North American Shale Oil
Outlook to 2025
North America’s shale oil is a technology-driven success story; however, it created an oil oversupply that led to an oil price fall of 50%, and an active rig fleet fall of 80% from 2Q14 to 1Q16.
Since 2Q16, spurred by price recovery, drilling activity has more than doubled. Key operational improvements are helping the shale oil industry endure low oil prices in this dynamic market environment. Despite possible short-term constraints of capital/rig/labor availability, the market is poised for a new chapter of growth, driven by activity in the Permian.
Our outlook explores the impact of operational improvements on shale oil margins in this lower-price environment, and presents a view of expected growth in drilling and completions, production, rig count, and capex to 2025.
Our North American Shale Oil Perspective is an abridged version of the outlook that covers all the major topics and introduces key charts.
"Recent development in the Permian, driven by favorable economic conditions, is leading the new growth in the North American shale oil market. "
1. US shale oil production will reach ~9 Mb/d by 2025
US shale oil production will reach ~9 Mb/d by 2025, but production can vary by 5.4 Mb/d depending on oil price scenarios.
2. The Permian’s average core breakeven price for 2017 is less than $41/bbl
Low breakeven is enabling the Permian to remain profitable despite well cost increases of 30%.
3. The Permian is experiencing 10x the IP of Eagle Ford and Bakken combined
The Permian’s IP growth rate for the past 5 years was 20% compared to Eagle Ford and Bakken (2%), and the Permian has more remaining drilling locations as it is still in the early development stage.
4. Total capex will grow at 25% p.a. through 2021
Increased drilling and completion activity will require total capex spend to grow to near 2014 spend levels; however, production will have nearly doubled since 2014.
5. Drilling and completions to grow by 20% p.a through 2021
Under the base “Price Recovery” scenario (WTI $60-70/bbl from 2019 onward), drilling and completions are expected to grow rapidly at 20% p.a., and production will grow at 12% p.a. through 2021.
WHAT'S IN THE REPORT
Shale oil market overview
The US shale oil market is in recovery. WTI has rebounded from its February 2016 low of $30/bbl, and has remained between $45 and $55/bbl since mid-September of 2016. Those prices have driven shale oil rig counts to over 500 rigs—more than 2.5 times the April 2016 bottom of 193. Several factors enable operators to continue producing in this lower-price environment:
- high-grading, since ~50% of sub-basins have uneconomic average breakevens at these prices;
- a 5-day reduction in average drilling days since 2014; and,
- an average IP improvement of 33% since 2014.
Amongst the remaining economic basins, the Permian stands out—having the lowest breakevens in the market explains why ~75% of shale oil rigs are in the Permian and why there has been such a wave of organic and inorganic (M&A) activity growth there.
Shale oil market outlook
The US shale oil market is projected to see strong growth in the coming years. Under the base “Price Recovery” scenario (WTI $60-$70/bbl from 2019 onward), the Permian is expected to drive 20% p.a. growth in drilling and completions through 2021. Efficiency gains will have a significant effect on produced barrels per dollar spent—total market spend for drilling and completion will nearly return to 2014 levels, but production will have nearly doubled since 2014. US shale oil production is expected to reach ~9Mb/d by 2025, under the “Price Recovery” scenario.
KEY CHARTS & TABLES
Shale oil market overview
- Shale oil production and rig activity since 2014
- Horizontal rig count
- New production per rig
- Midland basin oil IP growth factors
- Midland basin drilling days
- Well cost by basin to 2021
- 2017 half-cycle breakeven price by basin
- WTI vs. half-cycle breakeven prices for varying well cost increases from 2016 to 2017
- Permian transactions (>$500M) since Jan 2014
- Employment in the oil and gas industry, seasonally adjusted
- Unemployment rate compared to drilling activity
- Peak annual rigs and oilfield workers needed
Shale oil market outlook
- Shale oil new well completions
- Shale oil drilling activity by basin
- Shale oil well capex and production
- Shale oil production by vintage and completion status
- Shale oil production outlook
"Key operational improvements such as improving drilling efficiencies, completion design, and high-grading have sustained and will continue to drive growth despite the foreseeable cost escalation of 15-25% in the next 2 years."
Combining data and insights from a suite of advanced energy market forecasting analytics, the North American Shale Oil Outlook is McKinsey Energy Insights' bi-annual view on the evolution of the market to 2025.
Purchase of the outlook includes a PDF report as well as Excel data tables. Price: USD3,500