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Pumping the US brakes

Output will rise again in 2018, but less drilling and greater capital discipline will slow growth

America's tight oil producers will add new supply in 2018, but the pace of additions will slow. Investors have been fretting over the growth-at-all-costs model, and a more tempered approach will take hold.

Drilling activity rose sharply from June 2016 to June 2017; the rig count in the top four tight oil basins more than doubled. Production tends to lag a new well by about six months, so that run-up fuelled strong output growth through 2017. But the rig count crested in the summer and fell back to about 520 rigs for the rest of 2017. Unless a sudden price surge changes things quickly, the effect will be felt in early 2018.

The huge backlog of drilled but uncompleted wells—the now-famous Ducs—is a wildcard. Their number took off over the second half of 2017 as completions slackened. Heading into 2018, the Ducs surpassed 5,000, and perhaps as many as 7,000, according to Rystad Energy. About half were in the Permian alone. These wells can be brought online quickly and cheaply, sustaining output growth.

Nonetheless, shale executives are now under pressure from shareholders and lenders to start coughing up financial returns—not just oil. Paying down debt is another priority. Activist shareholders are also targeting executive pay. It all marks a change from 2016, when drillers reacted to strengthening crude prices by pouring cash into new production.

So how much oil? The Energy Information Administration reckons the Lower-48's onshore output will hit 7.83m barrels a day by end-2018. That's growth of 350,000 b/d through the year—well below the 0.96m b/d it expects to have been added by the end of 2017. Bank of America Merrill Lynch (BofAML) forecasts the tight oil additions between Q4 2017 and Q4 2018 will amount to 480,000 b/d—almost half the increment of late 2016 to late 2017. The stalled rig count and an apparent flatlining in productivity per rig metrics are behind the slowdown, the bank says.

It also points out that with US refiners nearly at capacity for light oil, most new US light tight oil production will have to be exported. The international appetite for this supply may be more limited than thought. Producers have been preparing for this. Continental Resources, the Bakken's largest producer, signed a deal to export 1m barrels of light tight oil to China in November 2017 and thinks such exports will rise. Pioneer Natural Resources, a blue-chip Permian producer, said it was exporting around 25,000 b/d at the end of 2017 and could quadruple shipments to 100,000 b/d, more than a third of its production, by end-2018.

Jefferies, another investment bank, also forecasts a tight oil deceleration in 2018. Its analysts expect Q4 2017 to Q4 2018 growth to come in at around 430,000 b/d, half the growth seen from 2016 to 2017.

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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