Choking back

With a dwindling market for their crude, many U.S. producers are confronting an unavoidable choice: shutting in existing production. Just go out and flip a switch and turn a valve, right? Wrong. Like everything else in the COVID era, shutting in production is complicated. It is the alternative of last resort for producers, whose primary directive is the economic extraction of oil and gas. But with demand for their products crushed, production from some wells no longer makes economic sense. Unfortunately, the process of shutting in wells is charged with contractual, economic and operational issues that the industry is scrambling to deal with. The situation is fraught with uncertainty, and many producers’ futures depend on how decisively they manage the shut-in process. Today, we discuss the urgent need to reduce oil production and the judgments producers will be making as they take wells offline.

A number of indicators suggest that the energy slump that started in the latter half of 2014 has bottomed out, and that happy days are here again (at least for now).  Who would have thought back in the good ol’ days three years ago this month—when the spot price for crude oil was north of $100/bbl and the Henry Hub natural gas price averaged $5.15/MMbtu—that Friday’s $54 crude and $2.63 gas would be seen as anything but a catastrophic meltdown. But not so. The fact is that in 2017, producers in a number of basins can make good money at these price levels.  Consequently, drilling activity is coming on strong. Crude oil production is up more than 500 Mb/d since October 2016 to 9 MMb/d, a level not seen in almost a year. And gas output has also been poised to rise, if only real winter demand had kicked in this year. What’s going on? Today we discuss the fact that what we have here, folks, is a rebound unlike any we’ve seen before.