtesy of Forge River Research

Indicatively, while over the past year total U.S. production is up roughly 525kb/d, virtually all of it, or 98.5%, is the result of horizontal rig production in the Permian Basin, where output is up by 507kb/d.

The Permian basin has been leading the increase in horizontal oil rig count (+178%)

More important, however, is that according to the latest EIA Daily Prodctivity Report forecast released today, in July total shale basin output is expected to rise by 127kb/d in one month, hitting 5.475 mmb/d, and surpassing the previous record of 5.46 mmb/d reached in March 2015.

Needless to say, this is bad news for OPEC, which continues to price itself out of the market by not only keeping prices high enough to make production profitable for US companies, but by allowing shale to capture an increasingly greater market share.

Worse news is that shale is just getting started: both the Energy Information Administration, OPEC and the International Energy Agency have chronically underestimated the contribution of U.S. crude oil supplies in their forecasts. As Shale River notes, each has significantly increased their estimates for 2017 U.S. crude oil production during the year, with recent upward revisions larger than prior increases. In fact, the EIA recently conducted its 11th consecutive upward revision of its 2017 estimate.

But the worst news - for OPEC yet again - is in the long-term, where if 5.5mmb/d is considered a record, just wait until shale hits more than double that amount, or over 12mmb/d, which Goldman expects will be achieved some time in the 2020s.

The reason: shale breakeven costs are dropping on a monthly, if not weekly basis, and which over the next 4 years Goldman expects will plunge to prices where US production will become competitive with the lowest-cost OPEC producers: Saudi, Iran and Iraq.

Impossible? The chart below showing the collapse in breakevens in the past 9 years suggests otherwise:

Here is Goldman:

We believe the Big 3 shale plays (Permian Basin, Eagle Ford Shale and Bakken) combined with Cana Woodford plays (SCOOP/STACK) and the DJ Basin can together drive on average 0.8 mn bpd of annual production growth through 2020 and 0.7 mn bpd of annual production growth in 2021-25. We see production plateauing towards the end of the next decade at present. Importantly, as described below, we  still see room for additional productivity gains; our estimates incorporate expectations for 3%-10% productivity gains per year through 2020.

 

While rest of the world is finding ways to move breakevens down towards $50/bbl WTI, we still see shale as the dominant source of growth and as a critical source of short cycle production. Our global cost curve from our recent Top Projects report shows continued decline in shale breakevens, though at a smaller pace vs. in past years. Outside of shale, we increasingly see industry – majors, national oil companies (NOCs) and governments – working to accommodate new projects that break even at $50/bbl WTI or less with a goal of becoming more competitive with shale. This largely is occurring through a combination of improved tax/royalty terms by host governments, more limited scale by producers (smaller projects that come online more quickly) and cost reduction/efficiency gains. We still see production from new projects falling off towards the end of the decade as a result of the reduction in investment after oil prices collapsed post-2014. As such, we expect shale will continue to be a critical source of marginal supply because shale along with OPEC spare capacity are the principal sources of short-cycle supply.

The bad news for OPEC is that it is trapped when it comes to oil prices: on the bottom by plunging state revenues and booming budget deficits, which spell out austerity, social instability and eventually revolution if prices are not boosted, and on the top by shale technological advances, which consistently reduce breakeven prices, and allow shale to stale market share from OPEC the longer prices are kept artificially high.

The solution, short-term as it may be at least according to Goldman, is that oil prices "need to stay lower for longer." That however is a non-starter with Saudi Arabia, which for obvious reasons, is rushing to IPO Aramco before math and physics finally declare victory over cartel-controlled supply, and oil prices crash. It remains to be seen if it is successful.

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Anarchyteez's picture

Peak oil! Peak oil! Peak oil!!!!!!!

Oh no it's peak oil! Oh dear gawd, its peak oil!

ABIOTIC!!!

Choke on it.

Soul Glow's picture

Abiotic means that plant matter doesn't break down slowly but rapidly.  This is not the case and science can prove it.  Peak oil just means one day there will be a peak in production - never mind EROEI, which by the way is a real thing too and it costs shale much more than light sweet crude to be produced.  So whatever logic you are trying to prove is fallacious.  Choke on that.

Anarchyteez's picture

Try Wikipedia.

Here, since you're 'challenged:'

"Not associated with or derived from living organisms."

Soul Glow's picture

RIght, but oil is not abiotic.  Shit and if it were, there would be no more produced ever.  SO I would say abiotic would be a more bearish case for oil.

Anarchyteez's picture

Love ya man,...but omg.

To hell with markets. I'm talking about the reality of truth.

Oil did not come from plants and animals. Period.

Soul Glow's picture

I get what you are putting down.  Oil is a finite resource.  Ok.  So that means when it is used there is no replacement.  Abiotic oil makes peak oil a reality too though.  Get it?

Anarchyteez's picture

Who in the hell is telling you it's finite?

It's abiotic for Christ sake. Translation, the earth is constantly making it!

I could ask you to google another topic which dovetails into this one..., but I don't think..., nope, not ready.

Fossil fuels are the second biggest myth ever perpetrated on humanity.

IntercoursetheEU's picture

Wishful thinking always makes the scam go down easier. Long wordy articles like this are there for a reason.  Follow the money.

Soul Glow's picture

The earth "makes" oil?  Ok, buddy.  We'll leave it there.

Zero_Ledge's picture

Yeah, obviously the earth makes more oil.  That's why the wells never run dry.  Just ask the Saudis - they've had the same reserves numbers for like 20 years.  It comes shooting out of the ground over there, praise Allah.  It's not like they need to pressurize the wells with seawater or anything...

/s

 

thisandthat's picture

What does one thing got to do with the other; ever heard of drying lakes/rivers? Does that mean water cycle is a lie and the earth is running out of water?

VangelV's picture

What does one thing got to do with the other; ever heard of drying lakes/rivers? Does that mean water cycle is a lie and the earth is running out of water?

 

Water is not transformed into some other substance when we use it.  Oil combines with O2 in the combustion process and is converted into CO2, H2O and energy.  That oil cannot be used again.  The peak oil argument does not say that we will run out of oil.  It just means that global production will peak because the marginal production will wind up destroying more energy than can be sold by the producers.  The shale myth does not prove anything because shale production has NOT been economic outside of the few prolific core areas in a few formations.  That is why most shale companies will go bankrupt once the scam becomes apparent to the suckers that are taking losses in order to extract the subsidized oil.  

thisandthat's picture

The argument was that Earth doesn't produce oil because wells run dry; that's asinine and why the example of water came into play: just because something deplets in one place (or all of the known ones), doesn't mean it can't still be produced and found elsewhere. Denying that is denying biotic oil itself...

Anything else is bollocks; endlessly recombining elements is all nature is about...

VangelV's picture

The Saudis are panicking because they need to keep pumping in sea water in their formations to drive the oil towards the wells, my friends.  Ghawar is dying and with it goes our hope for cheap oil in an economy that is growing moderately.  All of the world's great oil fields are past their peak production and declining.  And only fools would see salvation in shale production that is not economic even at double the current oil price.  

techpriest's picture

Going on that theory, it would mean that carbon and water deep in the Earth react to form light hydrocarbons, which undergo further reactions toward larger molecules as they head up toward the surface. Given the extreme heat and pressure (the heat making some minerals into catalysts), this form of oil generation is theoretically possible, but an oil peak would still occur.

A few papers have been published on the topic, and here's how an abiotic oil peak plays out. Let's say the Earth produces 10,000 bbl daily. It piles up over time, in some cases as literal tar pits. Humans come along, and wouldn't you know, but we now consume 80 million barrels a day, or 8,000x what the Earth produces, and those numbers are rising.

Eventually, if consumption keeps outstripping production like this, we will eventually use up accessible oil and me more-or-less limited to what the Earth is giving us, which is far less than what we're extracting currently.

thisandthat's picture

Your let's say says it all; it could as well be 10 billion bbl/day, for what it's worth...

oncemore's picture

What if crude was produced, as Venus and Mars crossed our patth trailing each other, few thousand years ago?

oncemore's picture

What if crude was produced, as Venus and Mars crossed our patth trailing each other, few thousand years ago?

thisandthat's picture

Guess what, genius, the earth also makes diamonds - or do you also think they come from dead rainbow unicorns?

open calender's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

thisandthat's picture

what lube do you use or is that dry drilling?

Arnold's picture

I have a flat earth for sale.
Lightly used.

sinbad2's picture

Do you know what happens to oil when it gets old?

It turns into coal.

The earth is a giant compost heap, but don't think you won't take your turn at the bottom of the heap.

VangelV's picture

It is finite.  Note that conventional oil production has peaked and that many of the early shale and dolomite plays have played out. Fracking helps get some more oil out of reservoirs but in the case of shale you are still looking at capital destruction so most of the investments are not worthwhile unless you are trying to get rich by issuing equity or get paid to keep the scam going.  

Ricki13th's picture

Yet oil has been rallying after the 5% tumble. 

Soul Glow's picture

Goldman wants to sell you a bag of shit....

Soul Glow's picture

Let's just say here - and I am being hypothetical because like you I am as much an expert as someone who has read a few books on oil - let's just say shale production falls in a few years as the technology used to get it out of the ground gets so good it drains the wells.  Let's just say the KSA also has seen the most oil they will ever produce.  Let's say at the same time it happens to Russia, Canada, Mexico, and the African nations....

That would mean that we are currently in an oil bubble.  Ironic - or not - that we are currently in an oil bubble at the same time we are in a finance bubble.  Looks like if this hypothetical is right then all bubbles have collided to form the greatest bubble ever known to man.  What a wonderful time to be alive!  And what a wonderful time to buy gold.

VangelV's picture

Let's just say here - and I am being hypothetical because like you I am as much an expert as someone who has read a few books on oil - let's just say shale production falls in a few years as the technology used to get it out of the ground gets so good it drains the wells.  Let's just say the KSA also has seen the most oil they will ever produce.  Let's say at the same time it happens to Russia, Canada, Mexico, and the African nations....

 

You are making assumptions that are not supported by facts.  The simple fact is the pure shale players that do not have cash flows and profits from conventional plays have not been able to generate positive cash flows at $90 oil when they were drilling core areas of good formations near distribution infrastructure.  Do you really expect them to become cash flow positive when oil prices are low and they are drilling less productive land far from the prolific core areas that made economic sense to exploit?  Conventional oil peaked around 2005 and there is no way to replace the declines with shale or tar sands unless there is a huge amount of capital spending that I do not see coming because the investments are not economic for shale and because tar sands production is stranded.  

That would mean that we are currently in an oil bubble.  Ironic - or not - that we are currently in an oil bubble at the same time we are in a finance bubble.  Looks like if this hypothetical is right then all bubbles have collided to form the greatest bubble ever known to man.  What a wonderful time to be alive!  And what a wonderful time to buy gold.

It is a wonderful time if you can invest in conventional players that have the balance sheet to survive the collapse in demand and are short the unconventional players that are leveraged and the alternative energy players that need government subsidies to stay afloat.  What happens after Tesla gives up the ghost and the shale players start to confess that they will never be able to make good on their loans?  



Soul Glow's picture

So we are in agreement?

sinbad2's picture

Central Asia is jam packed with oil and other goodies, but nobody bothered to develop them, because the were too far from the markets.

Then along comes China, and moves the markets to the supply.

The New Silk Road project is the biggest thing since Columbus discovered the Americas.

Central Asia will become the centre of the world, and the US will learn what it feels like to be Australia.

MrNoItAll's picture

The one and ONLY thing fueling ongoing shale production is CB/FED money printing. Pump billion$ into an industry that has lost billion$ already? Sure, that'll keep it going for a while. Turn off the money spigot and watch it crash and burn, right along with everything else.

totenkopf88's picture

God forbid the Fed lets commodities seek their own level- they can't allow a decade of $15/barrel oil or cheap farmland like back in the 80s

VangelV's picture

That won't happen.  Without the shale myth supporting the USD why would anyone hold it?  I assume that many foreign central banks are slowly selling off some of their dollars and looking to add bullion or companies that have a great deal of USD denominated debt that can act as a hedge against the inevitable correction that sends your currency to its true value as wallpaper.  

Normalcy Bias's picture

It appears that SA's War on American Shale has been lost.

totenkopf88's picture

It's hard to win a war against US shale when it is supported by trillions in fiat jewbux

VangelV's picture

Bit it isn't.  Shale companies still have to plug their funding gaps and they certainly can't survive for very long in this price environment.  Note that the drillers are beginning to hike prices as the bubble is being reflated again.  That means that the marginal producers have a limited shelf life and will only survive if there is a war in the Middle East and the drillers continue to provide services at a low cost for some time.  But even then they are worthless in the long run and I would rather own conventional players of the tar sands companies.  

VangelV's picture

 

 

It appears that SA's War on American Shale has been lost.

 

I guess I missed the part where shale oil became profitable and the shale drillers can generate positive cash flows.  Or are you assuming something that is not supported by actual evidence?  

fattail's picture

Did you also miss the part where prices crashed 50%, stayed there for 2 years, then  rig counts went up and oil production increased again.  That's evidence.  And some would interpret that as, someone is making money at these lower levels as the costs have come down.   

 

sinbad2's picture

Actually it was USA and SA's war on Russia that has been lost.

The US oil companies are losing money and SA is running out of oil, meanwhile Rosneft and Gazprom made $3.5 billion profit each in 2016.

 

hestroy's picture

If you believe GS, you are lost.

NurseRatched's picture

Pretty soon Sec. Zinke will re-open Alaska's North Slope and fracking will expand to the North Slope. When it does, America will be a huge exporter of oil.
What we have observed has been "Peak OPEC".

Cutter's picture

Full stop!!!  Something smells wrong here.  For years, most analysts had shale peaking in the early 2020s, some as early as 2018.  And that was under predictions of much higher oil prices.  Now Goldman, moves the peak for Permian to 2040???

Sounds like Goldman is issuing a new investment offering for shale financing. Buyer beware.

thisandthat's picture

Gartmann long oil in 3, 2, 1,...

hardcleareye's picture

A little different spin on this but.... production numbers are similar... (biggest increases were in the Perimin and Eagle Ford... both in Texas)

http://peakoilbarrel.com/texas-update-may-2017/

With regards to the break even production cost of $50  it is an accounting game... involving rate of return and pay back time...  they are not making real money anymore...  it has become a "shell game" look at the financial statements of the Oil companes involved in the tight oil and you will see they have LOST money....  ALL OF THEM!!!

Cutter's picture

"Lost money....All of them."  Exactly.  Art Berman recently stated that many of the shale producers could not make money at these prices, but they were pumping on existing wells and drilling, because they had to or their leasing rights would expire, and they would have to repurchase at much higher prices.  As someone else mentioned, you have to wonder if any of this would be occuring if the cost of money had "normalized."  If money is still free, and you can continue to get investors, I guess you can keep it going, even if its not profitable.

sinbad2's picture

BP has been accused of mixing shale oil in with WTI, and selling it as WTI.

whatamaroon's picture

Just note that the Oil &Gas E&P companies are dominated by white boys. AA hasn't hit the smaller companies..

Bwana's picture

I think Goldman forgot about the article a few days ago. New Drilling and fracking techniques have brought shale into play. The article was about another smart person who has figured out how to get oil out of structures where previously it was not economical. Presently they can fo this at less than $10 per barrel. It is a well known fact the majority of the oil in a field is never extracted. Many oil fields have 75% of the oil remaining because it is too expensive to get the balance of the oil. The new extraction process can free up for extraction up to 2 trillion barrels in already drilled fields. The article said it works for tar sands. Alaska has tar sands so vast they make the Athabasken Tar Sands look like an oil stain on a driveway.