US oil production growth this year is on course to be significantly lower than government forecasts, as companies struggle to find the operators and equipment they need to complete the wells they have drilled, according to a new energy research firm.
The steady rise in shale oil output from the US has weighed on global crude prices but the projections Kayrros, a Paris-based research firm backed by former Schlumberger chief executive Andrew Gould, suggest there may be less oil coming than expected coming on to world markets over the next few months. This would help support oil prices that have already risen about 10 per cent since the Brent benchmark dipped below $45 per barrel last month.
The signs of capacity shortages are also good news for oilfield services companies such as Halliburton and Schlumberger, enabling them to raise rates after steep cuts during the industry downturn that began in 2014, but suggest the profitability of US oil and gas producers will remain under pressure.
Once a shale well has been drilled it needs hydraulic fracturing or fracking and other procedures to start production. The number of drilled but uncompleted wells, often known as DUCs, in the US main shale oil and gas regions has been rising sharply this year, going from 4,944 last December to 6,031 in June, according to the US government’s Energy Information Administration.
Kayross argues that the number will continue to rise, slowing the growth of US oil output. By October, the firm sees onshore US production in the lower 48 states growing by 560,000 barrels per day from the end of last year to 7.09m, compared to the 900,000 b/d increase forecast by the EIA.
Antoine Rostand, president of Kayrros, said: “The fracking industry is taking time to ramp up; there are not enough crews available to complete all the wells that have been drilled.”
Activity in the US shale industry has been recovering for more than a year, even though companies have in aggregate been unable to cover their capital expenditures from operating cash flows at present oil and gas prices.The number of wells being drilled in the US has more than doubled, from 2,168 in the second quarter of 2016 to 4,433 in the equivalent period of this year, according to S&P Global PlattsRigData.
As the recovery continues, capacity constraints have started to emerge. Brad Handler, an analyst at Jefferies, estimated that if all the wells being drilled in the US were to be brought into production promptly, they would need about 14m horsepower of pump capacity for the fracking to complete them, and the industry actually had only about 12m horsepower of active capacity. He said prices for fracking services had nearly doubled from their lows a year ago, although they were still below their peak in 2014.
Patrick Schorn, vice-president for new ventures at Schlumberger, the oilfield services group, said on a call with analysts on Friday that its revenues from US hydraulic fracturing in the second quarter were up 68 per cent from the first quarter, and its capacity was already fully booked well into the fourth quarter.
The number of rigs drilling the horizontal wells used for shale oil production last week dropped for a second week in succession, the first such fall since May 2016, according to Baker Hughes, the oilfield services group, in a sign that financial pressures and the decline in crude prices between April and June may have constrained activity.
Nevertheless, the larger exploration and production companies including EOG Resources, Hess, Pioneer Natural Resources and Marathon Oil have been saying that their “2017 plans are more or less set at this point”, Paul Sankey, an analyst at Wolfe Research, wrote in a note earlier this month.
Some analysts believe that the capacity constraints will ease by the start of next year. Mr Rostand said that DUCs would be available to be brought into production in the future, but their contribution could be offset by a slowdown in activity and declining drilling productivity.