Shale Could Contract by 1.0 Million b/d Within the Year

As a price-elastic source of supply, US shale production will respond relatively quickly to the steep drop in oil prices. Already US E&Ps are reporting further reductions to their 2020 spending guidance and cutting back on planned drilling activity. A new-normal is here, with fiscal discipline and strong balance sheets even more important to weather current and future price volatility. ESAI Energy examined three price scenarios and the impact on shale basin production for the rest of 2020 under each scenario. A decline of somewhere between 170,000 b/d and 1.0 million b/d seems to be in the cards.

A sustained price under $40 will require significant restructuring, with many smaller producers unable to continue operating; bankruptcies will increase. This results in US shale ending 2020 almost 1 million b/d lower than at the start of the year.

If WTI were to recover fairly quickly to a range of $40 - $50, hedged production and a limited drawdown of drilled but uncompleted wells will initially keep production flat. Yet spending cuts will prevent enough drilling and completions to fully offset decline, resulting in overall US shale ending 2020 about 330,000 b/d lower than at the start of the year.

A recovery in WTI to over $50 should be sufficient to recover  and sustain US shale.  Producers will concentrate capex on maintaining, not growing production, paying down debt, achieving free cash flow, and maintaining a dividend. In this scenario, US shale ends 2020 with only a slight decline of roughly 170,000 b/d.

“So far, we are living in a market of sub-$40 or even sub-$30 oil. But a year is a long time. We still expect a recovery in prices in the second half.” explains ESAI Energy Shale Analyst, Elisabeth Murphy. "So, we may end up somewhere in between scenario 1 and 2”.

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