Slowing drilling activity in the U.S. shale patch is capping oil production growth while natural gas output is down from year-ago levels amid above-average inventories and unsustainably low prices earlier this year.
Oil and gas prices have dropped since the highs from the summer of 2022 when they spiked following the Russian invasion of Ukraine.
The decline in U.S. benchmark oil and gas prices over the past nearly two years has reduced – with a lag – drilling activity in the shale patch.
America’s oil and gas production hit record highs at the end of 2023 and continues to be close to all-time highs, but growth has slowed down in oil output while gas production has started to fall after a mild 2023/2024 winter boosted inventories to above-average levels and sunk Henry Hub gas prices to $1.80 per million British thermal units (MMBtu) in February 2024, compared to $9 / MMBtu in August 2022.
Oil Output Growth Slowing
Crude oil production from the Lower 48 basins, which exclude the federal offshore Gulf of Mexico, increased by 500,000 barrels per day (bpd) in April 2024 from the same month in 2023. But in April last year, the annual growth in the Lower 48 output stood at 900,000 bpd, per EIA data cited by Reuters market analyst John Kemp.
The number of oil rigs currently stands at 479—down by 66 compared to this time last year, according to the latest Baker Hughes data.
Despite the decline in the number of oil rigs, U.S. oil production has grown compared to year-ago levels, mostly thanks to efficiency gains, analysts say.
Amid the ongoing consolidation in the American oil and gas industry, producers have become bigger and are focusing on shareholder returns. They wouldn't be inclined to respond to every price spike with a major boost in drilling that ultimately floods the market with oil and depresses prices.
The big companies are looking to become bigger by adding premier assets of the takeover targets to their portfolios. And the key driver of the industry now is returning more to shareholders and preparing for inventory stacked up for years of production ahead, without the need to grow organically by investing too much cash flow into the drilling of new locations and wells.
In the second quarter of the year, oil production was essentially unchanged from the first quarter, amid a modest rise in the overall business activity index, according to oil and gas executives responding to the latest Dallas Fed Energy Survey.
“WTI (West Texas Intermediate) crude and Henry Hub natural gas pricing directly affects our business as we are operating existing wells and providing cash flow to investors,” an executive at an exploration and production (E&P) firm said in comments to the survey.
Another E&P executive added, “The last few years of mergers and acquisitions have decreased activity in the oil patch. The majors are not going to exhaust reserves to raise domestic production until supply and demand curves meet their goals.”
“They do not have to participate in treadmill drilling to keep incomes at a pace to develop reserves and pay back loans.”
So, growth in shale production is set to slow down. Lower 48 oil production growth exceeded expectations in 2023, adding 900,000 bpd of supply last year, but Wood Mackenzie expects Lower 48 oil production to grow by just 270,000 bpd in 2024 and another 330,000 bpd in 2025.
Last year, big efficiency gains allowed operators to meet or exceed expectations for wells turned in line, which helped boost production with significantly fewer rigs, according to WoodMac’s principal analyst Nathan Nemeth.
“However, efficiency gains and associated well cost savings are not translating into more drilling activity like we’ve seen in the past. Instead, E&Ps have reiterated plans to return cash to shareholders,” Nemeth noted.
Natural Gas Output Declines
While U.S. oil production continues to rise, albeit at a slower pace, natural gas output has dropped from December 2023 highs, and production has turned lower compared to year-ago levels. Dry natural gas production was 101.7 billion cubic feet per day (bcf/d) in April 2024, down from 102.7 bcf/d in April 2023, the lowest for 16 months.
Major natural gas producers curtailed some output in the spring in response to the price slump earlier this year, which saw prices tumble to a three-decade low.
In its latest Short-Term Energy Outlook, the EIA expects U.S. marketed natural gas production to drop by 1% this year, led by a 9% decline in the Haynesville region and 4% decline in the Appalachia region as some producers have limited development and production due to low natural gas prices.
The current refill season has seen lower injections into storage so far, due to rising demand for gas-powered electricity in the summer heat waves.
However, gas inventories are above average for this time of year, and working natural gas stocks for the week ending June 26 were 21% higher than the five-year average and 11% higher than last year at this time, per EIA data.
The EIA expects storage inventories to end the summer injection season on October 31 at 6% above the five-year average.
“If U.S. natural gas production is lower than our forecast and consumption in the electric power sector to meet air-conditioning demand increases more than we expect, natural gas prices could be higher than forecast,” the administration said.
By Tsvetana Paraskova for Oilprice.com
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