We’ll learn a lot from how we come out of this downturn. Not only has it involved the longest price decline since the 1980s, it also marks the first time that we’ve had a substantial unconventional component in the U.S. production mix. What will we see as the industry bounces back?

Recently released Department of Energy (DOE) data for January show that we have had 10 consecutive monthly declines in Lower 48 liquids production. On a month-to-month basis, since April of last year, the decline rate has averaged 65,000 barrels per day (bbl/d). It accelerated to an average of 103,000 bbl/d in the last two months, reflecting a steep drop-off of 178,000 bbl/d in December.

The process of rebounding, once price signals show incremental production is needed, should be simple, if you believe some prognosticators. After all, the beauty of unconventional production is that it can act as a “swing producer,” smoothly modulating up or down in line with directional shifts in demand. Some suggest that, as if by flipping a switch, production can easily be restarted—so much so that incremental production is always only a couple of months or so away. Right?

Others take issue with the idea of referring to U.S. unconventional production, which accounts for a little less than 5 MMbbl/d, or around 5% of global production, as a swing producer. John Hess, CEO of Hess Corp., for example, told Reuters that he prefers the term “short cycle” to describe U.S. unconventional production, saying it may take up to a year to stop or to restart production.

Of course, the ease of dialing output up or down depends on the readiness of the service sector, which even leading oilfield player Schlumberger Ltd. has said is undergoing a “full-scale cash crisis.” Recent Raymond James research noted that even with WTI oil prices projected to move up from $40/bbl in the first half to $60/bbl in the second half of this year, activity would lag “due to logistical and personnel limitations” as the industry needs “to repopulate a depleted labor force before a meaningful ramp.”

Operationally, there is a lot to do. Remember, this is unconventional production, ideally aimed at achieving scale. It requires plenty of permitting, reactivating warm or cold-stacked rigs, building multiwell pads, having frack sand at the ready and much more. And did anyone order guar from India?

But in reality, after the recent extended price decline—a slump now lasting some 20 months—the mindset of the industry is such that producers are likely to move conservatively. Tim Perry, Credit Suisse Group’s co-head of oil and natural gas, estimates that it will take six to 12 months to reactivate rigs and re-train crews and a similar time frame to rebuild a financial cushion, meaning one or two years before meaningful rig additions. “And that’s once you get to $50 to $60/bbl.” (See “Opting For Durability Over Dilution” in this issue.)

Raymond James offered a similar outlook. Less financially healthy E&Ps would look to shore up balance sheets before meaningfully ramping activity. Any inventory of so-called DUCs—wells that have been drilled but uncompleted—would be completed first. And E&Ps would hold off on ramping drilling until they were comfortable oil prices had been “established” at higher levels.

Client feedback to Tudor, Pickering, Holt & Co. focused on $50/bbl as a target for increasing activity. “We think many if not most operators will be looking for crude to move back above $50/bbl before committing additional drilling dollars,” the firm said in a note. “From a completions perspective, while many DUCs have already been worked down or are currently being worked down, the remaining operators with inventory should become more active around $45/bbl.”

Bottom line: Upcoming conference calls will seek to reassure investors that the industry will “maintain current capital discipline until crude sports a $5 handle with some duration,” Tudor, Pickering, Holt said.

Can industry players link an incremental production level to a crude oil price?

According to a summary of Simmons & Co.’s recent energy conference, management of EOG Resources Inc. cited impairment of the oilfield services value chain as a source of material concern—one shared by Apache Corp., Occidental Petroleum Corp. and Noble Energy Inc. EOG management went on to estimate that it would take the industry 18 months to generate 500,000 bbl/d of production growth and “several years” to generate 1 million bbl/d.

And that assumes a threshold price of about $65/bbl.

Comments