US oil production expected to decline once most shut-in volumes are back on production
Compared to our pre-Covid-19 case, US crude and condensate production curtailments peaked in May at 2.8 million b/d with about 1.2 million b/d of shut-ins having come back online already.
However, production is expected to resume natural decline starting this Fall due to the very low drilling and completion activity which has reduced horizontal oil rigs by 75% since mid-March, when the oil crisis started. Meanwhile, natural declines from producing wells are taking place and countering, to some extent, the impact of operators bringing wells back online.
Our latest forecast (End-August case), consistent with recent operator guidance, assumes rigs will stay relatively flat through the end of 2020 and gradually increase in 2021. US production is expected to decline through mid-2021 and then start to stabilize. We forecast a large drop in production by the end of 2021 (3.1 million b/d compared to our pre-Covid-19 case). Beyond 2021, US production is expected to gradually increase over time and reach the pre-Covid-19 rate of 12.8 million b/d by late 2023.
Much larger shut-in volumes than we anticipated peaked in May at 2.8 million b/d. The bigger shut-ins came from operators that closed more production than they had announced and higher volumes from small and private operators who did not announce any curtailments. May actuals from EIA confirmed the larger curtailments (10 million b/d actual vs 11.2 million b/d forecast). We estimate that about 1.2 million b/d are now back on production (0.8 million b/d from operator announcements and 0.4 million b/d estimate from operators that did not announce curtailed volumes returning to production).
Some additional shut-in volumes, although relatively small, will be back in September. However, the very low drilling and completion activity since mid-March (horizontal oil rigs down 75% and frac crews down 73%) will cause US production to start to decline until mid-2021 and then begin to stabilize.
While curtailments were taking place between March and August of this year, very few wells were drilled and completed thus reducing production (i.e. following the no-curtailment trajectory shown on the chart). This was exacerbated by the fact that base decline for US shale production is about 30%/year.
Our latest forecast, which is consistent with operator guidance, assumes the rig count has reached bottom and will stay relatively flat until early 2021, as oil companies wait for several months of sustained and higher oil prices before starting to gradually increase rigs. In the meantime, we expect operators to take advantage of the comparatively higher oil prices, their hedging positions and the large DUC inventory to increase well completions.
US production is expected to decline through mid-2021 and then start to stabilize. We forecast a large drop in production by the end of 2021 (3.1 million b/d compared to our pre-Covid-19 case). Beyond 2021, US production is expected to gradually increase over time and reach the pre-Covid-19 rate of 12.8 million b/d by late 2023.