U.S. rig count poised to shed 600 rigs within six months, Genscape says

12/18/2014

U.S. rig count poised to shed 600 rigs within six months, Genscape says

HILLARY STEVENSON, Genscape

LOUISVILLE, Kentucky -- U.S. shale producers may begin producing less as crude prices drop to five-year lows -- with some North Dakota Bakken operators already treading water -- as rig counts nationwide are poised to decrease by nearly 600 in the next six months, according to Genscape.

U.S. oil rigs will fall below 1,100 for the first time in three years, bottoming out at 1,073 in August 2015, but the “Bakken may be the most disadvantaged [to cope with falling prices] of the three large [U.S] shale plays over the Permian and Eagle Ford,” Genscape Oil Production Manager Jodi Quinnell said. It will take time for production to react to lower prices, and there could be more growth before production begins to decline if all the wells currently being drilled are brought online, she added.

North Dakota rig counts are currently 183, down from 188 in November and 191 in October, and North Dakota production declined for the first time in many months to 1.182 MMbopd, North Dakota Minerals Department Director, Lynn Helms, said last week. Production there may decline further because of more strict gas flaring regulations and new oil conditioning standards in North Dakota that are weakening crude prices, Helms explained.

Benchmark crude oil prices continue to drop, following OPEC’s November meeting, falling under $60/bbl and setting new five-year lows for both WTI and Brent. Citing the threat of U.S. shale oil as the main justification, OPEC decided to maintain output levels to retain market share. In turn, supply and demand economics pulled down the price of crude.

New low crude prices may push some U.S. shale oil plays underwater in the long term, and the most recent International Energy Agency estimates shows shale producers will break even at $42/bbl . However, other global oil players are suffering a larger, nearer-term impact as crude prices dropped below levels required by 10 OPEC member states to balance their budgets.

With WTI and Brent prices both in contango, surplus crude may move into storage before production is potentially shut-in. But, where will this occur? Genscape’s fundamental data on crude-by-rail movements, pipeline flows, and railhead prices give the most granular and up-to-date view on when and where production changes may occur.

Genscape predicts that U.S. production will peak at nearly 9.5 MMbopd by May 2015 from the current level of around 9 MMbopd. Production should begin to flatten through the back half of 2015. Analyzing the average weekly rail loadings and pipeline flows for downward trends could be an indicator of when Bakken production is starting to slow. Genscape currently monitors 93% of crude-by-rail loadings in the Bakken as well as 57% of Bakken-related pipeline capacity.

“With Bakken crude prices so low and the market in contango, producers there are beginning to sit on barrels, deciding not to move them to rail,” Genscape Senior Editor, Bridget Hunsucker, said. Like other crude prices, the Bakken railhead flat price has declined an astounding amount of nearly $50/bbl in about six months. Though the outright price has tumbled, the Bakken railhead differential versus WTI has strengthened recently, with bids reported to Genscape at WTI minus $8/bbl.

Adding to Bakken-by-rail economic difficulties is the expanding pipeline transportation optionality, most recently in the form of Tallgrass’ 230,000 bopd Guernsey, WY,-to-Cushing, OK, Pony Express pipeline. Genscape pipeline flow and rail loading data show a sustained year-over-year decrease in Bakken rail loading volumes since Pony Express started service in early October. Genscape believes that once Hiland Partners’ 50,000 bopd Double H pipeline is operational, more Bakken barrels will shift from rail to pipeline. Double H is expected to start operations in January 2015, according to Hiland Partners.

However, total rail and pipeline takeaway capacity already exceeds Bakken production, which may result in the cancelation of some planned pipeline projects. On Dec. 15, Enterprise Energy Partners announced plans to shelve their 340,000 bopd North Dakota-to-Cushing Bakken pipeline, citing that they had too few committed shippers. Other pipeline projects, including Energy Transfer Partners’ 450,000 bopd North Dakota-to-Illinois pipeline and Enbridge’s 225,000 bopd Sandpiper pipeline, remain slated for completion in 2017 and 2016, respectively.

Bakken shale producers have also felt pressure from forthcoming U.S. rail-car regulations, North Dakota mandates to reduce gas flaring, and, most recently, new light-ends removal regulations. As detailed in New North Dakota Bakken Conditioning Regulations to Ripple through Industry, the regulation will require all crude produced in North Dakota to have a vapor pressure of no more than 13.7 pounds per square inch by April 1, 2015, possibly adding $1-2/bbl to the price of Bakken crude, sources said. However, the North Dakota Department of Mineral Resources estimates the capital cost of the oil conditioning regulation to be near $20 million dollars, equating to $.10/bbl, Helms explained.

In addition to providing half-hourly pipeline flows and daily rail car counts, Genscape also regularly assesses the completion rate of new infrastructure -- pipelines, rail tracks, storage tanks -- that are critical to the growth of Bakken crude oil deliveries.

Related News ///

FROM THE ARCHIVE ///

Comments ///

Comments

{{ error }}
{{ comment.comment.Name }} • {{ comment.timeAgo }}
{{ comment.comment.Text }}