Nitesh Shah

Director Commodity Strategist

Maxwell Gold
Director - Investment Strategy

ETF Securities Outlook September 2017

US Oil Production Record Driven by Non-

Conventional
Summary
US oil production may hit an all-time high in 2018 despite US Prolific Drilling Areas
prices at half of 2014 levels.

Shale oil from the Permian Basin, a key driver of growth, may
continue to expand.

Off-shore oil in Gulf of Mexico will need further investment to

keep contributing as strongly to growth, but increasing
efficiency bodes well.

US production at an all-time high

US production of crude oil will reach an all-time high in 2018
according to the Energy Information Administration (EIA)s
forecasts. At 9.9 million barrels per day (mb/d), crude production
in 2018 will surpass the prior high reached in 1970 of 9.6mb/d. Source: EIA Drilling Report, ETF Securities, Data as of 09/19/17.
EIA estimate of production per day in thousands of barrels for September 2017
That reflects the resilience of the US market and a failure of the
Organization of the Petroleum Exporting Countries (OPEC) Production per rig traditionally a measure of efficiency seems
strategy to squeeze out what they believed was high cost production to have peaked in the Permian Region in July 2016. However,
in 2014. The engine of growth in the US is widely acknowledged as interpreting that as a decline in efficiency would not be correct.
shale oil. But looking at the detail, it is mainly shale from the Permian Region production per rig
Permian Basin that has been driving oil production higher, 800
followed by offshore oil production in the Gulf of Mexico.
700
US oil production by region
600
12 Eagle Ford Bakken Gulf of Mexico Rest of US
Permian
500
barrels per day

Forecast
10
400
millions of barrels per day

8 300

200
6
100
4
-
2007 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2
Source: EIA, ETF Securities. Data from 01 /01/07 to 08/31/17.

0 Many oil operators have decided to drill but not complete wells.
Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18
The oil in these wells is therefore close to being available, but
Source: EIA, ETF Securities. Data from 01 /01/16 to 07 /31/17.
intentionally not extracted. This skews the production per rig data
downwards. The reason for not completing these wells could be
Shale oil dominated by Permian Basin
linked to minor transportation constraints. The discount of West
Out of the major shale oil producing regions in the US, the Permian Texas Instrument (WTI)-Midland to WTI-Cushing from January
Basin is the largest and fastest growing. Of the 940 oil rigs in 2017 to July 2017 could be an indication of this.
operation in the US, about 377 are in the Permian Basin.
1
Past performance is no guarantee of future results.
 Drilled but uncompleted wells further investment. Based on findings from Rystad Energy on
2,500 investment sensitivities to price, off-shore oil investment is likely to
take place, but at a more subdued level. We believe that oil will
2,000
Permian trade in a range between US$40-55/barrel (bbl) over the coming
year.
Eagle Ford
Number of wells

1,500 US and Mexico offshore investments, by oil

60 price sensitivity
1,000 Appalachia
Bakken Historic
50 Sanctioned
Niobrara Below $40/bbl
500 Anadarko
40 $40-60/bbl
Haynesville

US$bn nominal
$60-80/bbl
- 30 Above $80/bbl
2013 2014 2015 2016 2017
Source: EIA, ETF Securities. Data from 1 2/31/13 to 07 /31/17.
20
There may also be a lag in completion due to a change in drilling
strategies. Pad-drilling the practice of using a pad to house 10

wellheads for multiple drilled wells has increased drilling

0
efficiency in many shale oil plays. The adoption of this technique is 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
about two years behind in the Permian Basin compared to other Source: Ry stad, ETF Securities. Data as of 08/22/17.

major plays. Completion times may be slower than in the past, However, just like on-shore shale oil, off-shore oil production is
because multiple wells are being drilled before completion takes seeing gains in efficiency. Cost reductions, standardization and
place. As completion picks up, oil production per rig is likely to rise. simplification have benefited off-shore oil as well. According to
research from Wood Mackenzie, global deepwater project costs
Gulf of Mexico production have fallen by more than 20% since 2014. According to their
Oil production in the Gulf of Mexico is mainly off-shore. While the analysis, some oil companies in the Gulf of Mexico have brought
narrative about USs production resilience is usually centred breakeven costs down from US$70/bbl to US$50/bbl. Average
around shale oil, off-shore oil production in the US has been footage per rig-day has increased rapidly in the Gulf of Mexico. Part
rapidly growing despite price weakness that we have seen since of that is due to high-grading (accessing the easiest to extract oil
2014. Crude oil production from the Gulf of Mexico had already set first). However, cost discipline and improving technology will
an annual high in 2016, surpassing the previous high in 2009. continue to aid efficiency.

Gulf of Mexico oil production Drilled footage per rig-day by year

2.5 Forecast 900
Continental shelf (Land)
800
Shale (Permian)
2.0 700
Shale (Other)
600 Gulf of Mexico Shelf
million barrels per day

Feet per day

1.5 500

Dips in 400
1.0 production
forecast due 300
to hurricane
related shut-
ins
200
0.5
100

0
0.0
2011 2012 2013 2014 2015 2016
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: US Energy Information Administration, ETF Securities. Data from 01 /01/09 to 08/21/17. Source: Ry stad Energy, ETF Securities. Data from 1 2/31/11 to 1 2/31/16. Ratio of total footage to
total drilling day s (including time from spud to total depth)

While shale oil can be very price responsive (rigs can be turned on
While both off-shore oil from the Gulf of Mexico and Shale oil from
and off in a matter of weeks in response to changes in price), off-
the Permian Basin have been the engine of growth in US
shore oil has a much longer investment cycle and so is less price
production since the price downturn that started in 2014, the
responsive. A large proportion of the growth in production in the
Permian Basin has most scope for further gains in growth after
past three years came from projects sanctioned before the price
2018. Output from projects already sanctioned will see the Gulf of
downturn. In 2016, eight projects came online in the Gulf of Mexico
Mexico production contribute strongly to the record high
and another seven are expected to come online by end of 2018.
production expected in 2018. Structural changes in drilling
According to EIA forecasts, the average production in the Gulf of
techniques likely account for the falling production per rig statistics
Mexico will increase to 1.7mb/d in 2017 and 1.9mb/d in 2018 from
in the Permian Basin, a trend we think will diminish.
1.6mb/d in 2016. Continued growth from this source will require

2
Past performance is no guarantee of future results.
Important Risks
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of
future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would
be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Maxwell Gold is a registered representative of ALPS Distributors, Inc.
ETF001218 09/30/18

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