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IHS Markit: ‘Great Shut-in’ hits North American production

Published by , Editorial Assistant
World Pipelines,

Due to the collapse in oil prices, IHS Markit expects US producers are in the process of curtailing about 1.75 million bpd of existing production by early June due to operating cash losses, lack of demand and storage capacity, and an unwillingness to sell resources at the very low prices available since the onset of the COVID crisis.

These reductions are not permanent. IHS Markit has projected a return of most curtailed volumes in the summer and fall of 2020 as tightening fundamentals lead operating margins back to positive territory. This resumption of production may accelerate if WTI remains above US$30/bbls – a price that allows operators to cover their operating costs and that reflects improved storage availability.

However, about one third of the volumes (approximately 550 000 bpd) will stay off the market for the long-term – or at least until WTI prices push above US$50/bbl, justifying the capital spending needed to repair the impact that some of the wells will have incurred from being shuttered.

“The oil market fear that characterised March and the extreme price pressure that producers felt in April have galvanized producers across North America into unprecedented action.

“Not even the US’ huge network of storage facilities and associated infrastructure was enough of a buffer for a crisis on this scale. Negative oil prices and the collapse of WTI futures contracts were a potent signal that stronger measures, namely shut-ins, were needed to curb oversupply,” said Raoul LeBlanc, Vice President, Fnancial Services, IHS Markit.

In the US, the expected curtailments go well beyond just low-productivity conventional wells, known as ‘stripper wells’. Those wells, which produce less than 5 bpd of oil and more than 35 bbls of water which must be reinjected to maintain reservoir pressure, are expected to make up 350 000 bpd of the reduction.

However, nearly 1.4 million bpd of the reductions are expected to come from relatively prolific shale wells. IHS Markit expects the bulk of the cuts to avoid the newest of the wells and focus on production from those with established production histories.

Canada, hit by its own economic and storage issues, is set to cut an additional 500 000 bpd from its production. Much of this reduction will come from oil sands projects, which have a set of options, handicaps and interdependencies that differ from other asset types.

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