Wood Mackenzie: US Lower 48 alone sustains $150 billion in CAPEX cuts to 2017

Of the more than $370 billion in global capital expenditure cut by upstream developers across 2016 and 2017, $150 billion was slashed in the US Lower 48 alone — more than three times any other single country, according to the latest Wood Mackenzie analysis. The swiftness and scale of the cuts by US operators in the Lower 48 is largely due to shorter lead times and the less capital-intensive nature of the US unconventional space.

“The plays that saw the highest proportion of their capital expenditure cut were in the Eagle Ford and the Bakken,” Jeanie Oudin, Wood Mackenzie Senior Research Manager, Lower 48, said. “That’s because the two plays were in full-scale development, with most operators’ acreage held by production at the time oil prices began to fall, allowing for a more responsive slowdown in activity.”

The Bakken and Eagle Ford plays together account for more than one-third, or 36%, of US CAPEX cuts during 2016 and 2017. Spend across the Rocky Mountains region – namely in the Bakken/Three Forks and Niobrara — took the deepest cuts in the US, slashing spending by 66%, or $44 billion. The Gulf Coast region was similarly hard hit, particularly in the Eagle Ford, whose cuts comprised nearly 20% of the US total.

Although reduced service costs and overall cost deflation have also contributed to falling spend, deferred investment continues to be the foremost influence on CAPEX declines in the US Lower 48. As rig counts have plummeted, a significant backlog of DUCs has provided cash flow to operators, allowing them to focus on completions at will as rig contracts expire — meaning production volumes are no longer tied directly to rig count.

“People expected that overall tight oil production would collapse when companies stopped drilling. However, it hasn’t collapsed, it’s only declined,” Mr Oudin, said. “Not only have operators built up a backlog of DUC wells, they are also utilizing longer laterals and enhanced completions to increase the productivity of wells as they bring them online. They’re just not adding new volumes as quickly.”

The current Wood Mackenzie production outlook expects 7 billion fewer barrels of oil equivalent production globally through 2020 —with 70% of those volumes lost from the US Lower 48 in the near term, through 2017.

In contrast, the Midland and Delaware basins experienced smaller declines in drilling activity. Partly due to many of the rigs being concentrated in the best areas and the stacked pay potential of the plays, the Permian has been the most resilient.

According to Wood Mackenzie’s latest analysis, it is largely mature producers and basin incumbents that have the most remaining economic inventory. Although some of these established operators are less characterized by the high growth metrics of some of their offset acreage peers, they have a bright and sustainable future.

“Combined with our outlook for Permian production growth, this is extremely positive for Midland and Delaware stakeholders,”  Mr Oudin added. “The Midland and Delaware basins hold the largest number of undrilled, low-cost tight oil locations in the Lower 48. No other region comes close.”