We Can Work It Out – EIA’s March 2016 DPR Natural Gas Revisions Defy Previous Production Declines

The monthly Energy Information Administration (EIA) Drilling Productivity Report (DPR) provides a leading indication of expected crude and natural gas production from seven leading shale basins across the U.S. The latest DPR released earlier this week (March 7, 2016) included a massive 2.5 Bcf/d upward revision to the shale gas production forecast for March. The upward revisions fly in the face of expectations of production declines at recent 17-year low prices. But they also validate daily pipeline flow data showing actual production climbing to a new daily record in February 2016 and continuing to stay robust. Today we break down the latest DPR data, what the revisions mean and consider implications for the market.

We’ve been following the DPR carefully since it was first published in 2013 (see Higher and Higher). Since then it has become an industry bellwether for shale basin production trends. The report takes lagged EIA production estimates, well production data from individual states as well as rig counts, and other data sources to produce a forecast for oil and gas production volumes from the seven major U.S. shale plays: Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica. Unlike many other production forecasts, the DPR’s methodology is designed to capture the net impact of both the changing decline rates of existing wells (producing longer than 30 days) and the changing productivity of new wells . We provided a detailed explanation of the DPR’s model inputs, methodology, assumptions and risks in our blog series “Every Rig You Take.” The report’s bottom line is that if the monthly change in rig productivity in a shale basin is enough to offset monthly volume declines from older declining wells, then the DPR forecasts a rise in production and if the decline in volume from existing wells is the larger of the two, the DPR shows a decline in production.

The DPR’s rig productivity measure makes the report a more meaningful indicator of changes in the direction and rates of production than just using raw rig count data. But revisions are common in the world of production modeling and the DPR approach is no exception. Since the DPR relies on data inputs that are lagged or incomplete, revisions occur as more actual/final data becomes available. Additionally, the underlying calculations for rig productivity are based on recent historical trends, which may not accurately predict future productivity trends, especially given that the historical data is itself lagged or incomplete. Only as more actual/final production data becomes available does the extent of productivity changes become clear. The current low-price environment is particularly ripe for that kind of productivity improvement, as producers are relying heavily on higher efficiencies and lower costs to stay afloat.

Getting back to the current DPR data, this month’s natural gas revisions were particularly spectacular, not only for their sheer size but for the fact that they changed the direction of the trend. If previous DPR reports lulled you into thinking that shale production data is finally showing the steep declines expected in a low price environment, then the latest report certainly warrants a double-take. And based on conversations with the EIA, these weren’t the usual run-of-the-mill revisions. So let’s take a closer look at the data, starting with DPR’s estimates of total U.S. shale gas production.